ESG | May 31, 2023

Big Chill: Political backlash and legal threats sap shareholder support for climate action and ESG

Amy Cortese and David Bank
ImpactAlpha Editor

Amy Cortese

ImpactAlpha Editor

David Bank

ImpactAlpha, May 31 – Shareholders are voting on a record number of resolutions related to corporate action on climate and ESG – for environmental, social and governance – at this year’s annual meetings. 

But support for such resolutions is flagging as major asset managers recalibrate their proxy voting strategies in the face of a coordinated campaign by Republican state attorneys general, including threats of legal action.

Last year, more than 30 proposals won majority approval. 

“We’re nowhere near that,” said Heidi Welsh of the Sustainable Investments Institute, which tracks the results. “The really big players are stepping back. They’re spooked a bit by the anti-ESG rhetoric.”

Today’s test: shareholder resolutions at ExxonMobil’s annual general meeting that call on the oil giant to detail the risks of climate-related litigation, report on methane emissions and quantify the costs of retiring assets to comply with net-zero scenarios, among other proposals. 

One of Exxon’s main arguments against the resolutions, echoing the attorneys general, is that net zero goals under the Paris climate agreement are unlikely to be achieved; therefore, Exxon’s risks under such scenarios do not “meet the level of likelihood required to be considered in our financial statements.”

Just four ESG proposals have drawn majority votes so far this year. Three-quarters of investors approved a resolution filed by Vermont’s treasurer asking Houston-based Coterra Energy to report on its methane emissions. Proposals involving workplace diversity, bias and labor standards drew majority votes at Wells Fargo, Starbucks and Seattle-based Expeditors International,  according to the Sustainable Investments Institute. Climate Action 100+ is tracking climate related results here

Shareholder activists trace the big chill to a March letter to some of the world’s largest asset managers from 21 attorneys general expressing concern with “the ongoing agreements between asset managers to use Americans’ savings to push political goals during the upcoming proxy season.” Groups including the Net Zero Asset Managers Alliance and Climate Action 100+, they continued, may be engaging in “potential unlawful coordination and other violations.” Vanguard withdrew from the Net Zero Asset Managers Initiative in December. 

After insurers received a similar letter from the Republican attorneys general, the Net Zero Insurance Alliance lost nearly half of its members. Munich Re, one of the world’s biggest reinsurers and a founding member of the NZIA, quit the group in late March. Its chief executive said he did not want to expose the group to “material antitrust risks.”

The think tank InfluenceMap this month reported that anti-ESG legislation at the state level has been driven, directly and indirectly by oil, gas and coal industry players. 

Climate litigation

Two years ago, the upstart hedge fund Engine No. 1 got three insurgent directors elected to the ExxonMobil’s complacent board. There are not likely to be any similar fireworks at today’s meeting, as energy security and oil profits overshadow climate action for some big asset managers. Even Engine No. 1 has pulled back from its earlier activism. 

Among the proposals before Exxon shareholders is a request for the company’s management to  assess the potential cumulative litigation risk from current environment-related litigation. Sparking the concerns – and the novel proxy strategy – is a court ruling in Guyana, where Exxon is developing oil offshore wells that could produce 1 million barrels of oil a day by the end of the decade. 

The court order requires Exxon to provide a guarantee it will cover “unlimited” costs in the event of an oil spill. In addition to the immediate cleanup, a spill in the region could affect neighboring Caribbean islands and expose Guyana to liabilities for lost tourism revenues. Failure to comply with the court order could result in the suspension of  Exxon’s drilling permit.

A proposal by Princeton, NJ shareholder ​​Anna Marie Lyles asks Exxon to report on its potential liabilities in Guyana in the event of a large spill. Mercy Investments is fielding a broader proposal that seeks an assessment of all of the company’s potential risk from environmental litigation anywhere. 

As You Vote

The Berkeley, Calif.-based shareholder activist group As You Sow comes in for special opprobrium in both the AGs letter and Exxon’s own recommendations to shareholders. Among the organization’s counter-measures is a partnership with Iconik, also based in Berkeley, which allows individual investors to cast their votes in line with As You Sow’s recommendations (Iconik also has partnerships with and Bill McKibben’s Third Act).

Iconik allows individual investors to forward their proxy statements to be voted according to their choices by the company’s automated system, removing much of the complexity that has hindered participation by retail investors. About one-quarter of all public equities are held by individual retail investors. As You Sow says institutional investors with about $10 billion in assets already use its As You Vote proxy services.

Iconik’s Alex Thaler said shareholders have voted on resolutions at nearly 750 public companies since the app launched last month. Shareholders are voting stakes ranging from fractional shares to holdings of nearly $1 million, he said. 

Iconik still has relatively few “voting assets under management,” but retail investors could conceivably swing a close election. And Thaler said the demonstration of shareholder democracy sends a signal of the preference of individual investors, rather than the asset managers who historically have voted their shares. 

“Most of the voting on our platform I would describe as skewing progressive,” he told ImpactAlpha. “If you do pass through the vote to individuals, rather than these intermediaries, what kind of vote do you get? I believe it’s more pro-social than pro-business.”