Climate Finance | April 28, 2020

‘Stewardship’ under scrutiny as shareholder season gets started

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha. April 28  –  Even before the COVID crisis, this year’s annual general meeting season was shaping up as pivotal.

The springtime ritual in which corporate directors meet shareholders face-to-face was to be the first since 181 CEOs signed a Business Roundtable pledge to elevate stakeholders – employees, customers, supplies and communities – along side shareholders. BlackRock’s Larry Fink warned corporate managers the $7 trillion asset manager might vote against them if they failed to make progress on climate risk and sustainability.

And BlackRock, the world’s largest asset manager, along with JPMorgan Chase, the world’s biggest bank, both signed the Climate Action 100+ pledge to pressure the biggest emitters of greenhouse gases to clean up their act.

The face-to-face part won’t happen, of course, but COVID-19 has only raised the stakes for hundreds of corporations facing shareholder resolutions pressing them on climate, social and governance action.

“This year can be an inflection point,” says As You Sow’s Andrew Behar. “The 2020 proxy season will test if investors and companies will help define a new economic paradigm or if these endorsements are just empty words.” 

The most engaged investors are now scrutinizing as well how companies have protected and treated their employees through the crisis, and whether they have reevaluated share buybacks after many were caught without adequate cash reserves. 

Essential workers

“We’ll see how companies view their role to the community, employees and their stakeholders, and if their view of the purpose of the corporation is really hanging together or not,” says Proxy Impact’s Michael Passoff, co-author of a recent proxy preview report.

As the annual shareholder gatherings, which typically take place between March and June, have moved online, some companies have used the shift to muffle  shareholder voices. Changes proposed last November by the Securities & Exchange Commission that would make it even harder for shareholders to file resolutions, as well as to get advice on which way to vote. The new rules are expected to be finalized this spring. 

SEC vote weakens corporate accountability and shareholder engagement

Warning sign: The changes have been long sought by business groups including the Business Roundtable, prompting skepticism that lofty pledges about stakeholders were at least in part an effort to stifle querulous shareholders.

More than 300 resolutions concerning environmental, social or governance issues across scores of companies are headed for votes at annual meetings this spring. The resolutions are non-binding, but have become an important tool for enabling investors to engage with companies and improve their governance. 

One example: Legal & General Investment Management, Aviva, Robeco, Schroders, and UBS last year called on oil giant BP to explain how its strategy is consistent with the Paris Agreement on climate change. Through sustained engagement, they won the board’s support and the proposal was unanimously approved by shareholders at last year’s general meeting, paving the way for BP’s groundbreaking net-zero commitment in February. 

Longtime shareholder advocates will believe all the new pledges when they see them. Still, in a year of unprecedented events, the AGM season could deliver some unexpected results. The COVID crisis “is really a wild card,” says Passoff. “We may see some interesting responses from companies.”

That’s already beginning to happen, he says, as investors engage companies to head off bad behavior.  One example: A group of 307 investors led by Domini Impact Investments, the Interfaith Center, and New York City issued a five-point plan urging companies to protect workers and limit buybacks and executive pay during the COVID crisis.

Some of what we’re watching:

Climate concerns reign

Environmental issues again dominate, and climate-risk dominates the category, with 64 out of 93 environmental resolutions, according to the 2020 Proxy Preview. Many resolutions this year call on companies to explain how their strategies align with the Paris climate accord. Climate Action 100+ has filed such requests with Chevron, Devon Energy, ExxonMobil, and Marathon Petroleum.

Investors are also concerned about the risk of stranded assets relating to natural gas infrastructure. Dominion and Sempra Energy successfully petitioned the S.E.C. to block stranded asset resolutions, while ones at Duke Energy and Southern Company were withdrawn after the companies and shareholders reached agreement. 

The ‘S’ in ESG

After withdrawals, some 40 resolutions seeking fair pay and equitable working conditions will be put to a vote this season. The proposals were prepared well before the pandemic hit, but the crisis only brings these issues into sharper focus. One opening for shareholders to hold executives to account: ‘say on pay’ issues. Another: engagement. “Companies with strong human capital management are going to fare better at the end of the day,” says Peter Reali of Nuveen.

The COVID crisis could bring more reporting rigor to an area that has had little forced disclosure, says Legal & General’s John Hoeppner. A recent statement by S.E.C.’s Jay Clayton and William Hinman suggests that company actions to “protect worker health and well-being and customer safety” may be “of material interest to investors and we encourage disclosure.”  

Stakeholder economy

Since signing onto the BRT’s statement of corporate purpose, 181 CEOs signaled that their employees, customers, communities, suppliers and society at large are prioritized alongside shareholders. Yet prominent Roundtable members have sought to block shareholder resolutions on everything from climate change to diversity, and the Roundtable itself supported the S.E.C. rule changes that would sharply curtail their use.

Stakeholder primacy: CEOs redefine the role of business in society

After their attempts to block the proposals failed, BlackRock and Goldman Sachs  face shareholder votes on proposals asking for details on how they plan to implement the new stakeholder-centric view. Votes on similar proposals last week at Citigroup and Bank of America failed to garner enough votes. 

Fossil fuel banker

JPMorgan Chase, the world’s largest fossil fuel financer, holds its annual meeting on May 19. On the docket: a proposal by As You Sow asking the bank how it intends to reach net-zero emissions by 2050 in line with the Paris Agreement, including emissions associated with its lending activities.

Shareholders are also asking the company to report on its financing of tar sands and other high-carbon activities, and waging a campaign to oust former Exxon chief and longtime JPMorgan director Lee Raymond. 

JPMorgan Chase plays catch-up on climate

Board purge at Exxon

The oil company blocked a request for an accounting of how it intends to reduce its total carbon footprint in alignment with the Paris accord. But it faces a challenge from the Church of England and New York State Common Retirement Fund, which last week urged fellow shareholders to replace Exxon’s entire board.

The investors were motivated by “profound dissatisfaction with ExxonMobil’s approach to climate change risks and the governance failures that underpin it,” they wrote in an open letter. “We believe that ExxonMobil can do so much better, and that a change in strategy and governance can bring about a long overdue improvement in shareholder returns.”

Big Tech

Amazon is once again the target of investors including employees and the Interfaith Center on Corporate Responsibility who have fielded more than 14 shareholder resolutions – the highest number for any U.S.-based company, reflecting the e-commerce giant’s growing power. The resolutions target areas from climate to governance; half are focused on human rights, including its facial recognition software and worker health and safety. Amazon’s response, says Legal & General’s Hoeppner, will be closely watched. “Its a bigger symbol to tech and future-leaning companies on how to be more engaged.”

Stewardship scores

As a handful of asset managers amass control an increasing swath of public shares, they are being held accountable by investors for their stewardship. Voting records are being scrutinized. Active “stewardship,” encompassing shareholder engagement as well as voting and other measures, is the new competitive differentiator for managers of so-called passive portfolios.

The Brief: Japan’s GPIF shakes up asset management, Samasource’s score, diverse teams, Sankalp’s entrepreneurial solutions

That puts BlackRock, in particular, in the hot seat. Investors are looking to see how it behaves after Fink declared that “climate risk is investment risk.”

“We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” Fink wrote in his January letter. 

That would be a departure: BlackRock voted against 93% of social and environmental resolutions last year, according to Morningstar. The asset management giant, which holds its AGM on May 21, is opposing a resolution asking it to explain how it will implement the Roundtable’s stakeholder pledge.

Looking ahead

The COVID crisis could prompt a wave of new shareholder resolutions next year targeting at a wide range of issues and companies, says Proxy Impact’s Passoff.  That could include drug pricing and access at pharmaceutical companies; worker health, safety and pay at retail, food, agriculture and transportation companies;  evictions and predatory loans at finance and real estate companies; and the spread of misinformation at social media giants. Executive compensation and how bailout money was used will also likely be a big issue, he added, especially at companies that laid off workers.