The season of proxy discontent

July 29, 2021

12:30 am

The recent proxy season was a fascinating and eventful one, both for our own activity and for the corporate world in general. The news headlines were grabbed by a small hedge fund, Engine No. 1, who succeeded in getting three of their nominees elected to the board of Exxon Mobil, holding just 0.02% of Exxon’s shares. It illustrated the power of collaboration and it signified an awakening of the annual general meeting as behemoths like Blackrock demonstrated they were prepared to use their votes to challenge large public companies. Proxy Preview reviewed the US proxy season in late June and said “To date, there have been 34 majority votes for ESG proposals, shattering last year’s record of 21… Last year, only two votes broke 70%, while this year 17 did.” (link) The focus is much wider than just climate and the environment. Proposals about political spending and lobbying accounted for most of the successful proposals in the US. Diversity also rose in prominence with a focus on board and executive diversity, diversity disclosure, diversity programmes and racial equity audits.

To illustrate the awakening of the AGM as a force for ESG impact, BlackRock supported 62.5% of environmental and social proposals in the last 12 months, in the previous 12 months they supported 6% of environmental proposals and 7% social proposals (link). No more hiding for the fund manager that says they act by selling the shares of a company they disagree with; stewardship requires real engagement, collaboration and the considered casting of votes. We are all active owners now.

Our engagements and collaborations prior to the AGM season were mainly focused on remuneration policies. We made some ground in our desire to see management more closely aligned with shareholders through longer holding periods for stock awards and a greater level of share ownership to ensure management has real ‘skin in the game’. However, there is much push back from remuneration committees on these issues. We face objections based on competition for talent, greater compensation available at global competitors, and claims of alignment with best practice when compensation schemes are based on the minimum guidance from bodies such as the Investment Association. This area is a real uphill struggle for shareholders.

The other area of focus for us was on the environment and particularly carbon emission reduction targets. Our engagement with the energy companies over the last 18 months, coupled with other independent assessments such as the Climate Action 100+ Benchmark, led us to conclude that Royal Dutch Shell’s transition plans were not ambitious enough and their capital expenditure plans were not going in the right direction to be aligned with the Paris Agreement. This is important, firstly society needs companies and particularly companies in the energy sector, to support the transition to a low carbon world. If they do not, it will be a huge struggle to mitigate global warming. Shell says they will move in step with society, but we need energy companies to do more than just move with society. We need energy companies leading by unlocking the problems of that transition. Furthermore, if they do not do more and are not seen to do enough, they will be subject to further divestment from other investors. This will weigh on their valuations. If they continue to allocate capital to develop new fossil fuel projects, they increase the risk of stranded assets, in contrast to the IEA opinion that no new oil and gas should be developed beyond that already committed to as of 2021. Therefore, there is valuation risk, stranded asset risk and in addition there will be a risk to their social licence if they do not demonstrate that they are agents of the transition.

However, as a result of pressure from shareholders and other stakeholders, Shell has made substantial progress on emission targets over the last five-years. We believe this is the right path to follow, rather than divestment. While we are typically supportive of management, we do see our votes as an extension of our stewardship and one of the levers to force change. Therefore, at the AGM we backed a shareholder proposal from Follow This, calling on the company to increase their targets on emission reduction. The proposal got 30% of the vote, up from 14% on a similar proposal in 2020. Prior to casting our vote, we informed Shell via a letter to the incoming Chairman, where we outlined our concerns. With this vote, and a subsequent but independent Dutch court decision, Shell has responded by saying they will move faster on their transition plans, we await the details.

We did not support a similar vote at BP, and we backed the transition plans at TotalEnergies. We believe both companies have much more to do, but we wish to give them time to execute current plans and to develop new plans. Importantly, both companies acknowledged the need to do more.

Barclays was also the subject of a shareholder proposal, from an activist group called Market Forces. The proposal called for Barclays to set “short-, medium-, and long-term targets, to phase out its provision of financial services to fossil fuel (coal, oil and gas) projects and companies”. The focus on phasing out lending to companies is somewhat problematic as it raises complications around conglomerates and around companies operating in emerging markets, where the transition may take longer. The trend among banks leading on climate is to force corporates to align with the Paris Agreement and to aggressively reduce lending to coal plants and coal mining projects. Barclays trails such peers, who themselves must do more.

While we didn’t support the shareholder proposal, we did get a commitment from Barclays on putting forward a ‘Say on Climate’ at next year’s AGM. We will participate in an engagement developing that advisory vote. We believe this was a good outcome, a ‘Say on Climate’ is a mechanism for shareholders to keep the pressure on Barclays to improve their transition strategy. Meanwhile, the shareholder proposal received 14% support.

This proxy season has been fascinating, it proved that asset managers are engaging on ESG issues and are willing to use their voting power to force change. Engine No. 1 provided an example for small shareholders of the possibility to make an impact, while the awakening of Blackrock sends a powerful signal to corporates that they can no longer count on a large passive vote in their favour. It gives all of us encouragement to build engagements and form collaborations, because the chances of a successful outcome are no longer so remote.

The information shown above is for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice.

Unless otherwise stated, all opinions within this document are those of the RWC UK Value & Income team, as at 29th July 2021. 

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