The Proxy Voting Guidebook showcases memos supporting shareholder proposals filed by institutional investors concerned about the risks and opportunities of climate change to companies in their portfolios. Each memo presents the business case for a shareholder proposal that will go to vote during the 2019 proxy season. The resolutions discussed are a sampling of more than 130 climate-related shareholder proposals and cover climate change-related topics including carbon asset risk, greenhouse gas (GHG) reduction goals, high carbon financing, deforestation, lobbying disclosure, sustainability reporting and water impacts.
Investor action to address climate change is growing rapidly
Climate Action 100+ (CA 100+) is a global investor initiative launched in December 2017 to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. More than 320 investors with more than $33 trillion in assets collectively under management are engaging companies on improving governance, curbing emissions and strengthening climate-related financial disclosures. The companies include 100 “systemically important emitters,” accounting for two-thirds of annual global industrial emissions, alongside more than 60 others with significant opportunity to drive the clean energy transition.
In July 2018, Climate Action 100+ released an update showing that 18 percent of focus companies have signed the official statement of support or committed to implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). (For more details on TCFD, which is now supported by over 580 investors and companies, see the Continental Resources memo.) In addition, 22 percent of CA 100+ focus companies have set or committed to set a science-based target or equivalent long-term target beyond 2030.2 Memos in this guidebook filed as part of CA100+ are marked with the initiative logo.
Along with the rapid growth of investors backing CA 100+ and the TCFD, support for climate- related resolutions by large asset managers is growing as well. During the 2018 proxy season, 46 percent of the largest asset managers operating in the U.S. voted for over half of climate-related shareholder proposals tracked by Ceres, up from approximately 33 percent in 2017.
Carbon asset risk
Scenario analyses have become a key way for oil, gas and electric utility companies to address carbon asset risk and the transition to a low-carbon energy future. The average vote on the three shareholder proposals requesting two-degree warming scenario (2DS) analyses filed with oil and gas companies during the 2018 proxy season was 52.8 percent (with majority votes at Kinder Morgan and Anadarko). In addition, the 2018 season featured a dozen 2DS proposals that were withdrawn in return for commitments by companies.4 Carbon Tracker estimates that $1.6 trillion of future capital expenditures are at risk of being wasted, with private sector fossil fuel companies bearing most of the burden.
GHG goals and clean energy sourcing
Quantitative, company-wide greenhouse gas (GHG) reduction goals are necessary for both corporate managers and investors to determine the overall expected impact of various initiatives to reduce emissions. The Science Based Target Initiative reveals that hundreds of large companies have already committed to setting GHG reduction goals and provides resources to assist companies.
Investments in projects which boost energy efficiency and projects which source renewable energy are two of the leading ways companies can achieve emissions reductions goals and capture the associated benefits. Improving energy efficiency typically generates a very high return on investment with little risk.7 In fact, CDP reports that carbon reduction actions tend to be more profitable than a company’s core business.8 Similarly, switching to renewable energy sources can provide companies important reputational benefits and reduce costs since wind and solar prices are now competitive with those of coal and natural gas in many regions, including large portions of the U.S.
Deforestation
Global supply chains for commodities such as cattle, palm oil and soy beans put companies at risk of supporting deforestation, which is associated with a multitude of human, legal and environmental abuses. In fact, deforestation produces more GHG emissions than the global transportation sector. Companies which use commodities produced in regions where deforestation occurs need robust policies and management systems to protect their reputations, ensure uninterrupted supplies and reduce regulatory and legal risks.
Lobbying disclosure
Corporate lobbying disclosure and its relationship to climate change-related laws and regulations is an increasingly important issue for fiduciaries. Investors who are part of the Climate Action 100+ initiative have raised the issue of climate-related lobbying with over 160 companies with high greenhouse gas emissions. This has resulted in positive movement by companies. For example, Royal Dutch Shell has agreed to align its own lobbying with the goals of the Paris Accord and to evaluate trade associations they support using the same standard. Investors working on the issue expect other companies will soon follow suit.
Sustainability reporting
The sustainability reporting process, in all its forms — stand-alone reports, web pages and ESG elements integrated within financial reports — underpins both corporate ESG programs and investing. It is impossible to manage or understand what is not measured. Indeed, in 2018, 85 percent of S&P 500 companies engaged in some form of sustainability reporting.10 Lack of ESG disclosure now contributes to poor ESG scores for companies on leading mainstream investment platforms offered by Bloomberg, Google Finance, Morningstar, Moody’s, MSCI, Sustainalytics, Dow Jones and Yahoo Finance.
Furthermore, numerous studies (included those listed below) link strong ESG performance with strong financial performance. Partly as a result, more than one in four dollars invested in U.S. markets are linked with some type of ESG investing.11 Larry Fink, CEO of BlackRock, wrote in his 2018 letter to CEOs: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.”12 It is critical that companies report on sustainability strategies, policies, goals and metrics to demonstrate how they impact these stakeholders.
Examples of studies supporting the financial importance of ESG issues
Friede, Busch and Bassen’s landmark meta study reviewed the results of 2,200+ studies from 1970 through 2014. “The results show that the business case for ESG investing is empirically very well founded,” the authors write. “Roughly 90 percent of studies find a nonnegative ESG–CFP (corporate financial performance) relation. More importantly, the large majority of studies report positive findings.
Morningstar’s research from 2015 shows that large-cap U.S. funds with high Morningstar Sustainability Ratings have lower risk.
A 2014 study showed that 88 percent of reviewed sources find that companies with robust sustainability practices demonstrate better operational performance, which ultimately translates into cash flows. 80 percent of the reviewed studies demonstrate that prudent sustainability practices have a positive influence on investment performance.
A 2012 review by Deutsche Bank Group found that 89 percent of studies on ESG demonstrate that companies with high ESG ratings show market-based outperformance, while 85 percent of the studies show accounting-based outperformance.
A study of the Thomson Reuters ESG dataset by Bank of America Merrill Lynch found that ESG integration can protect investors from bankruptcies, volatility, price declines and earnings risk. “Based on our analysis of companies with ESG scores that declared bankruptcy, an investor who only held stocks with above average-ranks on both Environmental and Social scores would have avoided 15 of 17 bankruptcies we have seen since 2008.”
An increasing number of investors are interested in ESG measures - more than executives think, according to research from MIT and BCG - and over half of investors will divest from a company with low sustainability ratings. The most popular reason cited in the study is that sustainability performance increases a company’s potential for long-term value creation.
Conclusion
The following memos elucidate the themes above as well as related ESG issues. Each memo describes an opportunity for shareholders to encourage sensible risk disclosure and mitigation by voting “for” the featured shareholder proposal. Support for ESG disclosure and active ownership (such as conscientious voting on ESG proposals) is backed by more than 2,000 institutional investor signatories of the Principles of Responsible Investing (PRI), who collectively manage more than $80 trillion.19 To see details of these and other climate- and ESG-related shareholder proposals, please visit: https://engagements.ceres.org.