Say on Climate Votes: Glass Lewis Overview

Say on Climate Votes: Glass Lewis Overview

Companies’ adoption of an annual shareholder vote on their climate strategies, or Say on Climate, has arguably been the most dominant issue of the 2021 proxy season. Since the first management proposal arrived on shareholders’ ballots, at the Spanish infrastructure operator, Ferrovial SA, we have seen a number of both management and shareholder proposals on this topic, all of which varied to some degree.

With the myriad proposals going to a vote in the coming months, we believe it is important to provide the market with our initial observations and considerations when evaluating these proposals. It should be noted that this issue is still very much flux, and likely will be throughout proxy season. Given the broad variety of proposals – both management and shareholder proposals – and the lack of standardization on how shareholders should evaluate each of the climate plans submitted to a vote, Glass Lewis will continue to maintain a case-by-case approach on this issue. We intend to codify our approach in advance of the 2022 proxy season, following investor, corporate, and stakeholder engagements.

Types of Proposals

Both management and shareholder proposals dealing with Say on Climate are going to a vote in the coming months. With respect to management proposals, we have seen two main varieties:

• establish a policy that would create the framework for the adoption of an annual vote on climate disclosure/strategy, or Say on Climate at future AGMs; and
• request shareholder approval of a company’s climate transition plan, or hold a Say on Climate at the 2021 AGM.

Examples of management proposals to establish a policy on Say on Climate proposals for future AGMs:

Ferrovial SA (Bolsas y Mercados Españoles: FER):

The General Shareholders’ Meeting shall decide annually on a consultative basis on the Company’s Climate Strategy Report. For this purpose, the Board of Directors shall make the corresponding Report available to the shareholders when the Ordinary General Shareholders’ Meeting is called.

This Report will be consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). It will also include the evolution of emissions of the different business activities, facilities and assets over which Ferrovial maintains control, in accordance with international standards (ISO 14064 or equivalent), indicating annual progress with respect to the Greenhouse Gas Emissions Reduction Plan.

The Report will be verified by an independent body, in accordance with specific internationally approved auditing standards (ISAE 3410 or equivalent).”

Canadian National Railway Company (TSX: CNR):

RESOLVED that, on an advisory basis and not to diminish the role and responsibilities of the Board of Directors, the shareholders accept the Company’s Climate Action Plan disclosing the Company’s greenhouse gas emissions and the strategy the Company has adopted or will adopt in accordance with its Climate Action Plan to reduce the Company’s greenhouse gas emission levels in the future, the whole in a manner consistent with the Task Force on climate-related Financial Disclosures recommendations, as disclosed in the section entitled ‘CN Climate Action Plan’ of the Information Circular of the Company dated March 9, 2021; and

RESOLVED that the Company shall report annually at each annual general meeting of shareholders, the Company’s progress made towards achieving the targets set out in its Climate Action Plan, and shall ask shareholders, at each such annual general meeting, to vote upon, on a non-binding advisory basis, the Company’s Climate Action Plan.

Examples of management Say on Climate advisory proposals at 2021 AGMs:

Ferrovial SA (Bolsas y Mercados Españoles: FER):

“To approve, on a consultative basis, the Company’s Greenhouse Gas Emissions Reduction Plan.”

Moody’s Corporation (NYSE: MCO):

RESOLVED, that the stockholders of Moody’s Corporation (the “Company”) approve, on an advisory basis, the Company’s 2020 Decarbonization Plan as disclosed in Appendix A to the Proxy Statement for the Company’s 2021 Annual Meeting of Stockholders.

Examples of shareholder proposals to establish a policy on Say on Climate proposals for future AGMs:

Unlike management proposals, shareholder proposals are only of the variety that seeks the adoption of a Say on Climate proposal at future AGMs, rather than requesting a vote on any climate plans at the 2021 AGM.

However, shareholder proposals requesting that companies adopt a Say on Climate in the future have also varied significantly. The shareholder proposals can be grouped into the following categories:

• proposals that solely request a Say on Climate at future AGMs;
• proposals that solely request a Say on Climate at future AGMs but make other suggestions worded so as to be optional;
• proposals that request a Say on Climate at future AGMs bundled with other implicit or explicit climate themed requests (e.g. reduction of emissions).

For example, one form of the proposal (such as that seen at Canadian Pacific Railway) has two resolved clauses embedded within the same proposal, including an explicit request that the company reduce emissions, while others have only a single resolved clause without a second explicit request.

Canadian Pacific Railway Limited (Toronto Stock Exchange: CP):

RESOLVED, that shareholders of Canadian Pacific Railway Limited (the “Corporation”) direct the Board of Directors of the Corporation to present to shareholders on or before 31 December 2021 a climate action plan disclosing the Corporation’s greenhouse gas emission levels (the “Emissions”) in a manner consistent with the Task Force on Climate-related Financial Disclosure recommendations and the strategy that the Corporation has adopted or will adopt to reduce the Emissions in the future [emphasis ours, added on explicit additional ask], including any Emissions’ progress made year over year (the “Reduction Plan”); and

RESOLVED, that beginning with the annual general meeting of shareholders to be held in 2022, the Board of Directors of the Corporation shall report annually at each annual general meeting of shareholders, the Corporation’s progress made towards the Reduction Plan, any updates or changes made or to be made to the Reduction Plan and the Directors of the Corporation shall ask shareholders, at each such annual general meeting (beginning with the annual general meeting in 2022), to vote upon, on a non-binding advisory basis, approval of the Reduction Plan and any changes thereto.

Charter Communications, Inc. (NASDAQ: CHTR) and Union Pacific Corporation (NYSE: UNP):

RESOLVED, that shareholders of Charter Communications, Inc. (“Charter” or the “Company”) request that the Board of Directors of Charter disclose at each annual meeting of shareholders, beginning with the next annual meeting of shareholders, a report disclosing the Company’s greenhouse gas emission levels (the “Emissions”) in a manner consistent with the Task Force on Climate-related Financial Disclosure recommendations as well as any strategy that the Company may have adopted or will adopt to reduce the Emissions in the future, including any Emissions’ progress made year over year (the “Reduction Plan”), and provide shareholders with the opportunity, at each such annual meeting, to express non-binding advisory approval or disapproval of the Reduction Plan.

Companies have also responded differently to these shareholder proposals. For example, after Moody’s received a shareholder proposal on this topic, it opted to place a management proposal to approve its climate strategy on the ballot for its 2021 annual meeting rather than wait for the 2022 meeting, jumping ahead of the shareholder proposal’s request. Canadian Pacific Railway, on the other hand, determined to place the shareholder proposal up for a vote and recommended that shareholders vote in favor of the resolution. Charter Communications also placed the shareholder proposal up for a vote, but took a different approach and recommended that shareholders vote against it.

Investor Responses to Say on Climate

Views on Say on Climate proposals are decidedly mixed. Many investors have indicated their support for these types of proposals, including the UK’s Local Authority Pension Fund Forum, Oxford University Endowment Management, Legal & General Investment Management, and investment manager Ninety One (fka Investec Asset Management).

Others have been more skeptical of the approach. For example, Vanguard has stated that it would review each proposal independently while State Street has said that companies with strong environmental track records should not have their carbon emissions plans put to a shareholder vote. State Street also expressed concerns that, if these plans become routine, investors may become passive and approve practices of substandard companies. In addition, in a recent Glass Lewis webinar, representatives from the California Public Employees’ Retirement System, New York State Common Retirement Fund, and the Office of New York City Comptroller also expressed some reservations with companies’ providing shareholders with a Say on Climate. Largely, the pension giants were concerned that it limited board accountability for companies’ climate strategies.

Robert Eccles, a tenured Harvard Business School professor, now teaching at Oxford University, has come out more firmly against the notion of a Say on Climate vote, making reference to some of the failures of Say on Pay. Eccles cites empirical research that suggests that the disclosure provided by companies as part of a Say on Climate is unlikely to effect significant changes. In addition, he cites the burden on investors “who then have one more issue to vote on during proxy season when in fact their most important role is to ensure Board accountability.”

Nonetheless, given that these are management proposals for which the board has recommended in favor, it is unsurprising that many have received strong shareholder support.

Glass Lewis Response to Say on Climate

Our initial impression of these proposals is to share certain concerns that some investors have articulated. Nonetheless, we also believe there may be a number of benefits to adopting a Say on Climate, which some other investors have advocated. Primary among the benefits of a Say on Climate is that it would ensure that companies are producing robust, Task Force on Climate-related Financial Disclosures (TCFD)-aligned reports that should allow shareholders to understand how each company is considering climate in its long-term strategy. Further, adoption of this proposal puts this issue firmly on the agenda for both companies and investors. It is our view that these parties mutually benefit from mechanisms that allow for engagement on issues related to climate and that allow shareholders to register concerns regarding how companies manage this important issue.

Very few investors have concerns regarding the additional disclosure that Say on Climate might promote. Glass Lewis strongly supports such disclosure, particularly when it is aligned with TCFD recommendations. However, from our perspective, the potential unintended consequences from offering a shareholder vote on a climate plan or strategy are more concerning. We are concerned that it could lead to scenarios where some investors, who may not have the capacity or technical ability to analyze these plans, provide a rubber stamp for climate strategies that are out of alignment with broader climate goals. Further, in certain markets, there could also be potential legal concerns. For example, as Michael Garland of the New York City Pension Funds noted on Glass Lewis’ recent webinar, support for a corporate climate plan “might jeopardize our right to take legal action in the future, if those disclosures were ever revealed to be fraudulent in some way and we had somehow given them our seal of approval.” In addition, companies’ climate reports are generally standalone documents that are separate from companies’ financial statements, thus the link between these plans and companies’ bottom lines is not always explicitly provided. Further, it could also mean that such information is subject to fewer assurance mechanisms, potentially raising some level of concern regarding the adequacy of the data on which shareholders are voting.

An additional notable concern relates to having shareholders vote on a company’s climate strategy, which for all intents and purposes is an element of a company’s overall business strategy. A potential unintended consequence may be that when shareholders are asked to approve a company’s overall business strategy in a single vote painted with broad brush strokes, they may unintentionally sign off on certain aspects of strategic plans without a full and reasoned analysis of the effects of those plans. Until there is greater standardization of Say on Climate votes, whether through regulation or codified best practice guidelines, we believe shareholders should approach these proposals with caution, recognizing that their votes may be interpreted as sign off on nuanced aspects of a company’s strategy.

Given these concerns, during the 2021 proxy season, we will generally recommend against management and shareholder proposals requesting that companies adopt a policy that provides shareholders with an annual Say on Climate vote on a plan or strategy.

When companies bypass that step, and place their climate plans up for an advisory vote, Glass Lewis will evaluate these climate plans on a case-by-case basis, as detailed below.

Best Practices and Glass Lewis Policy Approach for Say on Climate

Many companies are not seeking such shareholder approval to adopt policies that will come into play at future AGMs and have, instead, placed their climate plans up for an advisory vote during the 2021 proxy season. When evaluating these proposals, we look for companies to provide shareholders with context as to how they view the roles of the board and shareholders in executing their plans. Given the rapidly emerging nature of these votes and the absence of any standardized set of criteria for them, it is still too early to definitively outline best practices. However, there are some good practices we can identify from early adopters.

We highlight the disclosure provided by the French infrastructure company, VINCI (Euronext Paris: DG), as a good starting point for companies. In its Notice of Meeting, it states:

By consulting shareholders about its environmental policy in a Shareholders’ General Meeting, VINCI is breaking new ground in France. The vote will be purely advisory, which is necessary in order to respect the remits of VINCI’s corporate bodies. As a result, it will not be binding either on shareholders – who are not being asked to take responsibility for approving or objecting to VINCI’s environmental approach, since that lies with the Board and Executive Management – or on the Company, which intends to implement an ambitious environmental policy across all its business lines in any event.

The sole purpose of the vote is to encourage VINCI’s shareholders to buy into the ambition presented and described to them, allowing them to show their support for it if they wish.

Naturally, the Board hopes that this strategy, which will guide the actions of all Group entities and functions, will receive broad support and will therefore be shared.

 Given that shareholders may have multiple motives when voting on such a matter, the Company wishes to clarify that if the resolution does not pass, it would use all resources at its disposal to hold discussions with shareholders and seek information from them about why they did not support the proposed draft resolution, inform all shareholders about the results of that process and announce its intended measures aimed at taking them into account.

This disclosure provided us some assurance on two accounts: (i) the company clearly laid out that its environmental approach lies with the board and executive management committee, and shareholders are not being asked to take responsibility for this approach; and (ii) VINCI clearly lays out how it intends to respond should the proposal fail, and part of that response is engaging with its shareholders. In instances where we do not find these assurances in the meeting materials, we will typically recommend that shareholders abstain on proposals approving the plans.

We will also look closely at what the proposal is asking shareholders to approve. Given our concerns regarding shareholders’ direct votes on strategy, we believe the aforementioned disclosure is extremely important. However, we have looked favorably on proposals asking for approval of their disclosures. For example, Aviva plc (London Stock Exchange: AV) submitted a proposal asking shareholders:

“To approve the Company’s climate-related financial disclosure for 2020 set out on pages 60 to 63 of the Company’s Annual Report and Accounts for the financial year ended 31 December 2020.”

We found this request, as well as Aviva’s disclosure, to sufficiently address our concerns regarding this mechanism.

In addition to evaluating any disclosure on how a Say on Climate vote will be governed, we will also carefully evaluate companies’ climate plans or ambitions. In instances where we believe that the plans insufficiently address issues related to climate change, we may, instead of abstaining, recommend that shareholders vote against such plans.

Conclusion

Given the significant risks faced by companies and investors as a result of climate change, investors need companies to provide clear and comprehensive information that allows them to incorporate these risks into their investment decisions. In recent years, significant progress has been made with respect to the disclosure that companies are providing on this issue, aided by bodies such as the TCFD, which allows for a more comprehensive and comparable approach to how companies are incorporating climate-related issues into their strategic decisions.

We believe that there are many positive aspects to a Say on Climate vote; it ensures companies are providing robust climate-related information to shareholders on an annual basis and it places the issue of climate on the agenda for both companies and investors. Although we welcome these positive developments, we believe that Say on Climate also presents a number of challenges for investors and companies.

These challenges include:

• a lack of engagement from companies with the broader market regarding the concerns that have been expressed by investors about companies’ use of Say on Climate;
• an absence of legal clarity or codified best practice standards to assuage investors concerns;
• questions about the scope and utility of Say on Climate votes being adopted on a broad, non-targeted basis; and
• a potential lack of a thorough and highly-technical understanding of climate-related issues on the part of the investment community, broadly, which may hinder investors from fully understanding or being able to interpret companies’ climate transition plans.

With these benefits and concerns in mind, we will continue to carefully evaluate companies’ climate transition plans on a case-by-case basis. We will also continue to engage with market participants on this issue and intend to codify our approach to these proposals in advance of the 2022 proxy season.