Say on Climate votes emerged as the biggest ESG story of proxy season 2021 in North America, Europe … and perhaps now Australia. Following the lead of a number of companies in markets around the globe, BHP will be the first Australian company to put its climate strategy to a shareholder vote.
Corporate climate strategies have been a focus of ESG-minded institutional investors for years. With Say on Climate votes now showing up on meeting agendas across the globe, and market consensus forming around disclosure standards and practices, shareholders are looking for meaningful emissions reduction goals, along with clear and comprehensive reporting, and robust oversight at board level.
In support of its resolution, BHP has provided significant disclosure, including details of what appears to be a strong internal governance structure — but it’s not clear that the company’s transition targets meet expectations.
Background
Say on Climate has been a polarizing trend. Supporters note that the proposals put the issue of climate change firmly on the agenda and promote improved disclosure about the topic. However, sceptics have raised concerns. There is potential for the votes to serve as a rubber stamp on misaligned or poorly disclosed policies and for widespread adoption of the votes to undermine institutions’ existing targeted approach to companies’ climate strategies–the oversight of which many believe should remain the sole purview of the board, creating unnecessary costs for both companies and investors.
Another frustration expressed by shareholders about companies’ adoption of Say on Climate focuses on the lack of standardization of the resolutions being put to a vote. The specific terms of each proposal bear scrutiny. Was it proposed by management or shareholders? What exactly is being voted on – one-off approval of the climate plan, or a framework for future votes? How will the board interpret and respond to the vote results? By giving their “say” now, are shareholders giving up their right to take legal action down the line?
BHP: Do the company’s transition targets meet expectations?
In BHP’s case, the management-sponsored proposal seeks both to approve the company’s Climate Transition Action Plan (CTAP), and to establish a triennial advisory vote going forward. The CTAP outlines the company’s:
- Scope 1 and 2 emissions position and performance,
- Scope 3 emissions position and performance,
- Approach to assessing capital alignment with a 1.5ºC world,
- Just transition approach, promoting social and climate justice as the company moves towards sustainability,
- Climate policy engagement, including BHP’s strengthened approach to industry association alignment with the Paris Agreement, and
- Climate governance, including stakeholder engagement, board and management capabilities, and linking executive remuneration to climate change strategy.
BHP has provided robust disclosures on many accounts, along with a thorough discussion of its CapEx spending and alignment with the Paris Agreement. Yet shareholders aren’t simply being asked to consider the company’s current targets and disclosures – the proposal structure also includes the company’s overall approach for overseeing strategic issues related to climate on an ongoing basis. That would mean limiting shareholders’ voice to an advisory vote once every three years. That timeframe raises the stakes. If approved, BHP’s shareholders won’t get another opportunity to weigh in on the company’s climate practices until 2024. In a rapidly evolving landscape, three years is enough time for today’s standards and expectations to become obsolete — and with COP26 upcoming, the ground could shift sooner than later.
And while the company has provided significant disclosure, it’s not clear that current targets and disclosures are in line with today’s expectations. It is unclear to what degree any of BHP’s current targets are aligned with the goals of the Paris Agreement, raising questions as to whether they are science-based. Additionally, several investor-led initiatives have raised concerns about BHP’s alignment with several best practice standards. In a December 2020 assessment, the Transition Pathway Initiative noted that the target is not aligned with Paris. Similarly, the CA 100+ Benchmark notes that BHP’s target (or in the absence of a target, the latest disclosed GHG emissions intensity) is not aligned with the goal of limiting global warming to 1.5°C.
Scope 3 emissions, which include upstream and downstream emissions indirectly related to the company’s operations, are another area of concern. While BHP has the laudable goal of pursuing a long-term goal of net zero Scope 3 emissions, it appears to have somewhat limited targets. Instead, the company has pledged to partner with customers and others to accelerate the transition to carbon neutral steelmaking and other downstream processes, and to support the value chain by pursuing carbon neutral production of our future facing commodities. Recognising the significant uncertainty in even just calculating Scope 3 emissions, and, by extension, setting precise targets with regard to these emissions, more specificity could allow shareholders a better understanding of how BHP intends to address this issue. That’s particularly salient with regard to the company’s goal regarding steelmaking, which makes up approximately three-fourths of its Scope 3 emissions.
It’s not just a matter of what’s missing – some of the information that has been included could be presented more clearly. One of the main purported benefits of Say on Climate is that it ensures 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. Yet rather than being integrated into the CTAP, BHP’s reporting on TCFD alignment forces shareholders to refer to an Excel-based index and no fewer than seven different documents.
Conclusion
Shareholders have a lot to consider. BHP has a solid governance structure for its climate-related considerations: several directors have relevant skills and experience, climate and ESG are integrated into the executive incentive program, the company engages on the topic regularly with a variety of stakeholders, and the board has clearly outlined how the topic is governed at management level. Yet several investor-led groups have raised concerns with the company’s transition targets, and it’s unclear whether emissions reductions goals are science-based. Moreover, the vote goes beyond approving the current CTAP to formalize the company’s approach to shareholder climate voting going forward – with no further vote for three years.
Concerns about the integrity of the transition plan targets, and the terms of the proposal itself, led Glass Lewis’ ESG research team to issue an “against” voting recommendation on BHP’s Say on Climate proposal. And the background research and peer-based analysis in Glass Lewis’ Proxy Paper provides a clear, comprehensive picture of how the company’s plan stacks up both to competitors and to a variety of internationally-recognized best practice standards, giving investors the information they need to make their own vote decision.
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