Upset Over Climate Inaction, Investors Look To Use All Tools To Drive Change

Early signs indicate that investors may be willing to use the different voting tools—even those unrelated to climate issues—to increasingly signal their opposition to non-credible climate transition plans.

To date, many large investors, particularly those based in Europe, are unsatisfied with the progress companies have made toward meaningful climate change. We have seen this manifest in several shareholder revolts over climate transition targets that were deemed to lack credibility.

Most recently, a group of Dutch investors announced they will oppose pay plans of oil and gas companies that fail to set climate change goals in line with the Paris Agreement on global warming. These investors are not voting against remuneration proposals because they are inadequate – but they are prepared to use their Say on Pay vote to goad management teams into developing more meaningful or ambitious climate transition plans.

While this activism is currently limited to a small group of investors targeting a single industry, it is entirely possible that we will see broader adoption of this approach, especially if these efforts are successful in driving the desired change.

How have we gotten here?

Investor actions thus far, such as increased dialogue with companies, encouraging additional disclosure and supporting annual Say on Climate votes, have had limited success. In some cases, they have been seen as counterproductive (e.g., Say on Climate).

That said, the role increasing global regulatory scrutiny has played in prompting action cannot be downplayed. To recap, in late March, the Securities and Exchange Commission (SEC) proposed expanding and standardizing U.S. company disclosures about carbon emissions and other climate-related metrics. In February, the Council of the EU adopted its position on the corporate sustainability reporting directive (CSRD), the European regulatory framework for sustainable finance and the Task Force on Climate-related Financial Disclosures (TCFD) required for UK premium listed firms for fiscal years beginning in 2021.

Much as compensation disclosure regulation did over the past few decades, the mounting climate regulation is likely to significantly enhance investors’ ability to benchmark and accelerate progress relative to norms and established standards.

In light of the low adoption of Say on Climate votes for shareholders at annual general meetings (and some skepticism around its potential to facilitate greenwashing), investors have limited recourse with which to opine on climate transition targets; currently, there are no formal mechanisms for investors to formally approve management plans. So it is unsurprising that investors are starting to look for alternative routes to drive change that, while not directly tied to climate actions, are viewed as visible, prominent ways to signal dissatisfaction with progress to date.

Such efforts include:

• Say on Pay: Voting on pay is widely considered to be a relatively low-risk measure, particularly in markets where the vote is merely advisory (as opposed to binding). However, the Dutch group of investors intends to use this lever to negatively impact executive pay with the hope that it will prompt change.

• Director re-election: Existing directors have to be regularly re-elected at annual general meetings (AGMs), and new directors appointed during the year tend to be co-opted to the board but have to be elected by vote at the next AGM. While this vote has historically been used conservatively, we’re hearing more and more from the investment community that they intend to use it to signal their dissatisfaction with board members’ performance and effectiveness.

ISS and Glass Lewis, the two most influential proxy voting agencies, have both strengthened this expectation in their voting guidelines:

  • Glass Lewis states they “will generally recommend voting against the governance chair of a company who fails to provide explicit disclosure concerning the board’s role in overseeing [environmental and/or social] issues.”
  • ISS similarly states they will recommend a vote against where there are material ESG failures of governance, stewardship, risk oversight or a failure of fiduciary responsibility, and where there is a deemed lack in climate accountability and minimum steps required to mitigate risks related to climate change to the company and the larger economy.

Activists’ nominees: A third, more radical manifestation of shareholder dissent is a vote in support of the appointment of investors’ own directors to the board. In 2021, ExxonMobil was forced to relinquish board seats to directors who were nominated by activist hedge fund, Engine No. 1 in a clear campaign for the company to introduce a more effective climate transition plan. This included support from influential institutional investor, Blackrock, Exxon’s second-largest investor. Whilst there’s no doubt this is an effective method of focussing directors’ minds, we don’t expect it to be used often given the time, money and political expense of such an intervention. 

Indeed, there is also the last-resort option – which is for investors to divest their stake in the company. However, this option may not be available to the largest investors who need broad investment alternatives and simply absolves them of responsibility, making it someone else’s problem – which may not be aligned with investors’ mandates of using their financial clout to influence positive change.

How can companies respond?

We expect further shareholder activism and use of tools to hold their companies accountable. Companies should evaluate how prepared they are to respond to, or better yet, avoid such investor dissent.

Based on WTW’s global research on the views of directors and investors, actions to consider include:

1. Clearly articulate the linkage between business strategy, climate goals, and transition plans and engage with shareholders to ensure understanding of the company’s position and solicit feedback.

2. Set meaningful metrics and targets to track progress toward strategic goals: For greenhouse gas (GHG) emissions, targets should be sufficiently challenging and aligned with science-based targets (SBTs); savvy investors look for them to be set not according to a percentage reduction over prior years, but in alignment with the roadmap set by the 2015 Paris Agreement. Beyond GHG emissions, investors will also look for metrics tied to significant commercial or industrial milestones as contained in companies’ climate transition strategies. We also expect savvy investors to look at detailed disclosures, including capital commitments related to decarbonization and climate transition, before deciding how to vote (for example on remuneration issues).

3. Assess whether and how these targets should be reinforced through executive incentives: Most institutional investors consider incentive compensation to be a powerful tool in accelerating an organization’s climate transition and a key mechanism to align management interests with achieving credible climate transition targets. To help companies with this complex issue, in partnership with World Economic Forum’s Climate Governance Initiative, WTW published the Executive Compensation Guidebook for Climate Transition.

4. Enhance the board’s climate governance: Progressive companies are elevating the importance of the topic in the boardroom and are appointing directors who are climate literate, if not climate experts. Some companies are also establishing separate board sustainability committees to oversee and guide management to achieve long-term climate transition goals.

Pressure from investors, regulators, customers, employees and the broader community is pushing companies to set meaningful climate transition plans – along with measurable, transparent and appropriately difficult targets that are aligned with business strategies. Former Bank of England Governor, Mark Carney, described Say on Climate votes as a “progressive mechanism to help establish a critical link between responsibility, accountability and sustainability.” However, until such mechanisms become universal, binding and demonstrably robust, they might be insufficient to drive tangible change.

These early signs of investors signalling their intention to use Say on Pay, one of their few voting tools, to object to insufficient climate plans and action is, in effect, a proxy for Say on Climate votes. It seems investors are recognizing their role in establishing that “critical link between responsibility, accountability and sustainability” that Carney called for. Our advice is for companies to take responsibility and promote accountability for the action required to ensure a sustainable and effective climate transition.


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