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Commentary

A Mixed Proxy Season for Climate

Laura Hillis, Director, Climate and Environment at the Church of England Pensions Board, reviews the highs and lows of climate engagement in the 2023 proxy season.

Read any summary of the 2023 proxy voting season and the word ‘mixed’ is almost certain to feature in the first couple of sentences.

Resolutions this year trended towards being more specific and action orientated, and there was significant progress on climate lobbying disclosure through targeted engagement, specific resolutions and the option to vote against the board. There were, however, some serious setbacks for those who had worked to hold oil and gas majors to account and suggestions of a disparity between the long-term interests of asset owners, particularly pension funds, and how their asset managers voted on climate.

It’s time to evaluate these disparate outcomes, pick out the highs and the lows, and identify the actions and emerging themes that will lay the ground for a constructive voting season in 2024.

Lobbying takes centre stage

Corporate attempts to negatively influence climate policy are of significant environmental and financial concern to investors, and these came under the spotlight this year. To help ensure that the lobbying undertaken by the companies we own positively supports the Paris climate goals and is inline with their own stated commitments we, together with other investors and international investor networks, developed The Global Standard on Responsible Corporate Climate Lobbying in 2021. This framework for companies is designed to increase transparency and support positive lobbying action.  Fundamentally, unless there is the right enabling policy environment companies and investors will not transition.  This couldn’t be more relevant and material to investors stewardship.

This year, we again urged Volkswagen, an automaker we have repeatedly engaged on climate lobbying, to disclose comprehensive lobbying reports aligned with the Global Standard. Volkswagen produced its first disclosure shortly before its Annual General Meeting in May, a great outcome for its shareholders, some of whom have been engaging with Volkswagen on this important topic for many years.

We also made significant progress this year with National Grid, alongside Swedish pension fund AP7, when, following our pre-declaration to vote against the Chair and CEO over a lack of climate lobbying disclosure, the company released an updated policy with a commitment to conduct a lobbying review, an outcome that shows the game-changing potential of shareholder engagement.

This year also saw an uptick in lobbying-focused resolutions in the United States, some focused on climate change and others focused on political donation transparency. In Asia, Toyota faced its first shareholder resolution on climate change calling for greater transparency and alignment of its lobbying efforts. This was the first resolution filed in Japan on this theme, and the first shareholder resolution voted on at a Toyota AGM for 18 years. While support for the resolution was modest at 15%, this is a significant result in Asia, and will help this topic gain momentum with Asian companies and investors and likely future resolutions.

Energy majors fail on net zero alignment

Oil majors like Shell and BP choosing to backtrack on climate commitments and focus on short term profit maximisation – at the expense of the climate transition and the interests of institutional investors – was perhaps the biggest low of the season. And with the latest Transition Pathway Initiative (TPI) assessment showing no leading oil and gas company is aligned to net zero, it was with regret that we took the decision to disinvest all our holdings in the oil and gas sector. This was the conclusion of a five-year program of engagement with the sector which saw mixed success.

Misalignment between asset owners and asset managers

Pension funds have a long-term commitment to provide a retirement income for our beneficiaries. This means we need to take a long-term focus – many of our beneficiaries will retire long after ‘net zero 2050’. This long-term thinking appears to stand in contrast to some of the short-term thinking we saw in 2023 when it came to the casting of asset managers’ votes. We were particularly concerned by investor voting decisions at key oil and gas AGMs, which not only trumped the long-term interests of pension funds but have further increased the likelihood that climate targets will not be met or previous commitments could be easily ignored despite previous AGM votes endorsing the approach as in BP’s case.

While voting for a resolution or against a Director is always a complex decision that should not be taken lightly, continued support for management despite weaknesses in company approach can send a clear message to companies that such investors back a slow pace of transition or low ambition. It also casts into doubt managers’ own commitments to climate change. Pension funds are increasingly focused on this misalignment, and some will no doubt vote with their feet.

Evaluating the results and taking engagement forwards

With solid progress on lobbying set against disinvestment from oil and gas, and a rift between asset owners and managers over voting activity, responsible investors need to respond to these developments with a clear strategy and focus.

Driving the energy transition: It is becoming increasingly evident that oil and gas companies are unlikely to transition away from existing business models at the scale and pace required. If the energy majors no longer believe they can transition to renewables, a more radical shake up in our approach is needed. For the Church of England Pensions Board this has meant a pivot to engaging with the sectors which use the most coal, oil and gas – including the transportation, utilities and industrials sectors. Financing of new infrastructure for oil, gas, and coal globally is a key mechanism for ‘locking in’ emissions, and is another area of focus for many responsible investors.

Public policy and lobbying: With negative corporate lobbying at an all-time high, we intend to increase and expand our efforts. We will continue to collaborate with other investors on lobbying and ask for greater disclosure and transparency around companies ongoing policy dialogues on climate topics as well as commitments by companies to adhere to the Responsible Climate Lobbying Standard.

At the same time, we need to develop increased dialogue between investors and governments to accelerate the fossil fuel phase out in a fair way that does not penalize developing and emerging economies, and commit to winding down our holdings – as is set out in the Net Zero Oil and Gas Standard.

Collaborative engagement: This year saw the end of the first phase of Climate Action 100+, the largest ever investor engagement initiative on climate change, and the launch of its second phase. The initiative has made a significant contribution to the landscape of stewardship on climate globally, and in particular, the focus and ambition of the Climate Action 100+ Net Zero Company Benchmark, delivered by TPI and FTSE Russell, has supported investors in these engagements. The second phase will include a greater focus on sector transition, a welcome addition given many companies face the same issues.

Bridging the owner-manager divide: We need to foster a greater understanding between asset owners and asset managers across all voting and stewardship activity and will be working with other members of the UK Asset Owner Roundtable to build new constructive dialogue with managers to ensure that our long term needs are effectively understood and acted upon.

Engagement themes for 2024

The size and pace of the energy transition will no doubt be a focus for 2024 and beyond, and is likely to head in new directions. Attention to transition mineral supply chains will continue to grow, with the Global Investor Commission on Mining 2030 scaling up its work with an emphasis on avoiding violent conflict and environmental degradation as mining operations expand. Efforts to phase out the use of oil, gas and coal will continue, and we will likely see greater engagement with sovereign issuers around national plans and targets. The social aspects of the energy transition will also be critical.

Lobbying, both negative and positive, is also likely to be a key part of 2024 proxy season, alongside other governance issues such as executive pay and remuneration linked to climate and other ESG outcomes. We would also expect to see biodiversity emerge as a key topic at AGMs and in company and investor engagements, with the Taskforce on Nature-related Financial Disclosures framework due in September.

As 2024 plays out, there is no doubt asset owners will have a firm eye on the actions, votes and comments made by their asset managers as they look to seek alignment between their own long-term interests and the activities undertaken by the managers who act on their behalf.

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