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The ESG Interview: Beyond Disclosure

Eli Kasargod-Staub, Founder of Majority Action, says asset managers’ proxy-voting policies need to demand positive action from investee firms. 

Investors’ efforts to hold the boards of high-emitting companies to account for their contribution to climate change “are being systematically undermined by the proxy voting behaviour” of large asset managers.

This was the judgement recently made by Majority Action – a US-based not-for-profit focused on improving shareholder engagement – on the progress so far made by world’s largest investor initiative, Climate Action 100+, in curbing the emissions of the biggest polluting companies.

Collectively responsible for US$60 trillion in assets under management, Climate Action 100+’s mission is to engage 167 focus companies that are “strategically important to the net-zero emissions transition”. Signatories expect companies to implement a strong governance framework on climate change, take action to reduce greenhouse gas emissions across the value chain and provide enhanced corporate disclosure.

Misaligned voting

Yet since formation in December 2017, none of the coalition’s 45 focus companies in the US were fully on track to net-zero emissions and governance ahead of the 2021 US proxy season. Just ten of the 45 companies had set a net-zero by 2050 ambition, and no company had fully met Climate Action 100+’s benchmark indicators for capital allocation or climate policy engagement.

Further, Climate Action 100+ had only awarded full compliance for Task Force on Climate-Related Financial Disclosures (TCFD) to one of these 45 companies.

“This is a dismal performance for what represents the most baseline of investor standards around disclosure and does not measure climate performance,” says Eli Kasargod-Staub, founder of Majority Action.

What makes this performance even more disappointing, according to Kasargod-Staub, is the repeated endorsement by many Climate Action 100+ signatories of company boards that are failing to mitigate climate change risk.

Majority Action’s report finds 23 of the 45 US companies failed to achieve full compliance with any of the nine net-zero company benchmark indicators. Despite this failure, a majority of large Climate Action 100+ investor-signatories supported every single director at over half of these 23 US companies at which they voted. This group included the world’s largest asset manager BlackRock, alongside JP Morgan Asset Management and Fidelity International.

Seven US companies failed to achieve even partial compliance with what Kasargod-Staub calls “two of the most basic indicators of competent climate governance”: setting a net-zero ambition and issuing TCFD-aligned emissions disclosures.

Again, the failure to align with the coalition’s objectives was not to enough to stop 20 of the largest Climate Action 100+ investors supporting the election of every director at more than half of the seven companies at which they voted.

Fidelity International, HSBC Asset Management, Janus Henderson and Lord Abbett voted for every director at all companies at which they voted.

Lip service

Kasargod-Staub says many asset managers are marketing proxy-voting policies that pay lip service to investors’ ESG investment goals.

“A number of the largest asset managers have become quite skilled at adopting [proxy voting] approaches that look and feel and smell almost what you need them to be, but they do not go far enough.”

He adds: “They look tremendous, and they replicate almost every one of the Climate Action 100+ benchmark indicators. They ask companies to disclose their short-, medium- and long-term targets, but at no point do they say, ‘we expect your behaviour to be in line the global net zero target’. Policies are still framed in a world in which [climate change] might be happening.”

Kasargod-Staub wants to see asset managers demonstrate proxy-voting policies that demand positive action not just disclosure from investee companies, and says a failure to implement such approaches “is a wilful choice and one that is not in the best interest of their clients”.

By way of example, Majority Action found that four of Climate Action 100+’s “flagged” shareholder resolutions – those which are relevant to climate-related activities – would have received majority support if some of the largest Climate Action 100+ investors had not voted against them.

Kasargod-Staub says these votes “undermined necessary scenario planning, independent governance, and disclosure efforts at Chevron, Dominion Energy, Duke Energy, and Caterpillar”. BlackRock voted against all four of these flagged resolutions, and State Street voted against three of the four.

Lack of disclosure

The inefficacy of proxy-voting is compounded, Kasargod-Staub says, by a lack of disclosure. Twenty-one of the 75 largest Climate Action 100+ investors failed to “even disclose their firm-level proxy voting performance in a way that would allow their performance to be analysed and evaluated”.

He says: “The notion that it’s not a requirement of participation in the coalition to disclose publicly and prominently how you’re voting across all Climate Action 100+ companies across all geographies is just bizarre.”

Majority Action has called on signatories of Climate Action 100+ to implement four key changes.

First, adopt and implement proxy voting policies that enable voting against directors at companies that fail to align their targets, capital expenditures, and policy influence to 1.5ºC pathways.

Second, leverage resources including the vote flagging process and the Climate Action 100+ Net-Zero Company Benchmark to drive proxy voting to hold directors accountable.

Third, announce their intention to vote in advance of annual meetings, and disclose all votes at Climate Action 100+ companies within six months of the AGM date.

Finally, ensure that any asset managers or service providers for which an investor-signatory is a client are also voting for climate-critical shareholder proposals and against directors at misaligned companies. Majority Action says investors should expect a review of managers’ proxy voting track record on climate change in the due diligence process for all asset manager mandate renewals and request for proposals.

Kasargod-Staub says: “Many investors have adopted these world-leading proxy voting policies enshrining that they will limit the warming by high-emitting companies to one and a half degrees. They also need to demonstrate that there are the consequences for directors if that doesn’t happen.

“That is a stance that every signatory to Climate Action 100+ could take and it should be a requirement of participation. Investors are still free to engage with whomever they want, but every company that engages with Climate Action 100+ ought to know that they are doing so with a group of investors that have enshrined a clear stance on climate change.”

To help investors formulate their proxy voting policies, Majority Action has developed guides for the highest emitting sectors comprising electricity generation; oil and gas; automotive; and banks.

“The purpose of the guides is to empower investors that want to align their proxy voting in high-emitting sectors. They embed clear standards of performance that are rooted in the in clear expectation of what companies in these sectors actually need to be doing to limit their emissions,” Kasargod-Staub says.

While Majority Action is critical of Climate Action 100+, Kasargod-Staub sees the coalition as a force for good. However, if it is to achieve its full potential, he says signatories must demand more from the companies with which they engage and use their proxy voting power to greater effect.

“It is simply no longer acceptable to state that you are a member of a global initiative that claims to use its shareholder influence to shift company behaviour and then fail to make clear how you are actually doing that.”

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