Europe

The ESG Interview: “Resolutions Can Really Move the Needle”

ShareAction CEO Catherine Howarth reflects on the revival of active ownership and points to ESG’s “next big wave”.

Will 2021 go down as a turning point in the history of stewardship? AGMs held so far this year have certainly put directors on notice that investors are increasingly willing to confront them publicly, not just on climate policy, but on a broadening range of ESG factors.

Many will see 26 May as a key date in the shareholders’ revolt, when Chevron and ExxonMobil suffered reversals at the hands of investors, while Shell was ordered to accelerate its emissions reductions by a Dutch court, having won a controversial vote. But others will look further back to 8 January, 2020, when ShareAction coordinated a shareholder resolution with investors worth £130 billion, calling on UK bank Barclays to phase out fossil fuel finance.

A London-based charity focused on responsible investment, ShareAction had not filed a resolution in a decade, but alternative engagement tactics were making little ground.

Barclays soon became aware of the institutional support for the resolution, the buzz all the more noticeable for the novelty. Sensing the mood, the board took the unusual step of putting forward a rival resolution, promising a net-zero transition by 2050. ShareAction CEO Catherine Howarth describes this as a “massive commitment” compared with the bank’s previous position, but a lack of detail kept the original resolution on the ballot. Barclays’ resolution was passed almost unanimously, making it legally binding, while ShareAction’s proposal still achieved a respectable level of support, with approximately a quarter of shareholders backing it, plus 10% abstentions.

More than a year on, Barclays is not yet a poster child for the fight against climate change. This year’s AGM saw defeat of a further shareholder resolution, which would have aligned the bank’s portfolio with the Paris Agreement, but also the promise of a vote on interim climate targets at next year’s meeting.

The experience has paved the way for even more positive outcomes, Howarth insists. This year, ShareAction has almost normalised use of resolutions in the UK, getting more big-name investors on board and winning major concessions from large firms. In January, a climate change resolution was co-filed at HSBC by Europe’s largest asset manager, Amundi, alongside several other managers and owners. The healthy food resolution ShareAction filed with Tesco in February had the backing of institutions with a combined AUM of £140 billion, including Robeco, the large Dutch asset manager.

Catalyst for dialogue

Howarth admits to being “quite amazed” by their impact. “I didn’t really expect it. But it changed the attention that the boards and senior management paid to the issues we were raising. It catalysed an incredible amount of dialogue between those companies and their investors,” she says. “I’m not saying that we should have lots of resolutions, but I am saying that they can really move the needle.”

As with Barclays, HSBC soon realised ShareAction’s proposed resolution would win a good deal investor support, so also issued a counter-resolution, committing to phasing out coal financing by 2030 in OECD countries.

“We had an intense negotiation,” says Howarth. “Their resolution got much stronger as a result, and we held out the possibility that we would take ours off, if there’s was strong enough.” In the event, ShareAction felt HSBC’s commitment was sufficient to “call a truce” and withdraw, paving the way for an overwhelming vote in favour of the board’s resolution.

The Tesco resolution called for binding targets on sales of healthy food, to which the UK-based retailer agreed without offering up a counter-resolution, leading to ShareAction taking its demands off the ballot.

The resolutions lodged with the three FTSE 100 firms have yielded meaningful shifts in corporate policy and behaviour. There have been notable successes elsewhere, including in the US, even though votes don’t necessarily have the same force.

According to Proxy Preview, there were 34 majority votes for disclosure and action on ESG-related shareholder resolutions during the US 2021 proxy season to June 24. This represents a quantum leap from the 21 successes chalked up in 2020, itself a record. Many votes were overwhelming victories, rather than close calls. Half of the successful resolutions garnered support from more than 70% of shareholders, compared with just two last year. They covered a wide range of issues, including climate change, diversity, political lobbying, the Covid-19 pandemic and sexual harassment.

Beyond ExxonMobil, seven other climate change proposals secured more than 50% of shareholder votes, including one in which investors gave 98.8% support for reporting on supply chain deforestation impacts at agribusiness Bunge.

Strengthening stewardships skills

But investors are not getting it all their own way. Shell’s Energy Transition Plan caused deep division among investors before securing a majority at the firm’s AGM. Howarth observes that some firms have been coming forward with “quite ropey proposals”. This includes companies using non-binding ‘Say on Climate’ votes to secure backing for climate transition strategies that don’t necessarily stand up to scrutiny.

“This is where we really run into challenges around the ability of investors to do detailed due diligence on each one of those proposals, so that they’re in a position to vote in an informed manner,” she says. “If we have an absolute blizzard of climate-related votes, the asset owner and asset management community is going to have to get to grips quite rapidly.”

In parallel with her work at ShareAction, Howarth participates in industry-level efforts to strengthen stewardships skills across asset owners and managers. This includes serving as chair of the stakeholder working group of the UK’s Asset Management Taskforce, established in 2017 by HM Treasury to encourage cross-communication between the government, asset management industry and Financial Conduct Authority.

Last November, it released ‘Investing with Purpose: Placing stewardship at the heart of sustainable growth’, which contained proposals to assist asset managers and asset owners in expanding stewardship across asset classes and integrating it more thoroughly into investment processes. It also called for the implementation of a council of UK pensions schemes to oversee the implementation of higher standards of pension stewardship.

Facilitated by the UK Department of Work and Pensions, the Occupational Pensions Stewardship Council (OPSC) held its first meeting in early July, attended by 28 schemes with a combined £550 billion in assets under management. The Council aims to provide a platform for pension schemes to share best practice and research on shared challenges, such as climate change and corporate governance.

In practice, Howarth led the Taskforce’s work with asset owners while Keith Skeoch, Chair of its Stewardship Working Group and also Chair of the Investment Association, focused on asset managers.

“The whole of the asset owner sector is on a massive developmental curve. Things are improving rapidly, driven in large part by regulation,” says Howarth, noting incoming requirements which require asset owners to monitor and report in more detail on their investment policies and strategies, and obliging them to develop more comprehensive stewardship policies and practice active ownership.

Platform for best practice

For asset owners with limited resources, these can be quite onerous and far-reaching, such as the requirement for implementation statements explaining how schemes execute on policy to ensure accountability to beneficiaries.

“I think those are really positive regulatory developments. But it’s not enough to have regulation. We also need to have capabilities in the sector and investment to enable asset owners to do even better,” says Howarth, who has five years’ experience as a trustee.

This need was a key driver behind the creation of the OPSC, which Howarth sees as “an incredibly promising and exciting development” with the potential to provide a platform for asset owners to share best practice and intelligence on tactics and relationships with asset managers.

“There is a range of capabilities within the industry and yet everyone’s got the same challenges, e.g. making sure they get the best out of their asset managers and ultimately out of companies. When schemes typically have a lot of the same companies in their portfolios, collaboration just makes sense. It is also more interesting for people responsible for stewardship at pension schemes to have access to a cadre of other people with shared professional interest,” she says.

Howarth says larger schemes were prioritised to join the OPSC at the outset, partly as they are inevitably better resourced and thus more advanced in the development of expertise, but also because of the pressure their presence represents in encouraging asset managers to take note of their collective expectations.

“But I think the next stage of the journey is all about reaching out to a broader base of smaller schemes. I don’t believe there should be lower standards in smaller schemes, because their members deserve to be in well run-competent schemes. And I’m a strong believer in the fact that small schemes can do a brilliant job if the people at the top give it the attention it deserves,” says Howarth, who nevertheless expects an increase in both outsourcing and consolidation as schemes aim for and are increasingly driven to achieve higher stewardships standards.

Emphasis on escalation

Anecdotally, Howarth is seeing evidence that asset owners are investing in the human and other resources needed to devise and implement policies that deliver sustainably to beneficiaries and hold managers to account. ShareAction supports these investments by providing market intelligence to asset owners through its periodic global rankings of asset managers as well as best practice guidance.

Overall, Howarth is positive about the improvements made by asset managers in their stewardship activities in recent years, but feels there is still much room for improvement. For example, they should better recognise the value of a clear escalation policy or framework. This can give directors unambiguous advance notice of the precise consequences to follow if they fail to act on the stated priorities of shareholders. The prior warning provided by escalation can take the heat out of the situation, telegraphing to companies that disagreements on strategy will not be kept behind closed doors and may lead to shareholder opposition at the next AGM, for example.

“One of the questions is, what does good escalation look like? And how much is there a role for asset managers in setting clear and prior expectations, leading into the AGM season?” Howarth says firms should be under no illusions that – if they don’t meet expectations – they can expect votes against report accounts, auditors, remuneration policies or individual directors. Conversely, clearer escalation policies could lead to less frequent recourse to resolutions.

Last year, BlackRock declared it would routinely vote against directors of firms that failed to either report in line with recommendations from the Task Force on Climate-related Financial Disclosures or publish a climate plan. Other asset managers have followed suit. Howarth is encouraged by the willingness of the world’s largest asset manager to “go for the jugular”, but recognises the need to leave space for an ongoing and constructive relationship.

“You want a process whereby you’ve still got a sophisticated dialogue, but equally you’re sending clear signals, using an escalation pathway to make your expectations clear. That’s how really good practice is starting to evolve,” she says.

Redefining fiduciary duty

Unsurprisingly, Howarth welcomes the growing acknowledgement among institutional investors over the past decade of the financial materiality of ESG factors and the need for pension schemes and others to integrate those factors into the investment process. This is welcome, necessary but insufficient, given the scale of the systemic risks asset owners and wider society are collectively facing.

“Companies are shaping our future quality of life through their actions. I think pension funds need a mandate to manage ESG issues that have an impact on beneficiaries’ well-being, above and beyond the financial risks,” she says.

Earlier this month, a report commissioned by the Principles for Responsible Investing came to a similar conclusion, noting the need for a broader definition of fiduciary duty to provide asset owners with more scope to invest for impact.

Howarth draws a line from falling life expectancy levels in mature, stable economies to multiple health and nutrition challenges, particularly among poorer parts of the population, to the policies of food suppliers and distributors. “It’s important that a pension fund should be able to think about everything it can do with its investments to support the best interests and the quality of life of its beneficiaries,” she says.

This means asset owners should be free to support initiatives such as ShareAction’s campaign on improving health not only for reasons of financial risk but also because holding the food industry to its public health responsibilities is “fundamentally in the interests” of beneficiaries.

“Our scope for action on ESG and our definition of fiduciary duty is too narrow. The next big wave of ESG needs to focus on company impacts on the lives of beneficiaries, not just companies’ financial risks in an ESG frame. I don’t think we’re there yet, but the most advanced asset managers and pension schemes are starting to think in that way.”

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