Rev Kirsten Snow Spalding is senior program director of the Ceres Investor Network. She talks to Ben Maiden about how the 2021 proxy season may impact next year’s season and how governance issues are tied to sustainability performance
Was the degree to which support for environmental proposals rose this proxy season a surprise? What I’m hearing from the [Ceres Investor Network] is that the climate crisis, as indicated by all of the scientific research, is now a major focus for investors, so it wasn’t a surprise to see they were going to start addressing this in a more robust way, especially with the heaviest-emitting companies.
I think we’d been on that trend for a while but the Intergovernmental Panel on Climate Change report and the International Energy Agency scenarios suggest we’ve got to accelerate. Investors are dealing with [climate] as a real threat to their portfolios. Maybe another shift is that I’m hearing investors say, This is systemic. You can’t address it one company at a time. We can’t divest away from it. We’ve got to deal with it across the portfolio.
What else are you hearing from the Ceres Investor Network right now? The sense I’m getting about the 2022 proxy season is that we’re going to see more of the same. Investors are encouraged by the outcomes. What I’m hearing is that companies in advance of the 2022 season are making more commitments, they’re being more transparent about their plans and investors feel they’re getting more of what they need to address risk in their portfolios. I’m also hearing that the work companies did on climate in the last proxy season is translating into more focused action on the challenges with water, natural resources and human rights. It’s not just one issue – it is cutting across a range of ESG risks.
Are those actions by companies leading to more proposals being withdrawn? Investors work in two ways. Some say, We file first, and that instigates a dialogue. Then we can decide whether to go forward with the proposal depending on how the dialogue is going. Other investors say, We prefer to talk first and file only when the dialogue isn’t going well.
In either case – and it depends on the type and size of a particular investor – what we’re seeing is more investors coming together around priorities such as Climate Action 100+. There isn’t as much fragmentation in the market as there used to be – and that leads to more corporate action.
Is there a change in approach from investors? I think there are three things we saw in the 2021 season that will influence the next one. The first is director votes. The ExxonMobil vote will have a ripple effect: it demonstrated that investors are serious about climate risk and, if companies don’t make adequate progress, investors are prepared to address it as a governance issue.
When I say ‘governance issue’ I mean not only that we might see more director campaigns, but also that there’s a real focus on what audit committees are doing. Are they building into their financial assumptions shifts around climate, shifts in the business plan around climate? I think we’re going to see director and accounting-type resolutions because of this focus on governance. If a company is a laggard, it’s a sign that it’s not a well-managed company.
The second is that with climate we saw a lot of proposals on climate lobbying, and I think that alignment between companies’ advocacy efforts and their own actions is really important. I think investors are very interested in seeing where the lobbying dollars are going and how the industry associations are behaving.
If a company is prepared to move its own business plan then it’s also got to be prepared to seek policy support. It’s the only way we’re going to see the systemic risk of climate addressed.
My third point is [the] forward-looking emphasis on transition plans. I think we’re going to see more of that. It’s no longer sufficient for companies to tell us what their emissions are; they’ve got to tell us how they’re going to be addressing climate in their forward-looking plans. We saw a couple of resolutions last season [in this area].
As you say, the links between corporate governance and sustainability go beyond disclosures. What other areas are being looked at? What Climate Action 100+ and others in my network are focused on is that you use ESG metrics as a signal to how well managed a company is. These things are intimately related.
You can’t say, We’ve got a company that’s brilliant, but it doesn’t address these types of risks. If [a company] is failing on ESG metrics then probably we’ve got to look at that board. A key demand is board oversight of these issues.
Following on from that, how can investors or companies measure the effectiveness of governance as it relates to sustainability? I think we have good evidence that boards with diverse experience and expertise on these issues do better. Not only boards that have diversity in terms of race, ethnicity and gender but also boards that have diversity of experience and expertise. All of those things matter.
There are lots of ways boards can be structured to govern their sustainability risks in a robust way. It’s when we see that a company is not doing a good job that the board gets under the spotlight.
I think it comes down to the board chair and the CEO. If we’re not seeing real performance then investors are questioning whether this is a well-managed company.
You mentioned tying executive compensation to ESG. How important is that to members of your network? The say-on-pay movement was very important in terms of raising issues about executive compensation and relating that to performance. I don’t think we’ve seen at this point a lot of companies tying executive compensation to sustainability metrics.
In a case where there’s a failure, we may see those kinds of resolutions but I don’t think it’s going to be a wholesale strategy. You see companies in a sector and often the leaders and laggards relate both on the level of having failed on ESG concerns and underperforming financially. When you see both you have to ask what’s going on with the governance.
