The future of shareholder advocacy in North America may not involve say-on-climate advisory votes. But Michael Hugman from The Children’s Investment Fund Foundation says there are other mechanisms available to investors
The Children’s Investment Fund Foundation (CIFF) has spearheaded the recent say-on-climate campaign in North America, Europe and Australia. The campaign – led by Chris Hohn, founder of The Children’s Fund – is intended to use shareholder advocacy to provoke companies into disclosing their climate action plans. In Europe, a number of companies – including Unilever, Nestlé and Severn Trent – put these plans up for an advisory vote this year.
But in North America, the idea of an advisory vote received a less positive reception, as asset managers raised concerns that it would lead to investors rubber-stamping corporate climate plans. In this interview, Michael Hugman, director of finance for climate at CIFF, talks about the future of the say-on-climate campaign in North America.
The number of companies publishing ESG reports grows by the year. Why are you taking more assertive action to hold companies accountable for their climate impact? We perceive a couple of major problems. The first is that there are an awful lot of companies that are still doing nothing. There is a small percentage of companies globally that are even working on science-based targets or 2050 targets.
We’re very clear that 2050 targets by themselves are frankly meaningless – they’re simply not going to lead to any material real-world change on their own. So the first critical point is that we need to focus on actioning timeframes that are meaningful – which means we’re talking about five-year plans.
The single most-important aspect of say-on-climate is the focus on five-year plans and concrete, specific actions on business strategy. It’s much more important than the advisory vote that companies disclose concrete plans. And the vast majority of investors aren’t doing anything to make that happen.
We’re direct supporters of the Climate Action 100+ initiative and have been very supportive of the net-zero company benchmark that has come out. But even among the companies that have been supportive of Climate Action 100+, none has Paris-aligned cap ex plans.
The second challenge is about how you hold people to account to make sure their plans are happening. We’ve tried to be clear over the last six months that we’re not going to seek advisory votes in North America because the message has been clear that asset managers don’t want that.
But what is clear is if you look at the UK, Europe and Australia, you have pretty clear consensus that progressive investors, NGOs and leading companies do see advisory votes as a way of getting both the disclosure plans and the feedback mechanism. I think that’s partly to do with a different market structure.
It’s undeniably true that say on pay has been more effective in the UK and Australia than it has in the US and that leads to a difference of views across regions. In North America, there is a very valid concern about rubber-stamping and part of that is about how dominant passive investing is in the US equity market. All of which is to say that we and our NGO partners are not going to file proposals seeking advisory votes in North America. But let’s aim for disclosure of five-year plans: that’s the only way investors can demonstrate to their beneficiaries that they’re doing anything on climate change.
Beyond advisory votes on climate plans, what mechanisms can investors use to hold companies accountable? That’s a little trickier. The reality is that other avenues are not that obvious. For instance, the challenge with voting against directors is that even though it’s positive to see more asset managers and owners voting against directors, it’s normally done privately and there’s no communication done beforehand. There are concerns about collective action and being deemed to have acted in concert without the right designation from the SEC.
And the reality is that even when investors vote against directors, it rarely registers a change of more than a few percentage points. That’s not irrelevant, but it doesn’t change company strategy notably. The one big exception largely proves the rule on this: we all saw the dramatic impact at ExxonMobil this year. But in reality that was a very unusual campaign where one very brilliant investor spent millions of dollars on a very well-fought and specific campaign. It’s unclear to me how many US asset owners or mainstream asset managers would be able to replicate that.
Even when you look at campaigns like the one this season by Majority Action, which aimed to co-ordinate votes against certain directors, it got a bit of traction but the not the full-throated support of the US asset owner community. It seems the community is saying that it doesn’t want an advisory vote but doesn’t want to step up to hold people to account using other mechanisms, either. That’s why we feel it’s the right move to focus on disclosure plans.
Some investors we’ve talked to feel overwhelmed by the volume of available ESG data. There is a risk that 2050 net-zero plans contribute to more noise and that some companies could seize the opportunity for greenwashing. How will you mitigate against that? We’re going to work with our other philanthropic partners in an analysis of the plans that are published so that we can benchmark. We want to establish a net-zero center that is going to have significant philanthropic funding and is going to independently grade the performance of funds.
What you have right now is private companies rating that work. Ratings agencies tend to be conflicted because they earn fees from the companies they rate, so having a really strong independent analysis will help everyone have clarity over which companies are failing.
