Severn Trent was an early adopter in putting its climate action plan up for a vote – something an increasing number of companies are now doing. Richard Eadie tells Garnet Roach why that was just the beginning – and how it means the company must now be more open than ever
From bringing out 60 employees from across the company for an award-winning investor day to its ambitious net-zero goals, Severn Trent is a company that does ESG well. It is also a company that put its climate action plan on the ballot at its AGM this year.
‘If you’re going to say sustainability and ESG are core to what you do, then you need to live and breathe that through the way you talk – and the way you report,’ says Richard Eadie, who led the company’s IR team until earlier this year when he moved to head up its corporate strategy, sustainability and group transformation.
The UK water utility got a resounding thumbs-up from its investors, with 99.4 percent voting in support of its climate change plans. But why now? Or why at all, for that matter?
The idea of a say-on-climate vote was started by UK hedge fund The Children’s Investment Fund (TCI), which manages around $30 bn, with Spanish airport operator Aena becoming the fund’s first climate-vote success story in early 2020. The hedge fund has since taken its campaign global, while investor groups have added their own pressure and a growing number of companies have taken their own steps to add such a vote to the ballot themselves.
Back in 2019, Severn Trent made its ‘triple-carbon pledge’ – an ambitious 10-year plan to become a company that uses 100 percent renewable energy, 100 percent electric vehicles and is net-zero by 2030. ‘That's earlier than a lot of other companies are aiming for,’ notes Eadie. ‘So it makes sense to take a temperature check and ensure investors are comfortable with what we’re doing.’
Not a rubber stamp Severn Trent’s say-on-climate vote is a non-advisory vote that will happen every three years. What it isn’t, says Eadie, is an opportunity for investors to voice opinions on wider company strategy – something they already do when approving management or board members. He also stresses that the vote is ‘not a rubber stamp for what you’re doing around climate’. The real work, he says, comes after. You have to think about and communicate your plans – and keep showing your commitment to tackle climate change.
For Severn Trent, putting its climate action report up for an investor vote has ‘made it incumbent on us to talk about climate change’ more regularly, explains Eadie.
In a paper published in June this year, consultancy SquareWell Partners described say-on-climate as ‘one of the most contentious topics’ of the 2021 AGM season. It noted a growing trend for management-sponsored proposals, but warned that there is no unified approach to such votes. Even investors have opposing – and generally strong – opinions on the idea of a say-on-climate vote.
‘Some investors, such as CalPERS, have expressed concerns over the campaign’s impact on board accountability and the effectiveness of such a mechanism,’ SquareWell said at the time. ‘European asset managers, like Legal & General Investment Management and BNP Paribas Asset Management, on the other hand, have publicly expressed support for the say-on-climate vote.’
Perhaps most worrying, however, was the idea put forward by SquareWell that some firms have been adding their climate plans to the ballot only to give the appearance of being progressive on climate change – essentially the latest form of greenwashing.
Despite warning in a June 2021 report that some companies were adopting say-on-climate votes only to give the appearance of moving forward on climate change, Anna Hirai, SquareWell’s co-head of ESG research, says companies in carbon-intensive sectors ‘should take the lead in adopting say-on-climate proposals’ given their exposure to high transition risks – as well as their significant impacts on the environment.
‘For companies in less carbon-intensive sectors, it would be beneficial to clearly explain the rationale behind putting forward a say-on-climate proposal and how climate change impacts their business and the opportunities the transition presents for the company,’ she adds.
But she also advises companies to take stock of any shareholder concerns before putting their plans up for a vote, and has some advice about what a good climate action plan should look like. ‘A robust plan should include a clear net-zero ambition, interim greenhouse-gas emission reduction targets and trajectory, covering Scope 3 if relevant, and disclosure surrounding the company’s approach to capital expenditure planning as well as lobbying activity.’
SquareWell’s June report on the topic notes that some big institutional investors had concerns about the impact a say-on-climate vote could have on board oversight, and Hirai says companies should be mindful of this. ‘Companies submitting a say-on-climate proposal should clarify the board’s role in overseeing the climate action plan and how it will interpret and act on the shareholders’ vote,’ she notes.
Most important, though, is that ‘companies should ensure their strategy is aligned with climate science and is on track to meet the objective of the Paris Agreement,’ Hirai adds.
Embracing skepticism As an early adopter of a company-sponsored say-on-climate vote – Eadie notes that some firms did go before Severn Trent but only because of the timing of their reporting cycles – these issues weren’t even being discussed when the company made the decision to put its plans up for a vote.
That doesn’t mean its plans were blindly adopted by investors, however, something that actually came as a surprise to the company, says Eadie. ‘The skepticism wasn’t something we had anticipated, but we embraced it,’ he says. ‘That’s what your investors are there for: to challenge you and make you question your motivations to make sure your intentions are pure.’
What followed was a discussion around intention. Unlike at those companies where a say-on-climate proposal had come from the investor side, Severn Trent’s investors hadn’t been asking for this. ‘So we needed to make sure our investors were clear on our intentions in doing this. We had some calls where investors wanted to dig into our motivations,’ says Eadie.
He predicts that as more firms add a climate action plan to the ballot, investor skepticism will grow, too. And a big part of that is the rapidly increasing sophistication of investors when it comes to ESG conversations.
‘I’m increasingly impressed by just how quickly investors are progressing up the learning curve,’ Eadie says.
‘Two years ago, I’d have said corporates were leading investors on how to think about ESG. The corporate said, We have a good story to tell here. What we need is investors to care as much as we do. Investors are rapidly catching up, and funds are recruiting some really smart people so businesses need to be on their toes when they’re talking about ESG. Today, it’s a very, very level conversation.’
A clear path Having gone from early adopter to a resounding vote of support for Severn Trent’s climate action plan, what advice can Eadie offer other firms contemplating taking the say-on-climate plunge? One thing he talks about is the ‘philosophical’ decisions around reporting – essentially the same choice companies make about whether or not to go integrated.
‘You can either choose to embed all the climate change data into your annual and sustainability reports, as we did, or you can do a stand-alone report that says, This is what we’re doing on climate change,’ he says.
Eadie recognizes that it’s ‘probably easier’ to guide your investors with a stand-alone report: a sort of one-stop shop for busy investors. But he says Severn Trent ‘wanted to be pure about what we are as an organization, which meant we had to help people and signpost different bits of data and direct people more’.
So that’s one thing to consider, but his real takeaway is all about talking to your investors. ‘The advice I’d give to people who are doing it now would be to really engage with your investor base first. And to think hard about your motivations for doing this. As I said, this isn’t a rubber stamp – you need to think about your plans beyond the vote.’
While say-on-climate advisory votes have been met positively by some European investors, the concept has faced opposition from investors in North America. As You Sow, the Berkeley-based shareholder advocacy non-profit, filed a number of say-on-climate proposals during the 2021 proxy season.
Danielle Fugere, president and chief counsel of As You Sow, says: ‘It’s difficult for shareholders to say what is a good plan or a bad plan. Some of the largest institutional investors were very clear that they didn’t think approving climate plans was something they could – or even should – be doing. There was significant investor pushback.
‘But what we can say is that the science tells us we need to be aligned with net-zero and every company needs to take responsibility for its own emissions – its Scope 1 through Scope 3 greenhouse gas emissions. Countries can create policy, but companies need to be responsible.’
You can read the full interview with Fugere here.
