Recent developments demonstrate that climate change-related activism is no longer primarily the domain of ‘retail’ activist groups and that there has been a noticeable increase in institutional shareholder support for ESG-related activism, where directors may be targeted.
Climate change-related activism is no longer primarily the domain of ‘retail’ activist groups, such as Market Forces and the Australasian Centre for Corporate Responsibility (ACCR). Whilst these groups continue to mobilise social media channels to initiate the majority of requisitioned resolutions at ASX-listed companies, the reality is there has been a noticeable increase in the level of institutional shareholder support for ESG-related activism.
Importantly, the past 12-24 months has also seen the increased use of regulatory complaints and litigation as part of the activist toolkit. Claims of greenwashing or alleged (novel) duties of care will mean that even boards which are at the vanguard of climate response will need to ensure that their commitments and disclosure are underpinned by robust systems of governance and diligence.
Changing expectations of institutional investors
Many institutional shareholders, both in Australia and abroad, now expect companies to make and publish granular commitments to climate action and demonstrate performance against them.
Notable amongst domestic institutional investors is the new climate policy adopted by the Australian Council of Superannuation Investors (ACSI) in April 2021. Key aspects of ACSI’s expectations are disclosure of climate-related risks by adopting the Financial Stability Board’s TCFD risk assessment and reporting framework and alignment of corporate strategy to the Paris Agreement and the objective of net zero emissions by 2050. In the policy, ACSI also iterates its support for ‘Say on Climate’ whereby companies provide investors with an advisory vote on the company’s management of climate-related risks and opportunities.
ACSI notes that where companies consistently fall short of its expectations (as outlined above), it may recommend its members vote against directors of ASX200 companies on a case-by-case basis. In doing so, it plans to focus on the individual directors most accountable for oversight of climate-change related risks, for example company chairs, and the chairs of the risk and sustainability committees or similar.
At a global level, there has similarly been a step-change on institutional shareholder positions. The Net Zero Company Benchmark published by Climate Action 100+ is rapidly gaining traction amongst ‘climate exposed’ companies. Blackrock has also signalled a shift in its own proxy voting policy to make it clear that from 2021, it will vote in favour of appropriate ESG-related requisitioned resolutions, even where it considers the relevant company’s management to already be ‘on track’ in managing the issues.
Activists in the boardroom…
While overt activism by Australian institutional investors is still relatively uncommon, a prominent example of the ‘end point’ for frustrated institutional shareholders could be seen at the May shareholder meeting of ExxonMobil, where three external board nominees were elected (replacing incumbent board members) off the back of a climate campaign promoted by a 0.02% shareholder, Engine No. 1.
The result of the campaign not only clearly illustrates the importance that institutional investors now attach to climate-related risks, but also shows they are increasingly willing to exercise their influence over board elections to catalyse action at companies that they perceive are not sufficiently engaged on ESG issues.
The success of Engine No. 1 seems likely to spur a focus on similar campaigns at Australian companies. However, such campaigns seem unlikely to achieve success in this market, given the small pool of credentialled candidates willing to join an overtly activist ticket.
… and in the courtroom
Recent developments on climate activism have by no means been confined to the boardroom. Specifically, there have been a number of activist proceedings instituted on the basis of climate action both in Australia and overseas. A number of these proceedings turn on facts particular to the case and/or the different legal frameworks in the overseas jurisdictions and will not be directly binding on Australian courts. However, they illustrate the types of claims being formulated with greater frequency:
- Sharma v Minister for Environment: This case related to a ministerial approval for a mining extension, with the Federal Court finding, amongst other things, that the minister is subject to a “private” duty of care to young Australians in relation to harm from climate change. The case is being appealed by the government.
- Milieudefensie et al v Royal Dutch Shell: This case centred on Shell’s CO2 emissions reduction goal for 2030, which a group of NGOs considered not aligned with the Paris Agreement. The court found that Shell owed an unwritten duty of care under the Dutch Civil Code to Dutch residents to take adequate action. It is the first time that a national court has compelled a private company to reduce its emissions in line with the Paris Agreement.
- ClientEarth v Belgian National Bank: A British NGO, ClientEarth, recently commenced an action against the Belgian National Bank in relation to the bank’s alleged failure of its environmental protection and human rights obligations. The alleged failures arise from the bank’s purchase of bonds through the European Central Bank's Corporate Sector Purchase Program, with Client Earth contending that the program has a structural bias towards greenhouse gas-intensive sectors and fossil fuel companies and that the bank failed to take into account the climate, environment and human rights impacts of buying the bonds.
- McVeigh v REST: This case was brought by a super fund member against REST on the basis of alleged inadequate diligence and disclosure on climate risk. The case settled last year, with REST agreeing to enhancing disclosure of climate risks.
- O’Donnell v Commonwealth: This case was brought against the government alleging inadequate disclosure of climate risk in relation to its Treasury bond programme.
- Youth Verdict v Waratah Coal: This class action was brought by a group of 25 young people alleging development of the Galilee Coal Project will breach Queensland human rights legislation by infringing on young people’s rights to life, the rights of children, the right to be free from discrimination, and the cultural rights of Aboriginal and Torres Strait Islander People.
Short of instituting proceedings, there have also been recent examples of activists taking other steps, including:
- threatening litigation, with letters before action demanding companies take certain steps regarding their climate change policies or disclosures;
- making complaints to regulators alleging companies’ disclosures or actions are misleading or deceptive; and
- demanding a ‘Say on Climate’ shareholder vote, net zero and climate-related commitments and changes in investment strategies.
Increasingly, charting the new frontiers of shareholder activism requires companies to grapple with a range of different institutional and retail shareholder views on climate issues and formulate strategic responses with regard to what is in the company’s short, medium and long term interests.
Timothy Stutt and Mark Smyth are partners at Herbert Smith Freehills. Timothy is Australian lead for ESG and specialises in corporate governance, market disclosure and stakeholder activism. Mark is a litigator with experience advising on environmental and climate change issues, managing activism and litigation defence.
BHP has committed to a ‘Say on Climate’ at its 2021 AGMs. Rio Tinto, Santos, Woodside, Oil Search and AGL (in respect of itself and its DemergeCo) have committed to similar votes in 2022. But what is ‘Say on Climate’ and why is it becoming so popular?
What is ‘Say on Climate’?
The ‘Say on Climate’ movement advocates for an advisory shareholder vote in relation to companies’ climate transition strategies and progress. The movement has been primarily promoted by Climate Action 100+ (CA 100+), which across its 617-strong global investor membership manages some $55 trillion in assets. Notable overseas signatories include Blackrock, Calpers and State Street, and notable domestic signatories include AMP Capital, Pendal and First Sentier.
The case for ‘Say on Climate’
Given institutional shareholder views, boards may consider that they have little choice but to move towards ‘Say on Climate’ resolutions. However, there are some obvious advantages for early movers, including showing leadership on climate, securing institutional shareholder support and framing the resolution (as opposed to leaving it in the hands of requisitioners).
The case against ‘Say on Climate’
In putting companies’ climate strategies to the vote, there are also some potential drawbacks as well. Notably, boards may risk losing practical control over their climate strategy and may face difficulty reconciling long-range time horizons for climate commitments with an annual vote on progress (particularly where progress is dependent on technology development).