Shareholder Voting: Toward a Commitment to Climate Action?

Introduction

Each year, publicly traded companies hold an Annual General Meeting (AGM) to vote on the approval of their financial statements. Every individual or legal entity is entitled to vote if they own a share, and in most cases, they have as many votes as they have shares.

The Annual General Meeting (AGM) is also an opportunity to make decisions that do not concern the company’s capital or articles of incorporation; these are known as resolutions. They must be made available at least 21 days in advance. As a shareholder, you may submit a resolution yourself—either individually or as part of a group—provided that you hold at least 0.5% of the capital.^[1] by the custodian(s).

At a time when climate issues are gaining prominence at shareholder meetings^[2] and where, under pressure from shareholders, an increasing number of companies are putting their climate change strategies to a vote^[3], this article aims to provide a better understanding of how the issue is viewed by both shareholders and corporate executives. It also aims to offer some suggestions for turning these annual shareholder meetings into genuine drivers of greater dialogue and ambition.

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Historically, it was in 2011 that a resolution on environmental issues was first submitted at a shareholders’ meeting, at the initiative of Total shareholders who were calling on the oil giant to take action regarding the oil sands. After years of fruitless discussions, the shareholders finally gave up in 2020.

Nevertheless, that same year, at the urging of organizations advocating for more sustainable investment^[4], shareholders are beginning to hold executives accountable for their climate strategy by submitting resolutions to the agenda of annual shareholder meetings. In response, the “Say on Climate” initiative led by the Children’s Investment Fund (TCI) calls on the companies with the highest emissions to submit their climate strategies to a shareholder vote every year.

What challenges do nominee shareholders face?

Any shareholder or group of shareholders wishing to propose a resolution must hold at least 0.5% of the outstanding shares. This French rule may explain why climate- or social-related resolutions proposed by shareholders are less common in France than in the United States, for example.

Added to this is the cost of the process, which must be considered in light of the declining average holding period for securities and the rise in passive portfolio management. There is therefore a real benefit to partnering with other investors to file a resolution.

When shareholders submit a resolution themselves, they are demonstrating a genuine commitment. This commitment is seen as significant because, at present, asset managers do not systematically exercise their voting rights at annual shareholder meetings, even though asset owners have delegated that authority to them^[5]. Furthermore, a resolution coming from shareholders rather than management is less likely to conflict with their profitability requirements vis-à-vis executives.

What voting strategy should asset managers adopt?

Of the 102 ESG resolutions analyzed by ShareAction, 17 were blocked by the votes or abstentions of the three largest asset managers in the market^[6]. We can therefore see that, in practice, the largest asset managers are less likely to vote in favor of environmental or social resolutions.

Furthermore, for passive asset managers who track a stock index, in an era of mass-market operations and standardization, the primary objective is to reduce management costs—which can conflict with a highly active engagement strategy that requires time and money. However, passive asset managers must fulfill their fiduciary duty, and having an active voting strategy is precisely what allows them to address ESG issues.^[7]. One possible solution is to use providers of “proxy voting policies,” who assume the shareholder’s voting mandate and vote according to preestablished principles.

For all asset managers, having an ambitious voting strategy on ESG issues helps meet the growing requirements of the PRI^[8] and asset holders.

Despite this, there are times when fund managers who are signatories to the PRI6 or involved in initiatives such as the CA100+ vote against ambitious climate resolutions^[9].

What are the limitations of voting at the AGM when it comes to advancing climate issues?

Whether proposed by shareholders or by the company, the strategy is approved or rejected “as a whole,” which makes it impossible to express an opinion on a specific point, such as the fact that Total’s target for reducing its indirect GHG emissions applies only to its operations in Europe.

Another limitation of shareholder meetings stems from their lack of transparency. Voting records may not be published until months after the meeting has taken place, making it difficult to immediately understand the reasons behind the vote. Was the climate strategy rejected because of the proposed mitigation measures, or, on the contrary, because it lacks ambition?

How relevant are the climate resolutions proposed by the company itself?

Climate resolutions, when proposed by the company itself, have the advantage of garnering strong support from shareholders. The fact that they are developed internally, with a deeper understanding of the business and the company’s constraints, makes them more relevant and ensures they are backed by concrete actions. While shareholder-proposed resolutions are perceived as a sign of opposition and are binding on the board of directors once passed, a climate strategy put to a vote—even an advisory one—enables a dialogue on climate commitment and reduces the risk of conflict with shareholders. Conflicts can indeed lead to situations where executives are removed from their positions, which inevitably delays climate action. This factor may have played a role in the cases of Danone and Engie, in particular.

Very often, the strategies proposed by companies are problematic because they lack the level of ambition needed to address the climate emergency and comply with the Paris Agreement. Shareholders will tend to vote in favor of these strategies, sometimes at the expense of a more ambitious resolution put forward by shareholders. This was particularly evident in the case of Total, where a significant portion of investors supported the net-zero targets over the shareholder resolution, despite the fact that the targets covered only European operations with regard to indirect GHG emissions. These votes lend legitimacy to strategies that are not always backed by concrete measures to reduce emissions, thereby delaying climate action by high-emitting companies by several years. Finally, votes on a resolution submitted by the company are generally advisory and non-binding, whereas when shareholders submit a resolution, they can specify consequences based on the vote results. This differs from the situation in the U.S., where resolutions passed at shareholder meetings are never binding, regardless of their origin.

Recent developments in the law are moving toward resolving this conflict

In 2019, the Civil Code was amended to include the concepts of social and environmental issues and corporate purpose in the definition of a corporation. Furthermore, the PACTE Act establishes the framework for a corporation’s purpose and mission. These innovations give business leaders the legitimacy to pursue objectives that go beyond economic profitability. Typically, business leaders are empowered by shareholders to serve their financial interests. There is now a legal framework that grants them an additional mandate. The PACTE Act thus reconciles a different, more traditional view of the CEO as a leader of the teams that carry out the work. In this view, the CEO is less bound by shareholders than by the goal of a company that operates effectively and upholds its values.

We can draw a parallel with American concepts: In the 20th century, Milton Friedman theorized the goal of maximizing shareholder profits. Today, this goal is increasingly being superseded by social and environmental considerations. Shareholders are finding a growing interest in a more sustainable world. The victory by Harvard students to remove fossil fuels from their university’s endowment is a good example. In March, the student group leading this campaign discovered a legal provision stating that university investments in the fossil fuel industry could be illegal. Another factor that certainly convinced the board of trustees is the sector’s decline: energy company stocks have seen declining financial returns over the past 10 years.

Ultimately, the key is to foster dialogue between executives and shareholders

Submitting climate-related resolutions should be an opportunity to engage shareholders and win their support. In its 2020 study on shareholder engagement, Phitrust cites the example of a climate-focused investment.

This organization carries out private initiatives with companies to foster dialogue between executives and board chairs. In practical terms, this involves letters, interviews, discussions, and informational reports.

Phitrust also carries out public initiatives such as “investor meetings, media relations, written and oral questions, and the submission of resolutions at shareholder meetings.”

To address climate-related issues, Phitrust uses data from Carbon4 Finance.

What makes a good climate resolution? For a resolution that sets GHG emission reduction targets, the key criteria to meet are:

• Robustness: The strategy must be based on recognized and up-to-date methodologies and emission projection scenarios
• Accuracy, transparency, and comprehensiveness regarding:
  • Emissions scope (Scope 3 included regardless of industry)
  • Geographic scope (all business areas worldwide)
  • Scope of operations (all subsidiaries)
  • Time horizons (at a minimum, a medium-term goal, e.g., 2030, and a long-term vision, e.g., 2050)
  • The ambition level (1.5°C; 2°C)
  • Is this an absolute target or an intensity target?
  • Actions to Achieve the Objectives
  • A goal of carbon neutrality should not replace reduction goals
  • Monitoring: Annual reporting on progress (climate indicators tracked, e.g., internal carbon price)
  • Combined with appropriate governance: top management’s involvement in performance monitoring and a bonus/penalty compensation system based on whether or not set objectives are met

Conclusion

For climate action that is commensurate with the challenges at hand, it seems necessary for shareholder coalitions to propose rigorous, ambitious resolutions that require companies to align their practices. Resolutions put forward by management do not seem capable of driving progress, as they too often aim to maintain the status quo.

But this means that shareholders must seize a unique opportunity to:

1. "walk the talk," that is, to live up to their climate pledges,
2. encourage companies to move toward a more sustainable world—and thus give them ample room to invest—rather than focusing on maximizing short-term shareholder profits, thereby enjoying a resurgence in popularity,
3. finally take serious steps to protect themselves from the financial risks associated with climate change, whether physical or transition-related,
4. prepare for changes in investors' preferences regarding sustainable investing and thereby protect their business model and market share.

The points above summarize the actions investors must take to “do their part” in this existential struggle to restore a more sustainable world.