Annual meetings are usually predictable affairs. Major institutional investors vote on proxy ballots the way management recommends. And a few shareholders try, with uneven success, to garner attention to issues the company would prefer to ignore like, climate change.
ExxonMobil’s Shareholder Vote Is a Tipping Point for Climate Issues
After years of ExxonMobil management insufficiently responding to shareholder requests, conveyed through shareholder proposals, to report on how the company plans to adjust its business model to reflect climate risks and opportunities, these shareholders voted to replace some directors.
2021 brought a doubling in the number of climate proposals winning majority votes to 15 from seven last year. On average, asset managers voted in favor of 63% of the climate related shareholder proposals before them in 2021. Furthermore, nearly three-quarters of 58 large asset managers studied by Ceres voted in favor of more than half of the climate-related proposals before them. And the two largest asset managers, BlackRock and Vanguard, dramatically increased their votes in favor, helping to propel the historic success. This contributed not only the majority votes, but also to the average vote on climate-related proposals leaping to 41% this year from 31% last year.
As we head into the 2022 proxy season, this growing support from the largest asset managers for climate-related shareholder proposals is likely to play out even more broadly. A study by BlackRock found that companies almost always implement proposals that win majority votes. In addition, when a proposal gets a high vote, that puts significant pressure on other companies that might receive similar proposals the following year to reach agreements with the filing shareholders in advance of voting. As the physical impacts of climate change grow increasingly dire, the business risks and opportunities increase, which has more institutional investors ready to engage with companies on these issues.
The record-breaking gains in shareholders voting for climate-related proposals in 2021 brought climate issues within reach of a tipping point: with another year or two of similar improvement, the expected outcome for key climate-related proposals will be a majority vote.
2. Past performance is no guarantee of future performance, as investment fund disclosures remind us. That applies to corporate strategy as well. Just because a particular business model has been successful in the past does not mean it does not have to be continually re-evaluated. The scientific consensus on climate change was established years ago. The political and consumer consensus has reached a tipping point. The Biden administration has already taken a strong, administration-wide position on improving ESG disclosure and environmental standards. Failure to adapt to the changing environment, in both literal and metaphorical senses of the word, can make a company go the way of the manufacturers of buggy whips.
Do not wait to reach out to them when you are in trouble. The best time to cultivate them is five years ago. The second best time is today. That $35 million Exxon-Mobil put into the proxy fight would have been much better spent communicating with investors and responding to their concerns. The same goes for the very expensive fossil fuel industry-funded efforts at the SEC and Department of Labor to push through rules making it more difficult for investors to get access to independent research, submit shareholder proposals, and vote proxies, reminiscent of the efforts of the US-based auto industry efforts to prevent safety and emission standards rather than use them as a starting point for improvement, opening the door to more fuel-efficient, lower-emission competition from Japan.
In the biggest headline-grabber of all, ExxonMobil shareholders rejected at least two and perhaps three of the company's board candidates. Instead they elected anti-management candidates offered by a tiny hedge fund called Engine Company #1, which attacked Exxon's climate denial as a business folly that is leading the company towards bankruptcy. (Full disclosure: The Engine Company #1 candidate whose candidacy is too close to call, Andy Karsner, is a friend of mine.) One key to the shocking defeat of Exxon's board slate was the decision by its second-largest investor, BlackRock, to vote against three of the four challenged Exxon board members.
This past proxy season served as a tipping point for investors when looking at newly available 2021 proxy season3 voting behavior at the largest asset managers. Whether caused by the aforementioned global events, pressure from critics or other factors, large asset managers significantly increased their support levels for E&S shareholder proposals this past proxy season, which in turn increased the average support level of these proposals:
Beyond specifically voting on shareholder proposals, investors are beginning to vote against directors for poor ESG oversight. For example, during the 2021 proxy season, BlackRock voted against 255 directors for climate-related concerns, according to their Voting Spotlight. Other investors also took this approach, in addition to voting against directors for issues at the board level, like voting against directors for a lack of racial/ethnic or gender diversity.
The ExxonMobil decision followed another upset at oil major Chevron, where Dutch activist shareholder group Follow This tabled a climate resolution which received a 61% backing from investors. While shareholders have often talked about the need for companies to take action on environmental, social and corporate governance issues (ESG), these latest rebellions show a new willingness from large investors to punish executives who have been resistant to change.
BlackRock's ESG approach includes its investment stewardship teams first engaging directly with companies on issues where it is in support of change. The company voted against re-electing three directors at Exxon in 2021, for example, which climate investors had hoped was a tipping point for the company in using its shareholder power to be more aggressive in proxy contests. But the company has actually gotten more supportive of incumbent management teams this year, voting for fewer shareholder resolutions than in 2021 because it says companies are becoming more aggressive about climate mitigation.
Should Biden turn to citizens for help, putting pressure on Senators and House members to embrace an aggressive climate agenda? After all, a recent Pew poll suggests a high level of policy support for climate change. Probably not. Recall that even in the 2020 elections, voters did not rank climate issues among the top concerns motivating their vote. Moreover, citizen support for climate action will probably diminish if they were to face higher energy costs.
For an optimistic climate activist, some highly visible recent events might have been construed as a tipping point in the movement towards clean energy and the fight against the continued proliferation of fossil fuels.
Take my predictions with a grain of salt, because I still remember saying that Ronald Reagan would never fool enough voters to get elected, but it seems very likely at this point that Maura Healey will be the next Governor of Massachusetts. That makes her release of a climate plan a matter of some significance.
The fossil fuel industry is currently at a tipping point. Just look at what happened during one 24-hour period in late May: investors were successful in a historic vote that forced ExxonMobil to add two outsiders to its board of directors after years of activists trying to get the company to change its business strategy; Chevron's shareholders voted to force the company to create a plan to cut emissions generated by the use of its product; and Shell was ordered by a Dutch court to dramatically accelerate its decarbonization plans. The latter represents the first time a company -- not a government -- was ordered to reduce its emissions.
Is it possible that recognition of the scale and severity of the climate emergency might also trigger a series of political, economic, and social tipping points? Will an existential threat of this nature drive technological breakthroughs, mobilize unprecedented amounts of funding, and kick-start political action? The picture, at best, is mixed.
So I decided not to divest but to engage, and this shareholder season, a huge opportunity to stop these projects awaits. Shareholder resolutions requiring banks to stop funding fossil fuel expansion projects have been filed against the big six U.S. banks: JPMorgan Chase, Bank of America, Goldman Sachs, Citibank, Morgan Stanley, and Wells Fargo. Shareholders, particularly high-net-worth shareholders and major clients of asset managers like Blackrock, State Street, Vanguard, Schwab, and Fidelity, can tell their asset managers to vote for these pro-climate resolutions. 2ff7e9595c
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