This spring, Exxon Mobil Corp. faced an unfamiliar board-level threat – a little-known activist fund took aim at the major oil company, partly over its refusal to take tougher action to deal with climate-related risks.
The fund, Engine No. 1, surprised many by winning enough support from other institutional shareholders to install three nominees on the board in what was seen as a coup for investors seeking to use the tools of corporate governance to push for action on climate.
It doesn’t have to get that nasty. Publicly traded companies can head off extreme measures with a less invasive method often used with executive pay, and now catching on with climate matters.
Boards are now used to opening the floor to frank discussion with investors through say-on-pay votes, where shareholders provide input into the salaries and bonuses of top managers. They’ve proven to be a valuable way to sway companies into preventing exorbitant pay, especially when performance lags.
Environmental risks are a growing threat to shareholder value, and similar non-binding “say-on-climate” votes are being added to annual meeting agendas, two of them this year in Canada.
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It’s a live issue among major Canadian companies as investors worry about the risks tied to climate in terms of future costs or the viability of carbon-intensive businesses, said Dexter John, chief executive officer of Gryphon Advisors Inc., a Bay Street proxy advisory consultancy.
“We believe boards need to start focusing on their carbon footprint, their general footprint, the environment, Indigenous peoples – everything,” Mr. John said. “It’s creating vibrant conversations, very different viewpoints of the world based on who you’re speaking to, and [companies must] somehow try to figure out what’s the happy medium.”
Whether say on climate becomes as commonplace as say on pay will depend on how companies take the initiative to report details of emissions and plan to reduce them, and how policy changes will affect financial results as the country moves closer to its net-zero greenhouse gas target, said Rima Ramchandani, a lawyer at Torys LLP specializing in capital markets.
The basic tenets of executive compensation are well known. Pay packages are aimed at providing incentives to boost value for shareholders, retain talent and limit costs. Investors are well versed in determining whether CEOs are worth the money, though the compensation and corporate results still get out of whack.
There are various templates used for assessing corporate environmental plans and reporting them. Companies are increasingly adopting the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) program, though in Canada it is not mandatory. As more companies sign on to TCFD, investors will have better indications if those businesses are living up to their commitments.
“The say-on-pay initiative was really about trying to create some accountability for the pay practices that boards were putting in place,” Ms. Ramchandani said. “Climate change is a bit different because there’s still a dearth of disclosure. We’re not even at the point where there’s a market standard for public disclosure in this space.”
British billionaire hedge fund manager Chris Hohn started the Say on Climate movement through the Children’s Investment Fund Foundation. Companies such as Unilever PLC , Royal Dutch Shell PLC , Moody’s , S&P Global and Nestlé SA have held votes at their annual meetings. Others have committed to them for 2022.
In Canada, Canadian National Railway shareholders approved the company’s climate plans, and the company pledged to hold say-on-climate votes at future annual meetings. Rival Canadian Pacific has committed to put its climate strategy to shareholders at its 2022 meeting.
Say-on-climate goals are aligned with those of the Climate Action 100+, a group of 570 investors from around the world pushing major emitters to take action on climate change and set goals to reach net-zero emissions. That includes shareholder pressure to tie executive pay to climate-related targets.
Though it is not clear how pervasive the climate votes will become, they can help companies skirt the nuclear option of a proxy contest, as Exxon Mobil faced, Ms. Ramchandani said.
“Putting the climate action plan squarely in front of investors and asking for this non-binding advisory vote does sort of take the steam out of some of those proposals,” she said.
Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at jeffjones@globeandmail.com.
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Jeffrey Jones