At a glance
- Over the past few years, annual general meetings have seen a rise in engagement by activist investors focusing on climate risk disclosure.
- The rise in shareholder activism is part of an international trend towards exerting pressure on organisations to implement change.
- Climate-related shareholder litigation is rare in Australia, but an amendment to Victoria’s class action legislation could change that.
By Prue Moodie
In April 2020, Woodside Petroleum became the first Australian company to receive a majority vote on a shareholder resolution related to climate change.
More than half of the shareholders who voted – 50.16 per cent – wanted the company to adopt stricter greenhouse gas emissions targets.
You don’t get a percentage like that from retail investors alone. Voting advisory firms, which advise institutional investors, also openly supported the resolution.
Annual general meetings (AGMs) have heated up over the past few years, and activist investors focusing on climate risk disclosure are responsible for much of the excitement.
“The uptick in Australian shareholder activism started in about 2017,” says Ian Ramsay, professor of commercial law at Melbourne Law School.
“When it comes to ESG [environmental, social and governance] resolutions, the players are getting more sophisticated. I think greater engagement is absolutely desirable. You don’t want shareholders running the business, but if companies are intransigent on matters of significant concern, allowing shareholders an opportunity to express a view is valuable.”
Principles for Responsible Investment (PRI) is a United Nations-supported international network of signatories working together to promote and encourage incorporating ESG issues into investment policies and practices.
The organisation’s CEO, Fiona Reynolds, says active voting is a fundamental part of being a PRI signatory.
“The term ‘activism’ includes engagement behind the scenes as well as voting, but, among PRI members, there’s definitely a tilt towards public voting,” Reynolds says.
“We think the future of engagement is collective action.”
The question is, are ordinary shareholder resolutions, which have no legal force in Australia, more effective at achieving responsible climate policies than other avenues?
The private sector has produced an abundance of ESG reporting methods over the past 20 years.
Integrated reporting, Global Reporting Initiative reporting, the EU Directive on Non-Financial Reporting, Task Force on Climate-related Financial Disclosures reporting, to name just a few, owe their existence to the theory that companies whose ESG stewardship is wanting find it harder to access capital.
Shift in tactics
The rise of shareholder activism marks a shift in tactics.
A Schroders survey of 650 global institutional investors, conducted in April 2020, shows an international trend towards exerting pressure, often publicly, instead of quietly exiting an investment.
Institutional Investor Study 2020: Sustainability, a report based on the survey and released in October 2020, documents a dramatic rise in the proportion of investors who say they support active engagement with companies - 59 per cent are now in favour of action, compared with 38 per cent in 2019. Active engagement covers both voting and discussion behind the scenes.
According to the report, respondents’ main concerns are environmental issues, corporate strategy and accounting quality.
The report also shows that a higher proportion of investors are prepared to vote against companies in order to drive change (43 per cent) than the proportion of investors who would consider withdrawing or excluding investments from companies (41 per cent) in order to drive change.
These trends are reflected in Australia.
“I would say there is an increasing ambition among the people putting forward these resolutions,” says Jacqueline Peel, professor of law at Melbourne Law School.
“They are asking companies to take positions on Parisaligned transition targets and industry affiliations.”
Peel is the lead author of a report that looks at the legal tools available for shifting companies towards clean energy practices. The report draws on US research as well as Australian, but its focus is on the Australian corporate environment.
Drawing links between shareholder resolutions and corporate behaviour is an inexact science, but the Corporate Energy Transition Report points to Woodside’s announcement of a vice president of climate as one early result of April’s strongly supported Woodside resolution.
Other examples cited by the report are BHP’s withdrawal from the World Coal Association as a possible result of a 2017 resolution, and AGL’s June 2020 announcement that it would tie executive pay to carbon transition measures, which followed a 2019 shareholder resolution.
“The Corporate Energy Transition Report was driven by our interest in what role the private sector could play in a transition of our energy systems to a less carbon-intensive future,” Peel says.
This is an important question in Australia, which does not have a carbon pricing regime, she says.
In the absence of a carbon pricing regime, companies are still taking steps towards reducing emissions. Australia’s total greenhouse gas emissions dipped in the year to March 2020, and were down by 16.7 per cent compared to the peak in June 2007, according to the Quarterly Update of Australia’s National Greenhouse Gas Inventory: March 2020.
However, the new breed of activists who are behind many of the shareholder resolutions want to step up the pace. How do they see success?
“We’re getting big votes, but we need to start seeing companies change,” says Dan Gocher, the Australasian Centre for Corporate Responsibility’s (ACCR) director of climate and environment.
“We have to decide what to do about Santos and Woodside next year if there’s no change, for example.”
In 2020, ACCR filed two identical shareholder resolutions to Santos and Woodside, receiving 43.39 per cent and 50.16 per cent support from shareholders, respectively.
It is worth noting that a shareholder resolution is typically a last resort, not the beginning of a conversation with a company.
ACCR’s resolutions to Santos and Woodside asked the companies to disclose targets for greenhouse gas emissions (including Scope 3 emissions produced by customers), how the companies’ remuneration policies are linked to targets, and how any investments can be reconciled with greenhouse gas reduction.
Market Forces asset management campaigner Will van de Pol agrees that success is broader than just the high number of votes.
“We can get good results from companies when we don’t have a shareholder resolution. Sometimes the prospect of a resolution is powerful.
“Part of Market Forces’ job is to provide scrutiny over the long term, even though it can be quite frustrating.”
Timely disclosure of shareholder voting goes to the heart of shareholder accountability, but only about half of Australian superannuation funds disclosed their voting patterns in 2017-2019, according to research by the ACCR. The percentage is not likely to be any higher among the non-super asset managers.
Reynolds says PRI is consulting with members on a new stewardship reporting framework.
“One of the proposals is to make disclosure of active ownership – engagement and voting –mandatory. We’ll make an announcement in the first quarter of 2021. The new minimum requirements would take effect in 2022.”
Alison George is head of research with Regnan, a company that helps institutional investors address ESG issues, advises large investors about voting and speaks to companies on behalf of investors.
“Our advice is basically to treat climate change as a serious issue,” George says. “It’s a real area of concern. Enter into conversation with not just investors, but other stakeholders.”
A climate risk report is intended to be used for business management, not simply disclosure, George adds. “As in – how have things changed since you prepared the last report?”
How shareholder resolutions work
Australian law raises a formidable barrier to shareholders seeking to impose their will on a company.
If you want to force a company to change its business practices, you must first amend the company’s constitution via a special resolution.
A special resolution needs a “Yes” vote of at least 75 per cent to be successful.
The two non-government organisations spearheading AGM climate activism, Market Forces and the Australasian Centre for Corporate Responsibility, initially concentrated their efforts on gathering support for special resolutions.
They changed tactics when they found large shareholders in Australia were wary of making such fundamental change.
Activist shareholders now typically adopt a strategy involving filing two resolutions.
The first resolution is a special resolution to amend the company’s constitution to allow shareholders to pass advisory resolutions. That will almost certainly fail.
The second resolution is an ordinary (also called a substantive, or advisory) resolution. It is common practice for Australian companies to disclose ordinary resolutions and allow voting on them, even if the special resolution was unsuccessful.
In this case, voting on the ordinary resolution is non-binding.
Therefore, when the special resolution has been unsuccessful, voting on ordinary resolutions is a safe way for shareholders to send a clear message to directors.
This process is cumbersome, and there are calls for the Corporations Law to be changed to allow corporate constitutions to be changed more easily. Up to this point, the government has shown little interest in this kind of reform.
Climate-related shareholder litigation is rare in Australia, but an amendment to Victoria's class action legislation could change that.
The main thing that constrains the Australian litigation environment is its “loser pays” approach to costs, says University of New South Wales law professor Michael Legg.
“In the US, by contrast, the person who brings the action is only really at risk of paying his or her own legal costs. They may find a lawyer to do it on a contingency basis, in which case they will not even have to pay their own costs if they lose.”
“Contingency” means there must be a successful outcome before payment to the lawyer is required. In the US, the payment is usually a percentage of the outcome that is negotiated in advance between the litigant and the lawyer.
Australia has conditional fees. If the action is successful, lawyers can charge their standard fees plus a 25 per cent fee uplift. If the action is not successful, the litigant pays nothing to the lawyer, but is liable for the other party’s fees unless the litigant (or lawyer) has arranged a litigation funder.
The amendment to Victoria’s class action litigation legislation, which took effect on 1 July 2020, allows class actions that are closer to the US contingency system, says Legg.
“It allows for legal costs that are payable as a percentage of the recovery [settlement or judgment]. Unlike in the US, this percentage is not negotiated between the client and the lawyer, but must be set by the court.”
The ability to receive a proportion of a recovery could make class actions more attractive to lawyers, because they can earn a larger fee.
Legg adds one caveat – under the new Victorian system, the lawyers would be liable for the other party’s costs if the litigation were unsuccessful.
Nonetheless, he believes that Victoria’s change could spur the bringing of more class actions.
Although Legg thinks litigation is becoming more of a risk for companies whose share prices could drop because of climate-related issues, he notes that the broader aims of climate litigants, and those of lawyers and traditional litigation funders, don’t always coincide.
“For many litigants, climate change is about bigger issues than money,” Legg says.
“They’re not always looking for monetary relief, but rather a way to change conduct and policies. To do that, a declaration or an injunction may be the better litigation tool.
hat’s less attractive to a lawyer or funder who is paid by reference to the recovery achieved.”