The annual general meeting season has been characterised by the emergence of resolutions seeking a vote on climate transition plans and shareholder proposals for climate related disclosure or targets, as well as racial equity audits. Investors are calling for a swifter, more tangible response to these deepening environmental and social crises.
In aggregate, through the first half of 2021, EOS at Federated Hermes made voting recommendations at 9,630 meetings, versus 7,976 over the same period in 2020.
- EOS made at least one voting recommendation against management at 67% of meetings, up from 61% in the first half of 2020. The team ‘attended’ and asked questions at 22 shareholder meetings, including Deutsche Bank, BP, Google owner Alphabet, Novartis, Amazon and Facebook, up from nine in 2020.
- At the shareholder meeting of Berkshire Hathaway, EOS presented a shareholder proposal filed by the international business of Federated Hermes, California Public Employees’ Retirement System (CalPERS) and Caisse de Dépôt Et Placement Du Québec (CDPQ). It asked the company’s board to publish an annual assessment addressing how the company manages physical and transitional climate related risks and opportunities. With Berkshire Hathaway management opposing the shareholder proposal, it was defeated.
- EOS recommended votes on 2,395 shareholder resolutions in the first half of 2021 up from 2,294 over the same period in 2020.
- EOS’ tightening voting policies led the team to recommend opposing FTSE 100 chairs in the UK at five meetings (Carnival, Croda International, Evraz, Next and Informa) for failing to meet minimum expectations for racial diversity on boards, while shareholder proposals filed with several US companies urged their boards to oversee a racial equity audit analysing the company’s impacts on non-white stakeholders and communities of colour.
Crunch time on the climate crisis
2021 can be seen as a tipping point for investor engagement and voting on climate change, with the emergence of 18 ‘vote on transition’ proposals at companies spanning oil and gas, construction, aviation, and consumer goods. There were significant majority votes against management based on climate change at Oil & Gas companies in the US.
Japan saw its second and third shareholder resolutions on climate change, after the first at Mizuho Financial Group in 2020. This year, two similar proposals were filed at Mitsubishi UFJ Financial Group and Sumitomo Corp, asking the companies to align their business strategies to the Paris Agreement goals. These companies were targeted for their significant exposure to fossil fuels, including coal. EOS accelerated its engagements with them, while also seeking views from the NGOs who had filed the proposals, before recommending support for both.
EOS has had a formal climate change voting policy in place since 2019 targeting climate change laggards, which has been strengthened again in 2021. The team continue to use the Transition Pathway Initiative (TPI) assessment, setting a threshold of Level 4 for all European companies, coal mining companies or Oil & Gas companies, or Level 3 for all other companies.
This year also saw the emergence of ‘say-on-climate’ resolutions, with various companies facing a shareholder vote to approve their climate change transition plan. This came in response to various movements to improve investor scrutiny of such plans, following the rapid expansion in the number of companies aiming to achieve net-zero emissions.
EOS sought to support proposals that demonstrated robust target-setting, were aligned to external frameworks and accreditations - such as the Science-Based Targets initiative - and where it could see a clear and credible strategy in place to achieve the stated targets, including at Unilever, Aviva and Nestlé.
However, EOS did not support the proposed climate plans at Royal Dutch Shell, Glencore and Total, as these did not appear to be aligned to the Paris Agreement goals, or at airport operator Aena, due to a lack of targets for the Scope 3 emissions that are critical to its transport infrastructure.
In the US, oil major Exxon, another notable climate change laggard, partially lost a proxy battle with activist investor Engine No. 1. Three out of four directors proposed by Engine No. 1 were appointed against management advice, with a view to improving the company’s stance on climate change. EOS recommended support for all four, believing that additional board refreshment would preserve and enhance long-term shareholder value through the energy transition.
Meanwhile, EOS also recommended support for a shareholder resolution requiring Scope 3 targets at another US oil major, Chevron, which gained 61% support from investors.
Dr. Hans-Christoph Hirt, Head of EOS at Federated Hermes said:
“The pandemic has served as a wake-up call on the climate crisis for businesses, investors, policy-makers and individuals alike. This year’s voting season has evidenced a major shift in sentiment with. Engine No. 1’s successful proxy contest with Exxon and majority support for a shareholder climate resolution at Chevron just two prominent examples. The momentum is with investors calling for immediate action on climate change.
“We expect climate stewardship to dominate corporate and investor agendas in the coming months. The introduction of formal shareholder votes on transition plans of companies, a Dutch court verdict against Royal Dutch Shell, the International Energy Agency’s Net Zero by 2050 report and COP 26, all set the scene for increasing scrutiny from global investors.”
Toughening our position on diversity & inclusion
This year EOS tightened its voting policies on diversity and inclusion, demanding greater representation of women and ethnic minorities on boards and amongst leadership teams. Globally, it recommended opposing the re-election of directors deemed most responsible due to concerns about insufficient diversity.
In the UK, EOS continued to push for greater gender diversity on boards and among executives/leadership teams.
EOS expects FTSE 350 boards in the UK to have reached 33% female representation, for FTSE 100 companies to have at least one woman on the executive committee, and for women to comprise at least 20% of the executive committee and its direct reports. It recommended opposing the directors responsible (typically the board chair) at companies that fell below expectations, such as at Ocado, Imperial Brands and Glencore.
EOS also introduced voting on racial diversity in the UK, recommending opposing any FTSE 100 board chairs where the board had failed to meet the minimum expectations of at least one ethnic minority director. This meant EOS recommended opposing five companies – Carnival, Croda International, Evraz, Next and Informa.
Where EOS received assurances that this issue would be urgently addressed, it recommended supporting on an exceptional basis, including at housebuilder Persimmon and defence company BAE Systems.
Dr. Hans-Christoph Hirt, Head of EOS at Federated Hermes said:
“Investors are stepping up the pressure on companies to take action on diversity and inclusion. Recent proposals for racial equity audits in the US which we believe would add substantial value beyond the actions companies are already taking evidence this material shift in approach.”
“During our engagement we explained that such audits can provide additional insight into the root causes of complex problems that companies must address in order to develop enduring solutions. They also enable more rigorous performance evaluation relative to underlying challenges and increase a board’s capacity to provide effective oversight. Investors must continue to push for material change in the composition of boards, management teams and workforces at large, to ensure that companies better reflect and harness the strengths and diversity of today’s global society.”
To read EOS at Federated Hermes’ latest Public Engagement report, please follow the link here.