26 June 2023
Transition plan votes: Investors have their say
CCLA is clear on the imperative to act on climate change.
The Intergovernmental Panel on Climate Change (IPCC) has estimated that, for there to be an 83% chance of limiting warming to 1.5 degrees Celsius, only 300 gigatons (Gt) of carbon can be added to the atmosphere from the start of 2020.1 At the current emissions rate, this carbon budget is likely to be used up by 2030.
Thus, it is critical for companies to act decisively in the next decade, to set out a transition plan to explain their decarbonisation strategy and put such plans for an annual general meeting (AGM) approval.
By so doing, investors have a mechanism to assess company commitments, provide support for associated capital expenditure as well as express their expectations for greater climate action where needed.
CCLA engagement and outcomes
CCLA has joined investors representing £14 trillion of assets under management, calling on companies to provide a transition plan vote.2 This is by means of boards putting a specific resolution to shareholders at the AGM, asking for approval of the company transition plan setting out the decarbonization strategy for the company, and providing a means for investors to vote annually on progress against the plan.
We have also collaborated with other investors in corresponding with FTSE All-Share companies (minus investment trusts), encouraging them to put a transition plan to vote as well as writing to 72 European companies on the same topic.
Our engagement with Unilever as lead investor in the Climate Action 100+ initiative led to it being the first FTSE 100 company to introduce such a vote, and engagement with Rio Tinto culminated in its decision to put an advisory Say on Climate resolution to its 2022 AGM.
Of the fifty-five UK listed companies in the FTSE All-Share that responded to correspondence, the feedback has been positive or neutral. Eight companies note they have already put transition plans to a vote in 2021 or 2022, and two plan to do so in 2023. A further nine have discussed doing so at board level, want to engage further on the topic or say they will consider it for a future AGM. Of the remaining responses, none actively say it is something they will not consider.
Different markets, different contexts
While the principle of a transition plan vote is gaining momentum globally, the uptake in different jurisdictions varies.
In Europe, such votes have rapidly gained traction. In 2022, there were 18 company resolutions, nearly double those in 2021. Australian companies also showed a rise in votes, from one company in 2021 to eight in 2022.
The regime in the US is somewhat different, with there being many more shareholder resolutions than other markets and a long history of this being the focus for company and shareholder attention. In 2023, the focus of such shareholder resolutions is more on disclosure of transition plans, although seven do ask for an associated shareholder vote.3
Investor backing for transition plan votes
Company-sponsored transition plan resolutions in 2022, not surprisingly, all received majority shareholder support although in some markets, there are greater levels of challenge.
In Europe, shareholder scrutiny of proposals resulted in seven proposals in 2022 receiving less than 90% support. In Australia, only two proposals received over 90% support, with two receiving particularly low levels of 63% and 53%.4 These voting outcomes may in part be due to advice given by proxy advisory firms to institutional investors. For example, 2022 was the first time Institutional Shareholder Services (ISS) the largest proxy advisor, recommended its clients vote against some plans.
Conclusion
What has been the outcome of increasing investor encouragement of and support for transition plans and having a ‘say’ on such plans at AGMs?
First, it should not result in investors ‘rubber-stamping’ corporate plans. Even where vote outcomes show majority support, it has been shown that 75% of proposals gaining at least 30% of votes against, result in company action.5 And in the UK context, a 20% threshold requires boards to report to shareholders on any actions taken to address their concerns.
Second, it has resulted in greater levels of engagement about how to formulate, develop and approve plans. Engagement to date has shown that requesting a plan every year is likely to be too frequent, and that the annual vote might be more appropriate for a report on the implementation of the plan, with the strategy put to shareholders every three years. This is in line with the current approach to remuneration votes on policy and reporting.
What the growing number of resolutions and level of vote outcomes does show is the increasing demand for corporate climate accountability. It is incumbent on us at CCLA, as responsible stewards of capital, to use our influence to build on our successes, collaborate with like-minded investors and work with companies to drive real-world change.