01Record Levels of Climate Change Shareholder Resolutions in 2016
One of the reasons you don't hear that much about shareholder advocacy and engagement is that it often happens behind closed doors, a somewhat UK tradition long practiced by the likes of Hermes others with success.
Companies sometimes face multiple resolutions. For example, AES settled with investors on proxy access while a request for the company to assess their business model from a 2 degree Celsius temperature increase perspective remains unresolved.
American Electric Power, another large US utility, has agreed to provide a report on so-called "stranded assets" - the premise that most of the world's remaining fossil fuel reserves and resources need to stay in the ground for the world to remain a safe and prosperous place, as was first championed publicly by the Carbon Tracker Initiative.
The ICCR, or the Interfaith Center on Corporate Responsibility, arguably started the entire field of shareholder engagement, and tracks climate change-related shareholder resolutions over time, finding 257 filings in 2016, up from the then record 227 in 2015, and which was 160 in both 2011 and 2012.
Lobbying is the issue for which ICCR members, whose resolutions at times ultimately represent Trillions of Dollars in assets, file the most resolutions often on, while As You Sow filed roughly 100 resolutions largely regarding corporate strategies that they request to be implemented.
This activity might appear to be negative to some: however, they are intended to be positive requests for improved business practices which will be both financially and societally beneficial. CERES, for example, only files resolutions on this mutually positive basis.
As mentioned in this Forbes link, the financial performance of these more negative approaches has not been positive. Icahn Enterprises is down 45% over the past year, and the aggressive targeting of Nelson Peltz has not resulted in significant financial performance success after his arguably vicious attacks occur. These negative-activist requests, asking for companies to break up and scale down, can cause long-term damage to sustainability-related plans of companies such as Dupont and the Value Driver Model who had been seeking to expand their sustainability enhanced and advantaged revenue - such efforts can be simply cast to the side due to such negative activism.
Hence we see short-term, destructive activism as a negative and long-term activism for necessary change as a positive activity.
Unabated, climate change will destroy shareholder value, as much as 45% of economic value per the University of Cambridge as per their "Unhedgeable Risk" report of late 2015.
02Carbon Asset Risk
A major strand of ongoing shareholder engagement activity surrounds so-called Carbon Asset Risk.
As mentioned above, the main concern of the Carbon Tracker Initiative remains that up to 80% of the remaining coal, oil and gas needs to stay in the ground in the form of Unburnable Carbon and that Trillions of investment dollars are at significant risk, potentially causing a future financial crisis or bubble.
Hence, the Carbon Asset Risk strand of shareholder engagement calls for companies to return cash to shareholders rather than spend it on capital expenditure towards fossil fuel extraction which would otherwise be wasted.
Countries such as Saudi Arabia, Iraq, Iran and Kuwait have the least expensive resources remaining on the oil side of the equation. Qatar has some of the cheapest gas reserves.
More expensive resources and reserves, such as those in Alberta and in the Arctic are also the most environmentally polluting in addition to being the most costly.
This figures to put a squeeze on companies such as ExxonMobil, BP and Shell, all of whom are moving towards becoming gas companies rather than oil producers.
Do you doubt any of this? Saudi Arabia does not. They have just created a $2 Trillion fund for the post-Oil era.
Coal remains under severe threat with Peabody Energy the last standing US producer not yet bankrupt but expected to be and perhaps even sooner than this forecast, and which has lost over 99% of its value over the past 5 years.
Oil companies have been doing all they can to maintain dividends including layoffs, selling assets and increasing debt levels. They know shareholders won't be happy if these dividends disappear.
Carbon Asset Risk suggests another way to maintain those levels - by returning cash to shareholders rather than wasting it on projects doomed to fail financially.
Another strand of activity involves companies such as ExxonMobil funding disinformation campaigns even while understanding the dangers of climate change
This litigation risk adds another category of financial consideration for investors to keep in mind when they consider in so far as whether oil companies have room to financially rebound in a world of lower oil demand going forward combined with enhanced available resources given ongoing improvements in oil production technology.
This all also adds fuel to shareholders who have been filing shareholder resolutions on lobbying among other disinformation campaigns over the years, most recently by Yale's Dwight Hall, using the famous book The Ethical Investor, available at no charge at this link.
The head of Yale's ACIR committee, Jonathan Macey, which makes recommendations to the Yale Endowment said recently that "the ACIR is committed to voting for resolutions that are consistent with the reality of climate change." Macey also said that he would "encourage the ACIR to support Dwight Hall’s shareholder proposal."
While the proposal is not expected to go through, such pressure builds up over time and these longer term engagement techniques have been useful for building awareness at minimum as regards issues which eventually have significant financial impact.
As the Ethical Investor says ,Yale will "sell its stock in a company if it is unlikely that shareholder engagement will successfully improve a company’s activity."
This is also the stance of the world's largest investor, Norges Bank, whose entire investment strategy and positions are transparent and available here, including the companies they have divested from over time after shareholder engagement failed to bring about a positive result.
Note that academic research finds that companies with whom shareholder engagement is performed outperform the market.
Wilshire Associates also famously wrote on the CalPERS effect whereby companies with the poorest governance, after engagement is performed, have gone on to outperform the rest of the market, lending further credence to such investment strategies.
There is also the concept of Stewardship to consider.
Something of a UK concept, the basic idea is that if you are an owner of stock in a company, there is an obligation to be an engaged and active owner, not distant and ignorant of your own responsibilities as an owner.
For example, when you get letters in the mail asking you to vote on proxy statements, you should do that. Seriously.
It's important not to assume that the default vote with management is best for your own longer-term value, for the reasons listed above, for example.
If shareholder resolutions were frivolous, they would be thrown out by the SEC, and they are no longer doing that on climate change among other issues which will affect financial value.
Three other examples of Stewardship to consider:
1) Aviva Investors Stewardship Statement lays out 7 clear principles for other investors to consider and follow such as disclosing their own stewardship policy, avoiding conflicts of interest, committing to monitor owned companies, establishing clear guidelines, committing to collaborate with other investors, having a clear and informed policy on shareholder resolution voting and reporting on these activities.
2) Forceful Stewardship in the light of rapidly approaching effects of climate change makes sense as an additional step given the likelihood of degraded shareholder value unless meaningful steps are taken quickly, and
3) BlackRock and CERES published a stewardship guide in 2015, yet BlackRock continues to vote with management on climate change, a position they are not believed to have moved from, and which will likely become increasingly untenable.
04The Corporate Perspective
Shareholder engagement used to be considered a negative activity, but increasingly companies are seeing more positive approaches from NGOs such as Greenpeace, and see the benefits of these activities.
For example, Greenpeace used to be critical of Apple for their stance on the environment, and such pressure has helped convince Apple to go all in on positive environmental and social solutions, for which they are now heralded, rightly, as a leader, and as we have long argued would occur throughout this current decade.
Over the past 5 years, Apple has been +129% versus the S&P 500 +56%, outperformance that any investor seeks.
Apple, Amazon, Alphabet (Google) and Microsoft all just came out in favor of President Obama's Clean Power Plan in a filed brief.
Apple has also ratcheted up its social audits of factories in its supply chain and is seen as a leader in its sector by those who know the company and its peers well, regardless of previous negative reports on this in the media.
This combination of leading companies outperforming the market also engaging on necessary policy and implementing meaningful strategies is exactly what is needed.
Pressure builds on those who continue to deny science and societal trends both politically and financially as well.
Companies who can see the benefit of having a positive impact are leading the way for shareholder and societal benefit, showing that shareholder advocacy has had and does have important teaching to share.
05Systemic Risk and the PRI
For systems to work in perpetuity, they need to account for and bring into balance all possible categories of systemic risk.
Fiduciary Duty in the 21st Century calls for bringing in ESG risks and opportunities for best results.
The Principles for Responsible Investment also is considering a new 7th principle in systemic risk, and the new Investment Integration Project calls for new Systemic Reporting Frameworks by investors.
A must read on Systems Thinking is Dana Meadows posthumously published Thinking in Systems, my own favorite book of the past decade, and one which continues to grow in relevance and resonance.
If everyone takes their shareholder responsibilities seriously, it creates a financial system of checks and balances that allows for Effective Markets which have issues such as the environment and financial inequality baked in, as well as Efficient Markets which don't create unnecessary bubbles, and Resilient Markets which can survive any stress test, financial, environmental or otherwise.
Meadows informs on what happens when systems fail. Rapid acceleration of resource production only leads to more rapid eventual failure. Balance is needed, as is a sense of permanent replenishment.
This is what shareholder engagement has been all about and why it continues to be an important force for positive change. Checks and balances are needed, and such are a critical part of why the US form of government has been most successful in many ways.
Financial systems also need this balance, and as was seen during the recent global financial crisis and its ongoing aftermath, without adequate checks and balances systems can and do fail.
Climate change demands we build in just these sorts of checks and balances, as do other issues of concern from record levels of indentured slavery to ongoing economic inequality as well as boards of directors with conflicts of interest and unfairly high levels of compensation.
Shareholder engagement remains the most effective tool in the box of investors, and its potential may have only just started to be realized.
5 Ways Shareholder Activism Has Become a Positive Force for Good
2016 once again saw record levels of shareholder engagement on climate change, on the back of record levels that were set the previous year in 2015.