New research shows investor pressure is mounting for greater transparency on climate-related identification and management - a cautionary sign that directors should heed.

    Concerns about climate change are no longer just a fad. Investors are demanding that companies seriously engage with the issue of climate change, not just as a matter of corporate social responsibility but as risks to be integrated into their main business strategies, practices and financial statements.

    In response to the extreme events over the past two years, including Australia’s devastating bushfires, severe storms and flooding and now the COVID-19 crisis, investors and regulators are calling on companies to manage for the long term — and they’re expected to respond accordingly.

    Previously, it might have been acceptable for companies to prioritise other matters, but these drastic weather events and a global pandemic are changing their risk profile. It has never been more apparent that climate risk is investment risk.

    Investor pressure through AGMs

    Proxy results from resolutions at company AGMs indicate strong and growing support for climate-related risk disclosures. Shareholders are generally mindful that, under the Corporations Act 2001 (Cth), they’re not permitted to vote on matters related to a board’s power to manage the company. The principle exists to preclude advisory resolutions allowing boards to deny consideration of shareholder proposals.

    In 2019-20

    Over 10 special shareholder resolutions received more than 20% proxy support

    Six resolutions received more than 30% proxy support.

    One resolution received more than 50% support from proxies lodged.

    In 2017-18, only two resolutions received more than 20% proxy support.

    Instead, shareholders can propose a special resolution to amend the constitution, which, generally speaking, would permit shareholders to express an opinion or make a request about the way in which a power vested in the directors has or should be exercised.

    The members will then propose resolutions, contingent on the passing of the special resolution, for example, relating to reporting on climate change management. This has occurred regularly over the past three years. Unsurprisingly, the special resolution is not passed, but proxy vote results show investor support for climate change proposals is growing materially. An analysis of proxies lodged for AGMs in 2019–20 revealed that:

    • Over 10 resolutions received more than 20 per cent proxy support
    • Six resolutions received more than 30 per cent proxy support
    • One resolution received more than 50 per cent support from proxies lodged.

    Compare this to 2017–18 where only two resolutions received more than 20 per cent proxy support.

    Proxy results from resolutions at company AGMs indicate strong and growing support for climate-related risk disclosures.

    A high-profile board’s response

    At BHP’s AGM in October 2020, a resolution proposed that the company suspend membership of industry associations with a record of advocacy inconsistent with the Paris Agreement’s goals. It received proxy support of 22.4 per cent notwithstanding that the resolution wasn’t valid, as the amendment to the Constitution was not passed. Consequently, BHP issued a statement in its 2020 AGM results that it would engage with investors to better understand the reasons underlying the support for the resolution.

    This investor support should not be ignored

    The high level of investor support expressed through proxy votes, although not valid, cannot be ignored. And with 2021 AGMs underway, directors have started taking action.

    Rio Tinto has recommended that, at this year’s AGM, shareholders vote in favour of two non-binding advisory resolutions relating to meeting emissions targets and suspending membership with entities that are not compliant with the Paris Agreement. The Rio Tinto board also expressed an intention to put the company’s annual report on climate change to an advisory vote at its 2022 AGM.

    Santos, Woodside and Oil Search expressed similar intentions; however, they recommended that shareholders vote against requisition resolutions relating to climate change at their 2021 AGM.

    While this indicates that companies are beginning to respond to investor pressure, directors should be wary of investors’ increasingly assertive pressure on this matter, particularly in the fossil fuel industry. Resolutions to “wind down” the company have been requisitioned by an investor lobby group at the 2020 AGMs for Whitehaven Coal, the New Hope Group, Beach Energy and Cooper Energy, Santos and Woodside and are expected to be requisitioned at the upcoming AGM for Oil Search, as protagonists argue that continuing fossil fuel business is contrary to meeting climate goals.

    These resolutions exceed the reasonable expectations of directors, who should focus their attention on meaningfully engaging with climate-related risks and keeping the market informed of their response to the same.

    Institutional investors are becoming more active in submitting and supporting climate-related resolutions at AGMs and this is expected to continue into the 2021 AGM season. The Australian Council of Superannuation (ACSI), in its 2021 Climate Change Policy, outlines its strong expectations that, amongst other things, companies facing material climate-related risk disclose these risks in accordance with the Taskforce on Climate-related Financial Disclosures (TCFD) reporting framework and align their corporate strategy to the Paris Agreement and goal of achieving net zero emissions by 2050. ACSI warns a failure to comply with its expectations may result in their recommendation to its members to vote against individual directors who are most accountable for overlooking climate-related risks.

    The risk of “greenwashing”

    The increasing pressure on companies from investors, regulators and industry-based initiatives to engage in the assessment, management and disclosure of climate-related risk has seen a rise in public commitments by companies to emission-reduction targets including net-zero emissions. These commitments can themselves create risks for companies around what is colloquially referred to as “greenwashing”.

    It is important that companies that expressly or implicitly represent a commitment to achieving climate-related goals and investment products (which are made available on the basis that investments will be limited to entities that have committed to achieving such goals) are able to reasonably substantiate the grounds for such representations. Noel Hutley SC and Sebastian Hartford Davis in their April 2021 opinion, released by the Centre for Policy Development, have warned that an inability to do so may constitute greenwashing, leaving entities and directors vulnerable to liability for misleading or deceptive conduct. Companies that have made climate commitments have had growing success. However, as investors’ understanding of what is required to meet these goals is becoming increasingly sophisticated, companies and issuers of investment products must be prepared to seriously engage with achieving their stated commitments to continue this success and avoid liability for potentially misleading and deceptive conduct.

    What can directors be doing?

    Both risks and opportunities can and should be reflected in risk management planning and in the company’s financial statements and disclosures. Directors should utilise the TCFD reporting framework as a useful guide. However, it is important to remain vigilant that compliance with this standard will not necessarily insulate directors from the legal consequences of inadequate disclosure.

    Companies that take the opportunity to appropriately address these issues are likely to be well supported by investors, because active engagement in the transition to a low-carbon economy gives companies the chance to reframe and grow their business, and to put themselves a step ahead of their competitors.

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