A global approach to climate governance, and a step into the unknown 7 min read
The 'Say On Climate' is a new global initiative that presents a novel approach to the issue of climate governance, and is a movement that is becoming active in Australia.1
In essence, it seeks to alter how listed entities engage with climate-related matters, and their related disclosures. It calls for boards to voluntarily put forward advisory resolutions at their upcoming annual general meetings that seek shareholder approval of the organisation's climate transition action plan. In Australia – despite there being no general legal framework for advisory resolutions – the 'Say on Climate' initiative has already garnered the support of a number of prominent Australian listed resources companies, the boards of which have voluntarily committed to put forward advisory resolutions on climate action plans at their 2022 AGMs.
As we enter the 2021 AGM season, it is clear that climate-related issues will remain a key focus for listed entities and their shareholders. For organisations that are considering a commitment to the 'Say On Climate', there will be a number of relevant legal and other issues for boards to carefully consider, including directors' duties and the role of the board, stakeholder engagement and expectations, and what might be the impact on the company of a 'Say on Climate' vote. It will be important that boards reflect on these types of issues, and how those issues apply to their particular organisation, including whether the organisation:
- is able to appropriately frame a board-endorsed advisory resolution to capture the organisation's intentions, having regard to next steps (and avoiding unintended consequences) following the vote;
- operates in a sector or industry where the physical, transition and liability risks and opportunities associated with climate change are particularly acute;
- has previously been the subject of shareholder-requisitioned advisory resolutions relating to climate matters; and
- has the ability to put board-endorsed advisory resolutions to shareholders, having regard to the powers (and limitations) under its constitution.
An 'advisory resolution' is a non-binding resolution that allows shareholders (by voting in favour or against) to express their opinion on how the directors should manage the company and exercise their powers.
From a governance perspective, the endorsement of the 'Say On Climate' by several Australian listed resources companies and their openness to putting advisory resolutions to shareholders marks a significant, and remarkably rapid, shift. Only last year, Allens reported on the growing number of advisory resolutions on climate and related matters that were put forward by shareholders of a range of companies (rather than proposed by the board). During the 2020 AGM season, boards did not support these shareholder-requisitioned resolutions, recommending that shareholders vote against them.
In fact, in most cases, the advisory resolutions put forward by shareholders relating to climate matters were never put to AGMs. This is because the advisory resolutions were contingent on the shareholders first passing a special resolution to amend the constitution of the company to include a power for shareholders to make non-binding advisory resolutions. For ASX200 entities in 2020, shareholder support for such constitutional amendments fell well short of the required 75% voting threshold, receiving an average of only 6% of votes in favour. However, based on the proxies disclosed, shareholder support for the advisory resolution itself was much higher. For example, advisory resolutions on compliance with the Paris Goals that were put forward by shareholders for the AGMs of several of the large resources companies received strong proxy support (up to 50.2%).
The 'Say on Climate' approach bypasses the regime for shareholders to put forward the resolution and instead petitions the board to propose the resolution.
Boards will, no doubt, have observed that the momentum of shareholder-led activism on climate issues continues to build in Australia and globally. In addition, it is now widely acknowledged in Australia that material climate change risks are relevant to a director's duty of care and diligence and the duty to act in the best interests of a company. Most recently, an updated legal opinion by Noel Hutley SC and Sebastian Hartford Davis and draft guidance for financial institutions published by APRA have highlighted the need for boards to carefully consider the physical, transition and liability risks and opportunities associated with climate change. This follows on from other regulatory activity in this space, such as by ASIC and ASX, including ASIC reportedly issuing letters to certain resources companies regarding alleged failures to adequately disclose risks posed to their businesses by climate change.
The 'Say on Climate' is, however, a step into the unknown for Australian companies, and their shareholders and directors. For example, what would a 'Say on Climate' resolution ask of shareholders? What voting threshold would apply? If the resolution is passed, what happens next?
There are a number of factors that boards will need to carefully consider in assessing whether a 'Say on Climate' is appropriate for their company. They may include some of the items below.
- Directors' duties and the role of the board – At all times, directors must comply with their duties. The board needs to consider whether putting forward an advisory resolution is in the best interests of the company, including assessing the potential future impacts (risks and opportunities) if the relevant resolution is passed by shareholders. The board would need to consider how it allocates its and the company's current and future resources among its key objectives, as well as how it balances its obligations to, and the interests of, its various stakeholders.
- What happens next? – Boards should consider what steps and obligations might follow a 'Say on Climate' vote (whether it is approved by the requisite majority or not). While advisory resolutions do not necessarily bind the company, the board may consider that shareholders have provided a view on the company's position on climate-related matters and endorsed a particular course of conduct. What mandate has the company been given by its shareholders, and what flexibility and discretion would the board have on climate-related matters going forwards? Are there any additional risks that arise and what is the interplay with directors' duties?
- Potential further consequences – The manner in which a company seeks to action the outcome of a 'Say on Climate' resolution (if passed) may be open to scrutiny, and other stakeholders may seek (or expect) to play a role. In addition, the board would need to consider its ability to subsequently change any approach that was endorsed by shareholders. The additional disclosure that will accompany such resolutions also naturally brings a heightened risk of claims should those disclosures be considered to be inaccurate or otherwise misleading.
- Changing dynamic in stakeholder engagement – A board-endorsed advisory climate resolution would mark a change in approach between listed entities and stakeholder groups, such as environmental organisations. It may prompt a shift away from the traditionally adversarial process of boards recommending shareholders vote against advisory resolutions that might be put forward by these groups on an ad hoc basis, and bring in a more structured regime.
- Taking leadership of the climate discussion – Rather than being on the receiving end of a shareholder-requisitioned resolution, a board-endorsed advisory resolution would be a proactive initiative, which would provide an opportunity for the company to frame a resolution for its shareholders to consider, which reflects the company's relevant objectives, facilitating more targeted discourse around the company's climate strategy and allowing the board to take the lead on this discussion.
- Meeting stakeholder expectations – The level of proxy support for shareholder-led advisory resolutions during the 2020 AGM season evidences the growing investor appetite for climate-related governance and disclosure. Support for the 'Say on Climate' from organisations such as the Australian Council of Superannuation Investors also shows that this interest is shared by institutional investors.
- Being an early mover – The 'Say on Climate' is in its relative infancy and presents an opportunity for listed organisations to be 'ahead of the curve' at a time where showing market leadership in the climate space may be highly valued.
- Floodgates – Endorsing the 'Say on Climate' may (rightly or wrongly) be taken as a sign of the board's openness to advisory resolutions generally. Other stakeholders may put forward their own advisory resolutions for board endorsement, whether they be climate-related or otherwise. All the legal considerations described above would be equally relevant.
The movement was pioneered by The Children's Investment Fund Foundation, being the activist fund of UK businessman and philanthropist, Chris Hohn.