The art of climate resolutions

The 2022 proxy voting season, the time of the year when the world’s corporate behemoths convene their annual general meetings, was one for the net-zero history books. Investors filed a record 215 climate-related shareholder resolutions according to Ceres, the sustainability non-profit organisation.

When it comes to shareholder climate resolutions, the quantity is important but the quality is critical. In other words, how these shareholder resolutions are filed, discussed and voted upon determines the underlying success of a key strategy of the net-zero investor playbook – engagement.

Institutional investors looking for guidance on shareholder climate resolutions would do well to take a look at a new report from the Asia Investor Group on Climate Change. 

This network of local and global investors, with combined assets under management of $36trn, has teamed up with environmental law charity ClientEarth to analyse the nuances of the process.

Net Zero Engagement in Asia - A Guide to Shareholder Climate Resolutions, is the outcome of expansive collaboration. It took lawyers from 11 Asian jurisdictions to piece it together. There is no one-size-fits-all approach to these things and the report shows that bringing climate resolutions to bear is more art than science.

As shareholders in a company, investors can “exercise” shareholder rights meaning they usually possess the right to communicate their expectations at AGMs. How they weave climate change into this, is multi-faceted. For example, investors have historically voted against company leadership if the leadership fails to account for climate risks or they vote against the books if disclosures are deemed unsatisfactory.

The report covers shareholder climate resolutions which it defines as “shareholder-filed resolutions which concern a company’s governance, disclosure or business strategy on climate change and which can complement other stewardship options”. It makes three interconnected observations.

1. Right to file

The primary factor that produces a variation in how climate-related shareholder resolutions work is that the right to file one is not universal. In some jurisdictions, it can be challenging.

In Japan, for instance, the set of topics a shareholders’ meeting can address is constrained by the company’s charter documents (the constitution or the articles of association or incorporation). According to the report: “Shareholder climate resolutions would not normally fall within such matters.” To deal with this, investors have usually sought an amendment that makes climate change part of the company’s charter documents.

Similarly, under Indian company law climate change does not constitute an issue that needs shareholder approval. This means that a charter document amendment is needed, which, according to the report, remains an untested method.

On the other hand, in jurisdictions such as China, Singapore, Malaysia and Indonesia, investors tend to have the right to propose climate-related resolutions without having to amend the company’s constitution. In China, a jurisdiction where shareholder climate resolutions are few and far between, “shareholders have rights to propose and vote on shareholder climate resolutions and receive protection of such rights under PRC law”.

Malaysia, which has never seen a climate-related shareholder resolution, has significantly reduced the odds of management resisting one, given that the only way of doing so is by proving that the resolution is “not in the best interests of the company”, a task most managers would try to avoid.

2. Boardroom politics

The report makes the point that to a large extent, filing climate resolutions depends on the balance of power between management and different types of investors – how much of a company an investor owns and who owns the rest are crucial factors.

A good example is Thailand where corporate governance can take on different forms based on whether a company is private or public. According to the report: “The balance of power to determine the agenda of a shareholders’ meeting is generally in favour of the board of directors in the case of private companies, while being less so in the case of public and listed companies.”

The reason why amending the charter documents of an Indian company to allow for climate shareholder resolutions remains untested is “because most listed Indian companies have controlling shareholders who bear a significant influence on the boards of such companies as well as voting outcomes, leading to any resolution proposed by a minority public shareholder being ineffective from a voting outcome standpoint”.

In some jurisdictions, such as Japan and Vietnam, investors need to satisfy an ownership threshold. Japan’s rules imply that investors need to hold 300 voting rights, roughly equating to 30,000 ordinary shares. In Vietnam, shareholder climate resolutions can only be filed by “qualifying” shareholders, a term that means investors who own at least 5% of the company’s ordinary equity.

3. Regulators and winds of change

Lastly the report suggests that across Asia, regulators and investors have more in common than we think. Regulators have been introducing reforms that align with the net-zero investor interest of greater transparency. An interest that shareholder climate resolutions seek to protect.

The Malaysian regulator is trying to increase the “ESG fitness” of boards, referring to ESG-related expertise in management. Vietnam’s 2022 environmental law reform has increased the responsibility companies bear towards environmental protection. South Korea has announced plans to mandate sustainability disclosures.

In 2021, Singapore’s stock exchange announced that issuers must “comply or explain” with rules requiring climate disclosures. And India’s securities watchdog has said it wants to see a dedicated ESG risk management capacity in listed companies.

Across Asia, regulators and investors are pushing corporates in the same direction – and the pressure is only going to increase.

The report tells the story behind the record number of shareholder climate resolutions in 2022. If anything, it makes the numbers look all the more noteworthy. Investor expectations regarding net-zero are critical bits of information that need to be communicated, and communication is critical. As the saying goes: “Information and communication are two different things – information is giving out, communication is getting through.”

Atharva Deshmukh is Net Zero Investor’s head of research.