A shift in climate change-related voting

JPMAM’s Yo Takatsuki says the detail of every resolution carries even more weight than usual


Yo Takatsuki, global head of investment stewardship, J.P. Morgan Asset Management

The planet’s temperature is rising. The same could be said for this upcoming proxy voting season, too, with several heated developments at play that will have implications for the low carbon transition and beyond.

Public scrutiny around the sustainability practices of corporations is nothing new. That said, we expect to see a shift in climate change related voting. To date, much of the focus has been on the major producers and users of fossil fuels. To achieve net-zero by 2050, we recognise a ‘whole economy’ effort is required, and every company – regardless of whether it produces fossil fuel or consumes it in varying quantities – needs to demonstrate a clear stance on the issue of climate change. We, therefore, expect to see the focus of investor interest shifting, not just in terms of transparency and disclosure but also increased focus on the credibility of business plans and decarbonisation goals. Credibility is about alignment with the latest climate science and ensuring a company’s plans to achieve emissions cuts is realistic.

More companies are also likely to propose their own resolutions on climate at shareholder meetings. This so-called “say-on-climate” is where the board of directors and management voluntarily put forward a vote which tends to be less contentious in nature than most shareholder proposed resolutions. This is a trend we saw ramp up last year, and it’s changed the tone of the debate because, as you might expect, management resolutions are considered more realistic and palatable to the company. Last year, the initial flurry of these proposals were broadly supported by investors and welcomed as companies publicly put a front foot forward towards mitigating climate change. However, this year, there will be questions about whether a company’s tabled plans are genuinely ambitious enough.

And that gets us to another key aspect. The continuous evolution of sustainability issues, and its interplay with voting, has meant that the detail of every resolution carries even more weight than usual. Investors need to utilise the insights derived from research, analysis and engagement dialogue with investee companies to scrutinise these resolutions with a fine toothcomb. Some resolutions may seem benign or well-meaning on the surface but, digging into the details, they may be seeking the right outcome with the wrong process, while others may simply be asking for the wrong outcome altogether.

Net zero might sound like a catchy term, but the business dynamics and technical realities that will enable it are both myriad and complex. Transparency and 2050 goals are important, but that is not sufficient to achieve the necessary change. It’s, therefore, more important than ever that investors are voting not only with the right sustainability intention but also with a truly robust assessment of the financial materiality of the issues at hand. The devil is going to be in the details.

Social-related issues is another theme that’s becoming more visible, and we expect to see an uptick in the volume of shareholder resolutions this proxy season. Companies that don’t have a plan in place which outlines, for example, how they intend to expand the diversity of their board will likely attract votes against specific directors. The spotlight is also shifting beyond the board room to the c-suite and wider workforce. Moreover, the focus on diversity is evolving. Racial and ethnic diversity is now being scrutinised, alongside gender diversity.

Also, no proxy season would be complete without heated debate on executive pay. We’ll be watching carefully again this season for where pay may be misaligned with performance. We are also increasingly seeing climate and social related targets and goals as part of CEO pay plans. This drive to explicitly include sustainability goals as part of compensation schemes reinforces how these issues have become top of the agenda for companies, executives and investors.

Let’s be clear – the world’s sustainability challenges are both big and hard to resolve. Ultimately, what we’re looking for is that performance metrics are transparent and thoughtfully selected. The targets are robust and stretching. We, therefore, don’t want to see easy “slam dunk” type targets for executives to achieve, who then go onto receive handsome payouts when they have not done much. Companies need to explain to investors how achieving these will lead to long-term creation of shareholder value.

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