Major institutional investors turn to proxy solicitation on climate risk proposals

With the climate resolution at ExxonMobil being seen as a “proxy fight”, leading institutional investors are increasingly turning to proxy solicitation, a technique more typically used by companies to identify and communicate with shareholders during corporate events like takeovers.

At a recent Glass Lewis Proxy Talk, Anne Simpson, CalPERS Investment Director, Sustainability stated that they were conducting proxy solicitation in support of climate change resolutions at “around a dozen companies and had seen impressive levels of investor support. I’m appealing for support now,” she added.

That was enough for us to want to know more.

“In total, this season we are soliciting proxies on 37 companies,” Simpson told RI, “17 on climate risk reporting. These 17 are part of the group of companies which we identified as Systemically Important Carbon Emitters, the Global 100 companies that account for 50% of the carbon emissions in our portfolio. Our strategy has been to go forward with either filing or co-filing resolutions for disclosure on the Paris 2° target – disclosure about how companies will make the transition to a low carbon future and still be in business, which is important information for long-term investor like us. What we can do as CalPERS is file our intention to carry out a proxy solicitation with the SEC, which is a regulatory event. In the solicitation, we explain to our fellow shareowners that we are seeking their votes in support of the proposal concerned.”
In addition to the regulatory filing, the fund also hires a third party to contact shareholders directly. “CalPERS also hires a proxy solicitor, who we can then instruct through the Broadridge system, to contact a significant range of those listed on the share register,” explained Simpson, “which is no mean feat with big companies like Exxon and other energy majors. We also speak with the proxy advisors, to explain the investment logic behind our position, and also to provide their clients our perspective on risk and return. This is helpful as we are able to speak as a shareowner to fellow shareowners – peer to peer. All this chimes in with the widespread financial market support for the sound science and economics of the Paris agenda, regardless of where political winds are blowing.”
This all sounds expensive, so I asked Simpson about the costs involved. “Cost depends on the size of the share register, but we regard this as a strategic initiative to ensure the broadest possible support for climate risk reporting. In addition to staff work we hire a proxy solicitor and pay a flat fee based on the size of the share register and then we have a bonus fee for the outcome. The solicitor we use is George Garland. The potential outlay as a percentage of our total investment costs is very small.” As a percentage of CalPERS overall investment costs, proxy soliciting represents around 0.02%.Simpson noted that companies and the Business Roundtable are always complaining about the costs of dealing with shareholder resolutions – one of the many impetuses around the drafting of the Financial CHOICE Act. “It’s only this expensive,” said Simpson, “because they are fighting them, but what’s important here is that management is using shareowners’ funds money to argue against what we, as shareholders, are proposing.”
On the costs associated with a solicitation campaign: “We’ve got $1 billion invested in Exxon and we view climate risk as a material issue for the board to address, not spending this money would be penny wise and pound foolish. What that [solicitation] means is that we can get right down to the smaller shareholders, not just the usual suspects. It’s our commitment to transparency and accountability across the market to allow all investors to participate in this process. It might look like a lot of money per proxy solicitation but when you when you compare it to the overall costs and the potential losses then it looks a lot less significant.”
I asked Simpson whether any members of the pension scheme had ever questioned the proxy solicitation costs in your public meetings? “It’s one of our investment beliefs that costs matter,” replied Simpson. “And while we have $1 billion invested in Exxon, greenhouse gas emissions can have an effect on other assets in the portfolio. If we have extreme weather, sea level rises or global temperature increases, other companies then feel these impacts putting other assets at risk. If you look at the numbers and say well why would you spend this money on a proxy solicitation at the company, well, the question is how could you not? Like I say penny wise and pound foolish, these are pennies set against the risk to the portfolio.”
Simpson also pointed to the success of the campaign: “This is only the second year that CalPERS is really weighing in on climate risk proposals with proxy solicitations. Two years ago we were seeing votes in the mid-30s, the last year the average number was in the mid-40s and now we’ve had two wins, one at Occidental at 67% and [utility company] PPL at 57%. To its credit,” she added “Exxon has shown public support for the Paris Accord, and now they have written to the White House to say they support it so ‘hats off’ to Exxon. We’re beginning to see this oil tanker turn sloooowly but surely. We’ve got the business community moving, and the financial markets speaking and that’s a powerful combination.”
Of course, CalPERS is not the only fund running proxy solicitation campaigns. CalSTRS, the Local Authority Pension Fund Forum, the Nathan Cummings Foundation and the Seattle City Employees Retirement System wrote a letter to the shareholders of utility the Southern Company about mismanagement and decoupling of executive pay from performance and calling for disclosures about the transition to a 2° future.

The same four filed a solicitation with the SEC glossily setting out the same arguments. Both were notably necessary, since Southern’s ‘special’ annual meeting page offers this about the shareholder resolution: “We have been advised that a stockholder proposal is intended to be submitted at the annual meeting.” Most informative! Nevertheless, the votes in support of the proposal rose to 46% at the meeting last Wednesday, up from 34% the previous year. And almost two-fifths of shareholders registered their opposition to top pay policies. The 50/50 Climate Project also filed a solicitation to Exxon shareholders stating that “Board Policies, Composition, and Pay Undermine Ability to Mitigate Key Risks” at the company.
Tim Smith of Walden Asset Management, while not a direct recipient of a solicitation, said: “We have not had a solicitor call re Exxon so we weren’t on the list, but we did see the recent filing from the proponents and, of course, the recent SEC filing by Exxon, so we know the arguments.“Clearly this has revved up to be a real contest.” He also said that Exxon was doing its own solicitation, setting up visits with their large investors months before the annual meeting to update them on their thinking on climate. He noted that: “the new Exxon SEC submission details many things the company does to address climate but provides little information on how they are doing the transition planning asked for in the resolution.”
It appears safe to say that success has bred an even fiercer determination from shareholders to have their voices heard.
Simpson summed it up: “It’s worth saying that board accountability is the backdrop to companies being more responsive, if investors hadn’t spent many years getting majority voting in place and then proxy access, there would be little or no consequences for boards ignoring shareowner proposals.” Link