What’s the Story?

Last week, Computershare, a leading share registrar company, issued its annual AGM Intelligence Report for 2023.

The Computershare analysis of AGM questions to 31 July 2023 flags nine key issues. Three relate to the company directly. Another three involve environmental issues, and the final three are on directors remuneration, employee rights, and ethnicity/societal matters.

The Computershare figures for the year ended 30 June 2023, show that 24 companies across Europe voluntarily proposed advisory AGM votes on their climate disclosures and action plans. While commendable, this is down by one third on the 36 companies proposing such votes in the year ended 30 June 2022. Most of that drop came from the UK; where half of the 16 companies in 2022, chose not to have another vote on this topic in 2023.

The main proxy advisors, ISS and Glass Lewis, codified their voting policies on climate in 2022. In 2023, both ISS and Glass Lewis recommended a vote against three of these voluntary Say on Climate proposals (12.5% of these proposals in Europe).

The 2021 vote outcome for Say on Climate averaged 97%. But with increased investor scrutiny among shareholders and proxy advisers, this fell to 91% in 2022 (the lowest figure being 76.3%). During the 2023 AGM season, the average stayed at 91%, but the lowest vote fell to 53.1%, the lowest result ever seen.

Why Does it Matter?

Investors are keen to better understand the profile of a company’s, climate risk and opportunities. In addition, investors wish to assess the company’s strategy and plans to address and/or exploiting these factors.

Much guidance is provided in the TCFD disclosure framework. In the UK, this disclosure is required by the FCA for listed companies on a comply or explain basis. In addition, in 2023 the ISSB has issued IFRS S1 and S2 both relating to climate. In August 2023 the FCA welcomed these new Standards, and announced a process by which UK endorsed standards will be required for reporting periods starting on and after 1 January 2025, but now as mandatory disclosures.

But investors also wish to analyse the cost and credibility of a company’s Climate Transition Plan. In October 2023, the Transition Plan Taskforce (TPT), issued its gold standard Disclosure Framework for climate transition; with further sector guidance expected soon.

Climate is a major business issue. Physical risk is one item, but Transition risk is quite another. Already we see investors expressing nuanced investor views on the company climate profile and response. We can expect that scrutiny and dialog between investors and the company to intensify, as disclosures get more granular and experience deepens.

The CDP analysis of Transition Plans among 18,000 companies in 2022 showed just 0.4% met their required gold standard. However the CDP standard requires alignment with the global 1.5 degree target among other things. Even with much enhanced disclosure guidance, there seems still much to be improved.

Newspoint view

A UK led fall in Say on Climate votes for 2023 is not a major concern. There is major change in climate disclosure and sustainability disclosures unfolding across Europe and the UK. For some, it may be a practical response for the 2023 reporting year to pause on voting as the new detailed disclosures, and perhaps enhanced Transition Plans unfold.

A different concern is the very low level is Say on Climate votes observed at all. In 2024 or 2025 we might see a dam-break increase in companies proposing these voluntary votes. Indeed, it is predictable that the mandated disclosures will at some point be followed by mandated Say on Climate votes. Some investors have been calling for mandatory Say on Climate votes for some time, notably for some years, The Children’s Investment Fund.

For executive incentives, the climate related metric selection, targets and weighting all need much care. The detailed new disclosures provide investors with an easy read-across from the Transition Plan objectives to incentive pay ranges and pay outcomes.

Furthermore, delivery of the Transition Plan might entail deeper reshaping of STI and LTIP practice, rather than the simple “bolt-on” ESG approach seen to date in many cases.

Climate as an incentive modifier and/or specific Climate Clawback powers will be seen. Likewise; bespoke Transition Plan incentives, maybe framed as Mid-Term Incentives; and perhaps Climate Linked option plans might be seen in the mix.

With new listed company disclosure requirements in the UK for the 2025 reporting year, any Say on Climate votes will not be seen until mid 2026. That is only 4 years away from 2030; the year by which the global 50% cut in CO2e set by the Paris agreement should be achieved.

Climate action is urgent - but actions continue to lag the need. The risk of a “Minsky Moment” is increasing; the point at which the hoped for smooth transition morphs into some uncertainty, perhaps even slipping towards a disorderly transition, which would have deep corporate and societal repercussions.

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Remuneration Advisory and Support

ESG and Sustainability

Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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