A new wave of shareholder activism is sweeping investment markets globally with the aim of shaping corporate activity to better consider risks that, for far too long, have been considered non-financial. By Simon O’Connor.
Whether it is to fund start-up costs, support business growth or tie you over when trading through rougher times, businesses have conventionally turned to banks as a trusted and known source of additional finance. However, securing supplementary finance is not always an easy and straight forward process with the big banks.
This next wave is not about aggressive board take-overs, but instead getting our leading companies to better consider the interdependence between their business and broader society, environment and economy.
At the May AGM of the world’s largest oil company, ExxonMobil, a majority of shareholders voted against the board in support of a resolution forcing the company to stress test its strategy against climate change. The company will now be required to report on how its strategy will allow the company to adapt to a world shifting towards a cleaner energy future, under the Paris Agreement ratified by 195 countries.
Institutional investors, including some of the world’s largest such as BlackRock, have decided it is time to push harder when companies refuse to acknowledge the very real risks to their business from environmental issues such as climate change. Far from a soft issue at the periphery of investment market concerns, such issues have now moved into the direct sights of institutional investors concerned about the dramatic disruption occurring in the global economy.
Such is the concern by investors, that similar resolutions have been passed by companies’ shareholders including BP, Shell, Anglo American and Glencore.
This wave of investor activism is now hitting Australian share markets as well.
Many of Australia’s largest institutional Investors are increasingly willing to flex their muscles to ensure their long-term investment value is protected and grown in our increasingly uncertain world.
Today in Australia, 1 in every 2 dollars is invested by investors who are committed to considering environmental, social and corporate governance (ESG) issues and opportunities in their daily investment decision making. It has become clear to investors that for companies to survive and thrive in the 21st century, the consideration and management of sustainability issues – work force, community, environment, regulatory environment, supply chains, human rights and beyond – is ever more critical. Companies that are poor at managing their work force, their customers and their environmental impacts, send a negative signal to markets that they may also be poor at delivering on a strategy that delivers future strong financial performance.
A strategy built on underpayment of workers is a flawed, short term business strategy. A strategy relying on concealing the emissions of vehicles to by pass regulations is one that can only pay off until revealed. A board of a fossil fuel company who remain in denial of the political shift towards stronger action to limit fossil fuel emissions present a problem for shareholders. A business whose products cause significant social harm or poor health and who pass social costs to governments are very likely to see themselves regulated in order to limit those harmful activities.
In the past, shareholders may have sat back and left matters in the hands of boards to direct such companies. Today we are witnessing significant growing attention by some of the largest investors globally, willing to flex their ownership muscle to ensure those directors are being managed in a way that is consistent with growing shareholder returns over the longer term, not just the term of the latest CEO.
For these reasons, boards of Australia’s largest corporations have become ever more used to being questioned on the way they are considering these factors – traditionally seen to be non- financial issues – by institutional investors.
Board gender diversity, climate change, culture of an organisation, social license, political risks, occupational health and safety, appropriate protection for employees and beyond have become common speaking points at company meetings, analyst briefings and even AGMs.
Recently, at the AGM of the Australian gas producer Santos, a climate change resolution was put forward, similar to the one recently supported at the ExxonMobil AGM. The resolution sought a commitment from Santos to stress test its operations under a scenario where the business’ fossil fuel based emissions were seriously curtailed in line with the Paris Agreement commitments.
The resolution was ultimately unsuccessful. But does this mean Australian investors are not concerned about how ASX listed companies are managing climate change risks?
Far from it.
In the weeks prior to this AGM, Australia’s largest investors met with Santos on numerous occasions to press the company on the need to do more to prepare for this inevitable shift towards cleaner energy sources. The pressure by investors was sufficient that the company released a statement one week prior to the AGM committing to deliver the vast majority of what was asked for in the resolution.
Such corporate engagement on environmental and social grounds is the quiet rising tide in financial markets around the globe right now, and the boards of Australia’s largest companies are rapidly becoming aware that investors expect them to properly manage shareholders’ interests for the long term.
The lesson for business is simple – get on the front foot. Failure to consider a full range of long-term risks is bad for business, and will increasingly result in investors knocking on the door to drive action.