Is the climate of shareholder interests changing?
World leaders have faced significant criticism in the run up to November’s COP26 climate talks in Glasgow, for their lack of action to prevent climate change and to meet the targets set in the Paris Agreement. The Paris Agreement, which came into force in 2016 and has 191 signatories (including South Africa), sets long-term emission reduction goals aimed at limiting the rise in global temperatures.
In recent years, corporates have increasingly also made commitments towards meeting the goals enshrined in the Paris Agreement. While such commitments initially seemed to satisfy shareholders, a growing international trend towards more ambitious climate change proposals has since emerged, due in no small part to shareholder campaigns and activism.
It is no wonder that mounting climate change concerns have also impacted on views of what constitutes shareholders’ interests. While the notion that a company’s overriding social responsibility is to increase its profits, (as propounded by Milton Friedman and others) has been challenged in the past as being too narrow, this subject has gained urgency in light of the growing climate emergency. It is becoming more apparent that shareholders have diverse interests, which are not only economic, but also extend to environmental and social aspects. While profitability remains a key factor, it is no longer the case that shareholders are only interested in the profitability of companies.
Even if this change in the climate of shareholder interests ultimately proves to be overstated, it is clear that there will be an economic cost for companies that are unwilling to adapt to the emerging new reality, including the reduction in available financing avenues, as banks and other financial institutions come under increased public, shareholder and, possibly, regulatory pressure to limit funding for projects that would lead to carbon emissions. Financial institutions are starting to link climate change targets to the costs of debt, with one recent example being Mediclinic’s refinancing of existing debt through a sustainability-linked facility, where the cost of finance is subject to Mediclinic meeting certain carbon and water usage targets.
The pressure on banks is evident from shareholder resolutions proposed and approved at recent annual general meetings. By way of example, a recent 2021 shareholder resolution requiring the Investec group to take action to address its “financed emissions” (greenhouse gas emissions associated with its lending and investment portfolio) was supported by 99.95% of votes cast. Various other South African banks have also included climate change-related resolutions, and there is clearly a greater recognition of these concerns by banks and, consequently, there will be a larger focus in future on sustainability-linked lending.
To date, proposals for climate change resolutions in the United States have focused mainly on “a say on climate change”, which allow shareholders an annual vote on a company’s publicly disclosed climate change plans. This trend has been mirrored in South Africa, with climate change resolutions making headlines in 2021, and more shareholders demanding increased accountability and commitments from companies. This focus on expanded corporate responsibility is in keeping with the spirit of King IV, which requires companies to be responsible, ethical, and good corporate citizens, recognising their responsibility to a variety of stakeholders.
While some companies have resisted calls by shareholders for additional sustainability-linked resolutions to be tabled at annual general meetings, it should be borne in mind that, subject to certain thresholds being met and procedures being followed, shareholders are entitled, in terms of the South African Companies Act, to propose resolutions at general meetings or to require the board to convene meetings for such resolutions to be proposed.
In future, disputes between companies and shareholders regarding such resolutions could result in litigation, which, while regrettable, would have the benefit of ultimately providing greater certainty on such resolutions, companies’ obligations to propose them, and their enforceability, particularly in the context of climate change. While companies who resist this may be able to weather the ire of smaller activist shareholders, pressure will increase on them as large institutional shareholders become more assertive in this regard, with the latter wishing to display their sustainability credentials to their own clients.
It does not appear that the pressure for companies to make climate change commitments will decrease any time soon. As this goes to the root of shareholders’ interests, it will be interesting to see whether, in future, legislatures or stock exchanges will codify requirements for compliance with the Paris Agreement or its successors. If not, the public perception of companies being viewed as “good” or “bad” corporate citizens may perhaps serve as informal regulation, with negative publicity, market perception, employee morale, and potentially even consumer boycotts or campaigns, pushing companies to adopt a more sustainable approach.
Given the rise in shareholder activism, the role played by shareholder activist groups and calls by institutional shareholders, we expect to see additional climate change resolutions proposed in future, and it will be interesting to evaluate companies’ and the market’s responsiveness to these and future changes in the climate of shareholder interests. Although not imminent, we believe that, in time, early adopters in specific sectors may benefit.
Hufkie is a Corporate Financier | PSG Capital.