Shareholder activism at global energy companies

Shareholder activism at global energy companies

Is the passing of the BP AGM resolution an activist victory?

Original news

A coalition of major investors in BP plc (BP), known as the 'Aiming for A' coalition, requisitioned a special resolution to be voted on at the BP AGM held on Thursday 16 April 2015. The resolution received the support of the BP board of directors in advance of the AGM and was passed (with over 98% of votes cast in favour).A similar resolution has also been proposed (by the same coalition of investors) for the AGM of Royal Dutch Shell plc (Shell), to be held on 19 May 2015.

Who are the 'Aiming for A' coalition and what are their aims?

The 'Aiming for A' coalition is a grouping of asset owners and mutual fund managers from both the UK and abroad and includes the £150bn Local Authority Pension Fund Forum and the largest members of the £15bn Church Investors Group, as well as various charitable foundations and individuals. The coalition came together in 2011/12. Its stated aim is to undertake in-depth engagement with the ten largest UK-listed extractives and utilities companies, with a particular focus on the companies' climate performance (including promoting climate change mitigation, adaptation and transparency). The coalition's name is a reference to the 'A' carbon performance band (based on the A to E performance measure assessed by CDP). By way of example, BP reached a 'B' performance band in 2014.In its statement in support of the BP AGM resolution, the coalition explains that the reasons for it coming together range from systematic risk management and a 'collective fiduciary duty to engage in economic transformation' through to 'amplifying longer-term investor voices and involving ultimate beneficiaries'.

What did the BP resolution propose?

The 'Aiming for A' coalition requisitioned the circulation of a special resolution pursuant to the provisions of the Companies Act 2006, s 338 (CA 2006). Members of a public company can force resolutions onto the agenda of an AGM using the CA 2006 requisitioning procedure outlined in s 338(1), which provides that:

'...members of a public company may require the company to give, to members of the company entitled to receive notice of the next annual general meeting, notice of a resolution which may be properly moved and is intended to be moved at that meeting.'

Pursuant to CA 2006, s 338(3), such requests must come either from either 100 or more members having the right the to vote on the resolution to be proposed and holding shares on which there has been paid up an average sum, per member, of at least £100, or members together representing at least 5% of the total voting rights of all members who have a right to vote at the annual general meeting.

The special resolution was worded as follows:

'Special resolution—strategic resilience for 2035 and beyond

That in order to address our interest in the longer term success of the Company, given the recognised risks and opportunities associated with climate change, we as shareholders of the Company direct that routine annual reporting from 2016 includes further information about: ongoing operational emissions management; asset portfolio resilience to the International Energy Alliance's (IEA's) scenarios; low-carbon energy research and development (R&D) and investment strategies; relevant strategic key performance indicators (KPIs) and executive incentives; and public policy positions relating to climate change. This additional ongoing annual reporting could build on the disclosures already made to CDP (formerly the Carbon Disclosure Project) and/or those already made within the Company's Energy Outlook, Sustainability Review and Annual Report.'

The BP board of directors reacted by supporting the resolution (in the AGM notice) and, in doing so, set out a series of responses to the issues raised by the resolution by reference to how BP has performed and what its approach is.

What happened at the BP AGM?

After the BP chairman reportedly devoted the bulk of his opening speech at the AGM to climate change issues, the resolution was passed. The poll results show that 98.28% of votes cast were in favour of the resolution (with 60.24% of the issued share capital of the company voting). The disclosures required by the resolution are therefore now legally binding on BP.

What is proposed at the Shell AGM?

A special resolution in virtually identical wording has been proposed by the 'Aiming for A' coalition with respect to the AGM for Shell to be held on 19 May 2015. As with the BP board, the board of directors of Shell have, in the AGM notice, recommended that shareholders vote in favour of the resolution. Further, they state that Shell:

'...will provide additional reporting in relation to risks associated with climate change in 2015, in advance of full reporting in response to this resolution in 2016.'

Is the passing of the BP AGM resolution an activist victory?

The 'Aiming for A' coalition's purpose in proposing the resolutions at the BP and Shell AGMs was clearly stated in its supporting statements for both resolutions:

'We believe that supportive but stretching shareholder resolutions can play a positive stewardship role in the UK. They could amplify the need to balance the short-term and longer-term aspects of shareholder value creation.'

Reaction to the passing of the resolution has largely been to report it as a victory for activism. CDP (an international not-for-profit organisation providing a global system for companies to measure environmental information) described its passing as a 'game changing day. The way that BP's management and shareholders have come together to pass this resolution is unprecedented'. Several representatives of institutions within the 'Aiming for A' coalition have also seen it in these terms. For example, the Church Commissioners stated:

'BP's commitment to increased disclosure on its climate change strategy will set a new standard and is a significant development in the relationship between institutional shareholders and the oil and gas industry on sustainability.'

PIRC, the corporate governance and institutional shareholder advisory consultancy, have noted the potential for a gap between European-based companies (domiciled in markets where climate and carbon risks are broadly accepted as a political and economic reality) and the US, where the issues 'are more fiercely contested'. While the 'unprecedented action' of both the coalition requisition at BP and the numbers voting to approve it 'will not have escaped notice' in the US (and has triggered investors to call on the SEC to enforce more disclosure by US oil and gas companies on carbon-related risk issues), PIRC believes that climate-based resolutions at energy companies' AGMs in 2015 are unlikely to be carried. Therefore, establishing a global standard of transparency and disclosure on climate and carbon risk 'could be contingent on the effectiveness of shareholder engagement strategies' on the European side of the Atlantic divide.

Online news service 'The Carbon Brief' is more sceptical, noting that some of the demands in the resolution do not go much beyond what BP already choose to disclose (which the BP board acknowledged in its statement that 'many of the requests made in the resolution are already provided through BP's existing disclosure processes'). Its analysis concludes that while 'shareholders will be engaging with BP in the future to ensure that the resolution means that they get the information they need to continue pressuring the company to adopt a greener approach', the 'real success behind the resolution now will be to whether BP fulfils its end of the deal'.

Echoing this view, ShareAction, a UK-based non-governmental organisation campaigning for responsible investment by pension funds and other institutional investors and itself one of the groups involved in presenting the resolution, have commented that:

'If you're talking about 55 institutional investors, some of them are going to be naturally more progressive than others in this area. To get 98% of the vote through, I think it's fair to say we filed resolutions that were supportive of the company, but stretching. The real question now is the rigour with which BP lives up to its commitment on this stuff.'

While there clearly remains room for arguing that this shareholder activism actually represents more of a collaborative engagement with energy companies' corporate strategies rather than a repudiation of them, the BP result does give a boost to the role of pension funds and asset managers in their ongoing dialogue with the world's leading energy companies.

James Hayden, solicitor in the Lexis®PSL Corporate team.

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About the author:
Jenisa is Head of Market Insights for Lexis®PSL, with responsibility for the delivery of Market Tracker, a transaction analysis product that sits within Lexis®PSL Corporate. She has over 15 years of legal publishing experience, with a focus on researching and reporting on trends and developments in the corporate and commercial legal market. Previous roles include content developer for Lexis®PSL, Legal Podcaster at Informa, and Research Editor at Practical Law Company where she specialised in reporting on cross-border corporate and commercial developments from the firm’s New York office.