ESG Shareholder Activism: Here to Stay?
This article originally appeared in our Canadian Securities Litigation: Trends to Watch 2023 publication, which provides an in-depth overview of the most significant developments in the Canadian securities litigation landscape in 2022 and trends to watch for in 2023. Download the full publication here.
Relative to prior year, 2022 witnessed an increase in ESG-related shareholder activism in Canada, even though overall activism activity was less robust than in previous years. While the results of such initiatives yielded mixed success,[i] dissidents generally achieved more wins than their management counterparts[ii] and there is no doubt that they will continue. Canada has long been viewed by many as an activist-friendly jurisdiction. Whether or not that view is fair, we expect the composition of Canada’s capital markets and the existence of some uniquely Canadian legal tools available to stakeholders to contribute to more investors and other stakeholders targeting Canadian companies with ESG-related activism.
Climate-related activism has increasingly become and will remain a key issue for reporting issuers, particularly in the mining, metals, energy, industrial and tech sectors, as well as for their lenders and key business partners.
- Shareholder proposals: Laurel Hill reported that “88% of all shareholder proposals in 2022 concerned [environmental and social] matters, up from an already strong 62% in 2021.”[iii] These proposals include so-called “say on climate” proposals that seek non-binding votes on a company’s climate-related conduct and disclosures.
In 2021, Canada’s largest rail companies recommended and passed climate-related shareholder proposals and committed to hold annual climate votes. In 2022, each of Canada’s five largest banks were subject to “say on climate” shareholder proposals that ultimately failed.
However, say on climate initiatives may be “stalling”, in part due to “considerable skepticism about the value of “say on climate” and the potential for unintended consequences”.[iv] This is in part due to the overly prescriptive nature of such proposals, and their entrenchment into areas better left to boards’ and managements’ exercise of their stewardship duties, which has caused some institutional investors[v] and proxy advisory firms to push back on them.
Nevertheless, in our view environmental-related shareholder proposals will continue to abound, and more issuers, both large and small cap, across a wider range of industries can expect to receive proposals from investors pertaining to their advancement and disclosure of climate transition plans, progress, strategies and risk management oversight.
- Proxy campaigns: In the last few years, ESG-themed funds have attracted significant assets under management and many traditional activist investors have evolved to incorporate ESG-related objectives into their strategies. In addition, historically passive investors are continuing to show their propensity to become more vocal in ESG-related campaigns, whether themselves pushing for change or publicly or privately supporting initiatives led by others. In the near to medium-term, we expect such investors to target select Canadian issuers, particularly those that are underperforming their peers based on traditional metrics and that are perceived to having inadequate climate-related transition plans or other ESG-related financial metrics.
We expect an escalation in such activism, with shareholders seeking changes to boards of directors and/or terminations of C-suite executives, agitating for transformative transactions such as spin-offs and asset divestitures, and demanding more robust transition plans, greater progress on emissions reductions and improved climate-related disclosures.
- Disclosure-related litigation: Outside Canada, there is a steady increase in environmental-related class actions and other proceedings globally against companies and their directors and officers by a wide range of stakeholders, including investors.[vi]These claims have alleged, among other things: failure to adequately assess and develop strategies to address the impacts of climate change on the company’s long-term business,[vii] and “greenwashing”.[viii] Until recently, plaintiffs have been largely unsuccessful in maintaining these claims. However, we anticipate they will continue to adapt their approaches, especially with the proliferation of proposed mandatory climate disclosure regimes in Canada, the United States and globally.
- Fiduciary duty litigation: To date, there have been no derivative actions in Canada against directors and officers for failure to manage the climate impacts of their companies’ operations, as has occurred in other jurisdictions.[ix] Given the higher burden for commencing such claims, the likelihood of such claims being brought or being successful appears remote compared to other tools available to investors.
One such tool is the “oppression remedy” – a claim available to investors (among other complainants) under Canada’s federal and provincial corporate statutes – that may be brought against issuers and their directors and officers personally, when their conduct breaches the “reasonable expectations” of the investor with respect to the management or governance of the company and that breach is oppressive, unfairly prejudicial to or unfairly disregards the interests of the complainant.[x] While to date many oppression claims have proved unsuccessful, they remain a powerful tool available to investors to wield influence over the management and conduct of the companies in which they invest, and, as an equitable remedy, afford courts broad discretion to impose a wide range of remedies if successful.
- Regulatory enforcement actions: We also expect investors and other stakeholders will continue to bring formal complaints directly to regulators and other government agencies relating to the inadequacy of or misleading disclosures in respect of companies’ climate-related plans or progress.
2022 saw activist campaigns that raised issues that included worker health and safety initiatives. The most prominent example in Canada was the successful campaign by an activist fund against a major oil company, which focused on missed production goals, high costs and safety failures, including employee fatalities and other safety incidents.[xi] The human capital issues featured in the activist’s campaign resonated with the investor and media community, ultimately resulting in, among other things, the resignation of the company’s CEO and a 2022 settlement that gave the activist three new directors on the Company’s board, with two of those appointees serving on a new CEO search committee and, subsequently in January 2023, an extension of the activist’s option to appoint a fourth director in the event of continued underperformance by the Company relative to certain of its peers.[xii]
Also, a number off public issuers received shareholder proposals related to forced labour and human rights impact assessments with respect to migrant workers; to increase employee participation in decision-making; and seeking disclosure related to employee or supply chain human rights.[xiii] We expect this trend to continue.
Diversity in Governance
2022 also witnessed a continued focus on diversity and inclusion matters, both at the board and senior management levels. Social proposals saw an increase in filings in the US, with the topic of racial equity dominating investor engagement in the 2022 proxy season.[xiv] While racial equity audits have not yet become commonplace in Canada, shareholder proposals relating to equity, diversity and inclusion (EDI) continued to flourish in Canada in 2022, including relating to: reporting on Indigenous community relations, recruitment, advancement and education; producing disclosures on racial diversity within companies’ workforce; reporting on workforce composition and compensation practices related to EDI efforts; and increasing diversity targets at the board level.[xv]
While progress in gender diversity at the board and senior management levels is (slowly) being made, expectations related to diversity beyond gender continue to evolve.[xvi] For instance, in 2022, Institutional Shareholder Services (ISS)[xvii]and Glass Lewis[xviii] both enhanced their proxy voting guidelines on board gender diversity such that they will generally recommend voting against a board that does not have sufficient gender diverse directors. Looking forward at 2023 and beyond: (1) for meetings held after January 1, 2023, Glass Lewis will generally recommend voting against the chair of the nominating committee of a TSX-listed issuer if its board is not at least 30% gender diverse, or the entire nominating committee of its board has no gender diverse directors;[xix] and (2) starting in 2024, ISS intends to vote against or withhold votes from chairs of the nominating committees (or equivalent) of S&P/TSX Composite Index issuers that have boards with no apparent racially or ethnically diverse members,[xx] in each case, subject to certain exceptions.
Say-on-Pay votes for TSX-listed companies increased again in 2022, with 227 active votes in 2022 compared to 217 in 2021. Average support was down marginally at 95.0% in 2022, compared to 95.4% in 2021. Boards should continue to make executive compensation decisions that demonstrate pay-for-performance alignment, particularly as scorecards by proxy advisory firms on measuring compensation continue to evolve and become more nuanced and complex.
Preparing for and Managing ESG Shareholder Activism
- Risk oversight and risk management: A board’s responsibility for risk oversight, derived from directors’ statutory and common law duties remains a critical priority. In most circumstances, explicit board-level oversight of ESG issues is recommended. Existing structures, governance policies, plans and associated disclosure should be carefully reviewed to attempt to mitigate the risks of activism.
- Planning and crisis management: The board and senior management should regularly review, stress test and update, as necessary, a company’s crisis management plan, to anticipate potential ESG-related issues or events and to ensure the company is adequately prepared to deal with them.
- Stakeholder engagement: Companies should ensure that shareholder engagement is treated as a key (and regular) feature of their overall governance program and, as appropriate, proactively engage with investors and other key stakeholders. Institutional shareholders have been increasingly adopting their own voting guidelines when dealing with ESG issues and proposals.
- Disclosure controls: Companies should treat ESG risk disclosures with a comparable level of care and scrutiny that is applied to other material financial, business and operational disclosures, keeping in mind that ordinary principles of materiality may no longer be sufficient for adequately assessing and preparing disclosures about climate risk matters.
- Stay ahead of the issues: Ensuring boards and senior management have the right expertise to understand and respond to these and other ESG-related issues, and are consistently evolving their practices and disclosures in this regard, is now a business imperative.
[ii] Laurel Hill Advisory Group, Laurel Hill (Canada) Releases 8th Annual Trends in Corporate Governance Report, (November 7, 2022).
[iii] Laurel Hill Advisory Group, Laurel Hill (Canada) Releases 8th Annual Trends in Corporate Governance Report, (November 7, 2022).
[iv] Laurel Hill Advisory Group, Laurel Hill (Canada) Releases 8th Annual Trends in Corporate Governance Report, (November 7, 2022).
[v] BlackRock, Inc., BlackRock Investment Stewardship: 2022 climate-related shareholder proposals more prescriptive than 2021, (May 2022).
[vi] See for example Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, 594 U.S. __ (2021); Ramirez v. Exxon Mobile Corporation, 334 F. Supp. 3d 832 (N.D. Tex. 2018); McVeigh v. Retail Employees Superannuation Pty Ltd ACN 001 987 739 (November 2, 2020), Australia NSD1333/2018 FCA.
[vii] See, for example, In Re Exxon Mobil Corporation, Civil Action No. 2:19-CV-16380-ES-SCM (D.N.J. Sep. 15, 2020) City of Birmingham Retirement and Relief System v. Tillerson, 3:19-cv-20949 (D.N.J. Dec 2, 2019); Ramirez v. Exxon Mobil Corp., 334 F. Supp. 3d 832 (N.D. Tex. 2018).
[viii] See, for example, Beyond Pesticides v. Exxon Mobil Corporation, D.C. Super. Ct. Case No. 2020-CA-002532 (non-profit sued ExxonMobil, claiming it greatly overstated its engagement in cleaner forms of energy); Jochims v. Oatly Group AB, 1:21-cv-06360 (S.D.N.Y. Oct. 26, 2021) (class action alleging that an oat milk company made false and misleading statements about the company’s sustainability).
[xi] Elliott Investment Management L.P., Elliott Investment Management Sends Letter to the Board of Suncor Energy Inc., (April 28, 2022).
[xii] Financial Post, Activist investor Elliott poised to get fourth Suncor board seat as company continues to underperform, (January 16, 2023).
[xiii] Harvard Law School Forum on Corporate Governance, Human Rights-Related Shareholder Proposals in the 2022 US Proxy Season, (December 8, 2022); Laurel Hill Advisory Group, Laurel Hill (Canada) Releases 8th Annual Trends in Corporate Governance Report, (November 7, 2022).
[xv]Laurel Hill Advisory Group, Laurel Hill (Canada) Releases 8th Annual Trends in Corporate Governance Report, (November 7, 2022).
[xvi] Laurel Hill Advisory Group, Laurel Hill (Canada) Releases 8th Annual Trends in Corporate Governance Report, (November 7, 2022).
[xvii] ISS, International Sustainability Proxy Voting Guidelines, (2023).
[xx] ISS, Canada Proxy Voting Guidelines for TSX-Listed Companies Benchmark Policy Recommendations, (December 13, 2022).