An Inconvenient Truth About Climate-Related Shareholder Activism

• Published date: 03 June 2022
• Subject Matter: Corporate/Commercial Law, Environment, Corporate and Company Law, Directors and Officers, Environmental Law, Securities, Climate Change, Shareholders
• Law Firm: McCarthy Tétrault LLP
• Author: Canadian Securities Regulatory Monitor, Wendy Berman, Jennifer Longhurst, Robert J. Richardson, CD, Shane C. D'Souza, William Main and Brittany Cerqua

Climate-related shareholder activism, although not a new phenomenon in Canada,¹s no longer the exclusive domain of environmentalists and increasingly a key plank in institutional shareholder and activist campaigns. A new era of climate-related activism is dawning, from "say-on-climate" and other environmental-related shareholder proposals, to proxy fights over the adequacy of companies' climate-related transition plans or emissions-reduction targets, to climate-related litigation against companies and their directors and officers for "greenwashing" and other matters. We anticipate that climate will become the predominate issue in upcoming proxy seasons, particularly for issuers in the mining, metals, energy, industrial and tech sectors, as well as for those issuers' lenders and key service providers.

Canadian companies and their directors and officers wishing to avoid public scrutiny or regulatory intervention need to keep their climate strategy at the forefront, including by embedding meaningful and coherent processes to assess and manage climate-related risks and opportunities throughout their business; developing and implementing plans to fulfill climate-related promises (such as navigating a net zero transition); and engaging proactively with stakeholders.

" We anticipate that climate will become the predominate issue in upcoming proxy seasons particularly for issuers in the mining, metals, energy, industrial and tech sectors... "

Canadian capital markets - which have a large number of extractive issuers and venture issuers - face critical challenges as the world transitions to a lower carbon economy while experiencing the physical and financial consequences of extreme weather events. Institutional investors, asset managers and other stakeholders have intensified their demands for enhanced transparency related to issuers' climate transition plans, their integration of climate-related factors into corporate strategy, their management of climate risk and self-assessments of business resilience, their specific emission targets and progress towards effective oversight of climate-related risks and opportunities.²

Since 2019, a paradigm shift in the global allocation of capital to sustainable investments has underscored the need for climate-related risks and opportunities to be factored into the price of investments to ensure efficient capital allocation. Global inflows into sustainable investments have reached over US$4 trillion³ and Canadian investment in sustainable funds more than doubled in 2021.⁴ As of the first quarter 2022, more than 4,900 entities from over 80 countries, representing approximately US$121 trillion in assets, have signed onto the UN Principles for Responsible Investment (PRI).⁵In addition, stakeholder pressures have contributed to divestment from many carbon-intensive sectors and increased investment in organizations focused on energy transition.

Climate-related activism has dramatically increased over the past five years. Globally, the number of activist campaigns involving public environment-related demands (including environmental demands relating to climate change or greenhouse gas ("GHG") emissions and campaigns with a social or sustainability objective) increased from a mere eight campaigns in each of 2020 and 2021, to 42 during 2022 year-to-date ("YTD"), representing a more than 400% increase relative to last year.⁶ Consistent with this trend, in the United States, the number of US-based issuers that faced public environment-related activist campaigns increased from just four and three in 2020 and 2021, respectively, to 33 in 2022 YTD.⁷ According to Insightia, during the first quarter of 2022 alone, half of the activist situations faced by Canadian issuers were focused on climate change, GHG emissions or other sustainability issues.⁸ And these figures do not account for the significant increase in the number of environment-related shareholder proposals globally and in each of Canada and the US, as discussed further below.

Canadian public companies and federally regulated financial institutions will soon be subject to mandatory climate-related disclosures⁹ and similar regulatory proposals have been proposed in the US by the Securities and Exchange Commission ("SEC"). While the scope of mandatory disclosures is still being debated, many companies are already voluntarily disclosing climate-related goals, strategies and risks. As with any disclosure, public companies and their leadership face concomitant liabilities, risks and obligations. Enhanced climate-related disclosures is expected to trigger greater stakeholder scrutiny and activism, as investors seek to redouble their efforts to drive further change, whether through public or private campaigns, shareholder proposals, litigation or other efforts aimed at encouraging regulators to commence enforcement actions including through whistleblower programs.

We anticipate that climate-related impact investing and activism will continue to escalate, with activists seeking changes to boards of directors or terminations of C-suite executives, agitating for transformative transactions such as spin-offs and "dirty" asset divestitures, and demanding more robust transition plans, greater progress on emissions reductions and improved climate-related disclosures. In turn, we anticipate an increase in the number and size of complex civil and regulatory actions against issuers. While this might be an inconvenient truth for some, companies should prepare as climate activism is here to stay during the global transition to a low carbon economy.

" Enhanced climate-related disclosures is expected to trigger greater stakeholder scrutiny and activism... "

The growing storm

Canada has long been viewed by many as an activist-friendly jurisdiction. Whether or not that view is fair, the composition of Canada's capital markets and the existence of some uniquely Canadian legal tools available to stakeholders (including the right for 5%+ shareholders to requisition shareholders' meetings and the availability of a statutory oppression remedy), may contribute to more investors targeting Canadian companies with climate-related activism.

Shareholder proposals: Over the prior five years, the volume and levels of support for climate and social-related shareholder proposals have increased rapidly. The primary objectives of these proposals include enhanced company disclosure and accountability. The recent changes by the SEC broadening the scope of permissible shareholder proposals, has resulted in a clear increase in environmental and social shareholder proposals being put to a vote before SEC-registered companies.¹⁰ Climate-related proposals in the 2022 proxy season so far have received mixed results, with some investors, including BlackRock, the world's largest fund manager, becoming more critical of and less willing to support proposals that "are more prescriptive or constraining on companies" or that seek to "micromanage companies".¹¹ Regardless of this season's outcomes, climate-related shareholder proposals present significant strategic, business, legal and reputational risks for companies and their directors and officers and, even if unsuccessful, can serve as a strong platform for future change.

A growing number of large companies have held or committed to hold say-on-climate advisory votes - an annual, non-binding advisory shareholder vote on the companies' disclosed climate action plans. In 2021, shareholder advocacy groups filed say-on-climate resolutions for more than 75 companies in North America and over 147 climate-related resolutions were filed in the United States, with 47 of them going to a shareholder vote.¹² Both during and prior to the 2022 proxy season, major oil and gas companies globally have faced an unprecedented number of climate-related shareholder proposals seeking them to, among other things, adopt reduced emission targets and to report on climate-related financial risks, typically in accordance with the Recommendations of the Task Force on Climate-related Financial...