■Webinar Report: What are the achievements of climate-related shareholder proposals in Japan, and what’s next?
Proxy Watcher and Insightia hosted a webinar with six panellists to delve into the outcomes of shareholder proposals made during the 2022 shareholder meeting season. The webinar covered how to achieve a Japanese corporate society consistent with the Paris Agreement, investor engagement and the way of interacting with investors.
About this event
- Date and time: 18:00-19:30 (JST) January 18, 2023
- Host: Proxy Watcher / Insightia
- Participants: more than 100 people in total, including institutional investors, sustainability officers of listed companies, members of the press
Panelists and topics (in order of appearance)
- Sakon Kuramoto (Attorney-at-Law of Japan, Attorney-at-Law of the State of New York, U.S.):
The role of ESG shareholders in Japan (in Japanese)
- Nick Spooner (Climate Change Engagement Specialist, Robeco):
Shareholder proposals and institutional investors’ decision-making
- Haonan Wu (Assistant Manager, Federated Hermes – International):
On increasing shareholder value through corporate dialogue with shareholders
- Megu Fukuzawa (Japan Energy Finance Campaigner, Market Forces):
Shareholder proposals to the Japanese general trading companies
- Eri Watanabe (Senior Finance Campaigner, 350.org Japan):
Climate change-related policies and issues of Japanese megabanks (in Japanese)
- Yasuko Suzuki (Program Coordinator, Kiko Network):
Voting results of shareholder proposals on climate change submitted in 2022 (in Japanese)
Sakon Kuramoto (Attorney-at-Law of Japan, Attorney-at-Law of the State of New York, U.S.): The role of ESG shareholders in Japan (in Japanese)
Stakeholder capitalism proposes that corporations should pursue long-term value creation rather than only maximizing the short-term profit for shareholders, taking into account the interests of all stakeholders in society as a whole. In recent years, institutional investors and financial institutions have been more active to invest from the ESG perspective. If Japanese companies choose not to respond to this trend, they may not achieve medium- to long-term growth by incorporating ESG investment and financing.
In ESG activism, shareholder rights advocacy groups, asset management companies, and NGOs focus on non-financial aspects and raise issues as shareholders of listed companies. It has become more active in Japan in recent years, with an increasing number of shareholder proposals particularly related to climate change. In Japan, shareholder proposals were perceived negatively, however, investors and shareholders should be considered as partners for creating long-term and sustainable corporate values, as indicated by the Corporate Governance Code and other regulations. In the context of the need for dialogue and collaboration with shareholders, listed companies need to take shareholder proposals seriously.
It is necessary for ESG shareholders to make proposals that lead to medium- and long-term growth of the company, through proposals, dialogue and collaboration in normal times, and to make efforts to gain consent from the company’s management and other shareholders. Proposals to change the articles of incorporation, which are the mainstay of shareholder proposals, face a high hurdle to passage. However, one option is to consult the will of other shareholders in the form of an advisory resolution or the resolution of the election of directors. Collaboration with institutional investors, which means dialogue between shareholders, is essential for ESG shareholder activities.
Nick Spooner (Climate Change Engagement Specialist, Robeco): Shareholder proposals and institutional investors’ decision-making
As an institutional investor with a climate strategy, Robeco engages with companies to help them achieve net zero by 2050. Shareholder proposals comprise the constructive part of our engagement. We usually file resolutions after having worked with companies for multiple years. With increased hybridization between shareholder proposals and management proposals on climate issues around the world, companies are coming to support resolutions filed by shareholders. Our proposals even receive over 95% of support in those cases.
Filing shareholder resolutions is often a collaborative work with other organizations. Some shareholders file resolutions systematically across different companies to ensure consistent wording. Investors expecting to file proposals can learn from successes and failures of precedent resolutions. The resolution filed in 2019 at BP plc has been exemplary for many resolutions at the oil and gas industry around the world.
Our approach to voting on shareholder proposals is principle-based. We examine whether the proposal is leading to positive outcomes with that company. Stimulating dialogues between investors and a company around a certain issue is the constructive part of our engagement to improve the company’s climate strategy and reduce risks that the company is associated with.
We prefer to file shareholder proposals that are sophisticated and clear but not too prescriptive so that the resolutions allow some flexibility for companies to interpret how they execute their strategies. If a company breaches norms in their approach to climate risk management or if a company does not take adequate actions in response to a shareholder proposal with a high percentage of support, we consider voting against directors. This is an important part of our endeavor to shift companies over time.
Haonan Wu (Assistant Manager, Federated Hermes – International): On increasing shareholder value through corporate dialogue with shareholders
Climate change has been the most concerning issue for institutional investors. Companies are expected to address physical and transitional risks due to climate change. Physical risks include global warming as well as consequent economic costs and social impacts. Regional differentiation and uncertainties make the risk assessment challenging. In 2022, European droughts exacerbated the energy crisis and Japan experienced the worst heatwave since the record began. Companies are also facing transition risks. Decarbonization will transform global and national economies. If political and technological responses are delayed, the transition will be economically and socially disruptive.
Stakeholders request companies to increase commitments and tangible outcomes on climate change mitigation. Stakeholders expect companies for science-based approaches to the 1.5˚C scenario and disclosure of their plans for selling or transferring carbon intensive assets. Companies’ path toward the 1.5˚C target involves climate-related financial disclosures, commitments to SBTi (Science Based Targets initiative), and strategies aligned with the 1.5˚C target. This will lead the companies to actual reduction of greenhouse gas emission. To help companies proceed on this path, we engage with the companies to know their reduction of greenhouse gas emission, accountability of their boards on climate-related issues, and their strategies to achieve net zero.
It is important for financial industries to analyze, measure, and manage the greenhouse footprint of their financing, lending, and underwriting activities. As part of the engagement by IIGCC (the Institutional Investors Group on Climate Change), Mizuho Financial Group received a climate change shareholder proposal in 2019. As a result, Mizuho launched a framework to assess credibility of its clients’ climate transition plans. They also became one of the first Japanese financial institutions to join PCAF (Partnership for Carbon Accounting Financials). MUFG Bank and Sumitomo Mitsui Banking Corporation also received a shareholder proposal. This resulted in their advancement towards termination of new coal project finance and improved disclosure of targets to reduce greenhouse gas emission.
This trend goes beyond financial industries. J-Power was under IIGCC’s engagement and received a shareholder proposal in 2022, which led to their improved target-setting to reduce greenhouse gas emission. BP plc was part of Climate Action 100+ and received a shareholder proposal in 2019. The proposal received more than 90% of support, inviting the company’s disclosure of emission reduction targets. Engagements by investors are beneficial for companies to reduce climate risks.
Meg Fukuzawa (Japan Energy Finance Campaigner, Market Forces): Shareholder proposals to the Japanese general trading companies
Japanese trading houses are involved in expanding the fossil fuel industry despite their targets to achieve net zero by 2050. Since Japanese trading houses are very important to Japanese society and economy, we would like them to be leaders of the country’s decarbonization.
We started engaging with Sumitomo Corporation around 2019. Despite their being committed to reaching carbon neutral by 2050, they had plans to expand the coal power sector. Their coal policies had major loopholes and their coal power generation policy allowed their involvement in new construction of coal power projects. After our engagement, Sumitomo changed their policies on coal mining and coal-fired generation. For the latter, their policy in 2019 allowed individual decisions to develop new coal-fired power stations if necessary. Their revised policy in May 2021 denied any new developments as IPP or EPC, while allowing possible involvement in the Matabali coal-fired power plant in Bangladesh. In February 2022, they updated their policy and announced to stop participating in expanding the Matabali power plant.
Mitsubishi Corporation planned to expand their fossil fuels and LNG businesses despite their commitment to net zero by 2050. Engagement was needed to have them assess these projects against the 1.5˚C scenario and improve disclosure of their management of financial risks that climate change poses to their businesses. Two shareholder resolutions were filed in 2022, one on adopting and disclosing greenhouse gas emission reduction targets and the other on disclosing items related to net zero by 2050. In October 2021, their Roadmap to Carbon Neutral Society mentioned LNG only as a supply during the “transition period.” In May 2022, in their Midterm Corporate Strategy 2024, they designated LNG as “Transform,” subject to additional scrutiny and consideration. Investor engagement is critical. We urge investors to keep engaging with the trading houses and push them to be leaders in decarbonization in Japan.
Eri Watanabe (Senior Finance Campaigner, 350.org Japan): Climate change-related policies and issues of Japanese megabanks (in Japanese)
350.org Japan has been lobbying with Japanese megabanks since around 2016. Shareholder proposals on climate change to megabanks have been made for three consecutive years since 2020. The proposals are mainly about the formulation and disclosure of business plans which consistent with the goals of the Paris Agreement. Investor engagement has helped megabanks to strengthen their climate change policies, which were virtually absent in 2018. Led by the shareholder proposal in 2020, Mizuho Financial Group set a reduction target and established a related credit balance system for coal-fired power plants. As for Mitsubishi UFJ Financial Group, the Group has established a net zero target for its investment and loan portfolio in the wake of a 2021 shareholder proposal. Responding to the 2022 shareholder proposal, Sumitomo Mitsui Financial Group issued their financing policy which prohibits supporting new development and expansion of coal mining and the related infrastructure.
These objectives and policies, which were formulated in response to 350.org Japan’s shareholder proposals and investor engagement, are spreading to other industries as well. There is an expansion of strengthening coal policy, establishing and disclosing decarbonization targets, and information disclosure based on TCFD (Task Force on Climate-related Financial Disclosures) recommendations. However, there are still many challenges to achieve net zero. In the investment portfolios of the power sector, for instance, the emission reduction target by 2030 is set in terms of emission intensity (carbon dioxide emissions per unit of power generation). The problem with the emission intensity target is it can be reached even if the absolute amount of carbon dioxide emissions increases, therefore it is preferable to set targets based on absolute emissions. As for the oil, gas and coal sectors, targets are limited to upstream production operations. Regarding the oil and gas policies, all three megabanks only strengthen the due diligence (i.e. social and environmental risk assessments) on specific oil and gas sectors, with no restrictions on investments and loans.
NGOs’ shareholder proposals and investor engagement have expanded megabanks’ climate-related policy and information disclosure steadily. Nevertheless, loopholes remain in those policies and the set targets, letting the investments and loans that are inconsistent with net-zero targets continue. To achieve net zero, megabanks should develop or strengthen the short- and long-term targets, as well as the policies with more vigorous financial limitations for those businesses starting or expanding in fossil fuel sectors.
Yasuko Suzuki (Program Coordinator, Kiko Network): Voting results of shareholder proposals on climate change submitted in 2022 (in Japanese)
In the annual general meeting (AGM) season of 2022, the number of shareholder proposals to Japanese companies reached a record high of 330 to 97 companies, with a particular increase in ESG-related proposals. There is growing interest among overseas investors toward Japanese companies in line with the companies’ global expansion. In the Japanese context, shareholder proposals are limited to (1) the appropriation of surplus funds, (2) the election of officers and (3) amendments to the articles of incorporation, in which the latest is the most common. Proposals suggesting the change of articles of incorporation are often opposed, however in recent years, there is an increase in motions assessing the validity of those proposals that aim at improving corporate value over the medium- or long-term.
With the enactment and revision of the Stewardship Code, voting results and reasons for or against individual proposals have been disclosed. The main reasons against the proposals are (1) the company should follow the strategy it has already presented, (2) the company’s risk assessment on climate change does not affect its profitability, and (3) it is not necessary to stipulate it in the articles of incorporation. This shows that “whether the proposal will lead to an increase in corporate value” is the criterion for approving the proposals or not. The results indicate that as the understanding of shareholder’s approach advanced, the mindset and attitude toward the risks of climate change have changed. As for exercising voting rights, foreign asset trustees tend to be in favour of the proposals compared to domestic ones.
Some voting advisory firms have started to provide specific climate risk-related disclosures in their own voting guidelines and policies. Glass Lewis has added a section to its 2023 voting advisory policy for Japanese listed companies, recommending to vote against the election of the responsible directors if there is insufficient disclosure on climate change. Institutional Shareholder Services (ISS) recommends voting against the election of directors if the companies do not adequately disclose climate risks and do not have quantitative reduction targets for the greenhouse gas direct emissions, in their revised voting advisory policies for all countries, which will come into effect from February 2023. It is hoped that this trend will lead to more information disclosure and numerical targets being set by companies.
This is not investment advice.
This webinar communication, or any oral communication made in connection with the shared materials, is for informational purposes only and is not intended to be and should not be construed as investment advice or a recommendation to make an investment decision based on an analysis of the value of any security under the Financial Instruments and Exchange Law. It is not intended to be, and should not be construed as, investment advice or a recommendation to make an investment decision based on an analysis of the value of securities.
Not a Joint Voting Right
Neither this webinar communication nor any oral communication made in connection with the shared materials is intended to constitute an agreement or consent to, or an application for or acceptance of, the joint exercise of voting or other shareholder rights within the meaning of the Financial Instruments and Exchange Law or the Foreign Exchange and Foreign Trade Law. It is not and should not be construed as such. For the avoidance of doubt, each shareholder exercises its voting rights and other shareholder rights independently based on its own judgment, and no liability is created by a breach of consultation with the other party, even if the result of the exercise of voting rights or other shareholder rights differs from that discussed between the two shareholders.
No Solicitation of Proxy Votes
Neither this webinar communication nor any oral communication made in connection with the shared materials is intended to be, and should not be construed as, a solicitation of proxies for voting rights within the meaning of the Financial Instruments and Exchange Act or the Foreign Exchange and Foreign Trade Act. The shareholder who is the speaker is not soliciting proxy votes at the meeting and is not accepting any proxy vote or other shareholder right from any other shareholder.