The 2017 proxy season will be remembered as the first proxy season to see “2° Celsius” shareholder proposals succeed at annual meetings of U.S. public companies. Environmental shareholder proposals have quietly garnered increasing support in annual meetings of public companies in recent years, but the 2° Celsius proposal has enjoyed greater and more vocal support than others. Shareholder voting data from the 2016 proxy season pointed to the possibility that 2017 could be the first year that these proposals would receive more than 50% of shareholder votes at annual meetings. As of mid-June 2017, three 2° Celsius proposals have passed the 50% vote threshold at annual meetings. Below we summarize the groundwork laid for this type of proposal by the 2015 Paris Agreement and international meetings before it, and we present voting data from annual meetings of 2016 and 2017 to show the increasing popularity of these proposals.

From the Paris Agreement to 2°C Proposals

A stated goal of international climate discussions for decades has been to prevent the planet from warming an additional two degrees Celsius. Scientific studies have suggested that an increase in global temperatures of 2 degrees Celsius above pre-industrial levels will commit the world to a future of irreversible, destructive consequences including severe droughts, rising sea levels, flooding, and shortages of food and water. While the 2 degree Celsius concept has been part of the climate policy dialogue since the mid-1990s, the 2009 Copenhagen Accord was the first major international agreement to recognize “the scientific view that the increase in global temperature should be below 2 degrees Celsius.”

At the conference of parties to the United Nations Framework Convention on Climate Change held in Paris in December 2015, 195 countries, including the United States, committed to reduce greenhouse gas (GHG) emissions to a level that would cap the rise of the global average temperature to “well below” 2°C. The Paris Agreement, examined in previous Climate Change Blog postings, requires parties to submit individual nationally determined contributions that specify the GHG emissions reductions that each country will achieve and commits more industrialized nations to substantial financial contributions to facilitate GHG reductions and climate adaptation in less developed countries.

In recent years, environmental shareholder activists have adopted “Paris” as a shorthand in requesting information regarding companies’ plans for climate action and the reduction of GHG emissions. Environmental shareholder activists began submitting 2° Celsius proposals to companies during the 2016 proxy season. The non-binding proposals ask companies to publish reports assessing long-term portfolio impacts of various plausible “scenarios of future climate change and emissions regulations.” The proposals ask that company reports explain how a company’s capital planning and business strategies incorporate considerations of both short- and long-term financial risks of a lower-carbon economy that is anticipated to evolve in the near future, consonant with aspirations of the 2015 Paris Agreement.

Some 2°C proposals additionally ask that reports disclose how companies have considered the impact of future climate change scenarios in light of the “450 Scenario” promoted by the International Energy Agency. The 450 Scenario sets out an energy pathway to limit global greenhouse gas concentrations to 450ppm of carbon dioxide—the level that certain members of the scientific community believe is necessary to provide a 50% chance of limiting the global temperature increase to 2º Celsius. The 450 Scenario envisions a future where nearly 60% of power generated by 2050 comes from renewables, the power sector is largely decarbonized, and significant changes have been made to power systems to integrate wind and solar energy. The 450 Scenario further envisions that by 2040 the share of energy sourcing from fossil fuels constitutes only one-third of total energy sourcing worldwide. Functionally, this means that a company facing a 2º Celsius proposal with an added request for 450 Scenario treatment is being asked to explain to shareholders how the company will dramatically reduce—or even eliminate—its greenhouse gas emissions.

First Signs of Voter Support in 2016

The 2016 2°C proposals were submitted exclusively to energy companies and proved popular with certain major investors. Of the six proposals listed in the table below, three were brought by relatively small investors, two were brought by the New York State Common Retirement Fund (AUM approximately $192.0 billion1), and one was brought by Hermes Equity Ownership Services (AUM approximately $39.2 billion, AUA approximately $313.33 billion2). In turn, the proposals found consistent support from a handful of massive institutional investors, among them Morgan Stanley Investment Management, Inc., Legal & General Investment Management, Deutsche Asset & Wealth Management, Allianz Global Investors and California Public Employees’ Retirement System (CalPERS). While no 2°C proposals passed in 2016, affirmative turnout at meetings listed below reached the 30th and 40th percentile of votes cast at each meeting. The high affirmative turnouts were supported by Institutional Shareholder Services (ISS), which recommended that shareholders vote for all 2°C proposals listed below.

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Enhanced Interest of Institutional Investors in Climate Change During 2017

After the 2016 proxy season, certain leading U.S. asset managers showed an increasing eagerness to explore the proposition that environmentally conscious policies drive shareholder value. Three of the world’s top asset managers by value of assets under management—State Street Corporation, BlackRock, Inc. and J.P. Morgan Asset Management—published reports that examined connections between shareholder value and sustainability. BlackRock’s white paper Adapting Portfolios to Climate Change urged investors to consider incorporating climate change awareness into their portfolio management. J.P. Morgan Asset Management issued a report to its clients discussing its “commitment to sustainable investing.”3 State Street’s research report entitled The Investing Enlightenment urged investors to take environmental considerations more seriously.

In turn, leading institutional investors have so far come out in greater force in 2017 for 2°C proposals. BlackRock and Vanguard Group, who declined in 2016 to vote for 2°C proposals, have expressed support for 2°C proposals in 2017. At the Exxon Mobil shareholder meeting on May 31, 2017, BlackRock and Vanguard voted a combined 13%, or $43.6 billion, of Exxon shares—joined by State Street Global Advisors who voted 5.1% of the Exxon’s outstanding shares for the proposal.

The new support from these major investors for 2°C proposals was not surprising to those who have been following recent public statements of leading asset managers about environmental topics. BlackRock’s “Engagement Priorities for 2017-2018,” discussed in an earlier post on the Climate Blog, declared “our patience is not infinite—when we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term economic interests of our clients, we will not hesitate to exercise our right to vote against management recommendation.”

Further boosting 2°C proposals in 2017 has been ISS, which has recommended in favor of every 2°C proposal put to shareholders so far in 2017. As of June 15, 2017, of 14 2°C proposals put to shareholders, three have passed, seven received affirmative votes in the 40th percentile of votes cast, and two have affirmative votes in high 30th percentile of votes cast.

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A Trend Likely to Continue in Spite of a U.S. Withdrawal from the Paris Agreement 

It appears unlikely that a U.S. decision to withdrawal from the Paris Agreement will slow the ascending frequency and popularity of 2°C proposals, let alone of comparable manifestations of shareholder environmental pressure. A U.S. withdrawal from the Paris Agreement may instead embolden shareholders to apply more pressure to corporations on environmental issues. If BlackRock and investors of its stature are taken at their word, their interest in corporate environmental policy is influenced by their fiduciary duty to generate returns for their clients. Stepped-up environmental shareholder activism by those investors in the wake of a U.S. withdrawal from Paris could therefore serve three complimentary purposes for such investors: to compensate for perceived deficiencies in the Trump Administration’s commitment to environmental protection, to send a message to the Trump Administration that Wall Street takes a different view on environmental policy, and to maximize long-term returns for their own investors.