Shareholder lobbying resolutions: ISS suggests the high failure rate suggests a majority of shareholders are satisfied with companies' additional disclosure ▪ Institutional Shareholder Services (ISS) has released its analysis of votes on the 31 shareholder lobbying proposals filed at US companies to 13 June 2022. ▪ For clarity, shareholder lobbying resolutions usually call on companies to provide detailed disclosure of their direct and indirect lobbying activities and expenditures, and the governance arrangements in place to ensure these activities are in line with the companies' goals/shareholder interests. See for example, the shareholder lobbying proposals filed at: Netflix (Proposal 8 in the Notice), Delta (Item 4 in the Notice); The Travelers Inc (Item 4 in the Notice) ▪ According to ISS, of the 27 proposals that have gone to a vote: – only two received majority support – the lobbying resolution at Netflix and separately the resolution at The Travelers Companies Inc. – on average, shareholder lobbying resolutions received 31.8% shareholder support. ▪ ISS suggests that the number of shareholder lobbying proposals filed is an indicator that the issue continues to be a concern for shareholders, but also suggests that the high failure rate of these proposals is an indicator that the majority of investors 'are convinced that additional disclosures made by companies that have long been targeted by such proposals mark a sufficient improvement over past practices'. Third party reviews ▪ ISS notes that a subset of shareholder lobbying proposals, directed at three pharmaceutical companies - Eli Lilly, Gilead Sciences and Johnson & Johnson - called on companies to commission a third party report into the alignment of their direct and indirect lobbying activity with their public policy position/public statements. ▪ According to ISS, these resolutions 'typically received' above average support from shareholders. The proposal at Gilead Sciences received 49.9% support. Climate Lobbying ▪ ISS also notes the emergence in the US of a new subgroup of lobbying resolutions specifically focused on climate lobbying – the alignment of companies' direct and indirect climate lobbying activity with their stated climate commitments/position eg support for the goals of the Paris Agreement. [Note: In Australia, climate lobbying resolutions are not a new phenomenon. The Australasian Centre for Corporate Responsibility's (ACCR) database of shareholder ESG resolutions in Australia highlights a number of examples going back some years] ▪ According to ISS, most of the resolutions that were filed on this issue were withdrawn after companies agreed to increase disclosures regarding the Paris alignment of their direct and indirect lobbying. [Source: Harvard Law School Forum on Corporate Governance and Financial Regulation 04/07/2022] Investor backed trio of shareholder climate resolutions secured between 18-26% support at J-Power Three shareholder climate resolutions filed at Electric Power Development Co Ltd (J-Power) failed to secure sufficient support to be approved at the company's 28 June 2022 annual meeting. The resolutions (co-filed by three major institutional investors representing US$3 trillion of assets under management – Man Group, Amundi, and HSBC Asset Management - together with the Australasian Centre for Corporate Responsibility (ACCR)) called on J-Power to: ▪ amend the company's Articles of Incorporation to include a requirement to set a business plan and Paris-aligned short and medium term emissions reduction targets and report annually on progress (Resolution 8 in the Notice). The resolution received 25.8% support. [Note: Similar shareholder proposals were filed by a different group at Mitsubishi Corporations and Sumitomo Mitsui Financial Group – neither of these proposals were carried. This is discussed in a separate post below.] Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 5 ME_183543315_1 ▪ amend the company's Articles of Incorporation to include a requirement to disclose how it assesses the alignment of future capital investment against those targets (Resolution 9 in the Notice). The resolution received 18.1% support) ▪ amend the company's Articles of Incorporation to include a requirement to disclose how its remuneration policy incentivises the company's executives to work towards its climate goals (Resolution 10 in the Notice). The resolution received 18.9% support. None of the resolutions had board endorsement. The board's opposition was based in part on the way in which the resolutions were structured – the board considers that it is 'not appropriate' to amend the Articles of Incorporation to include 'specific details of business execution'. The ACCR described the result as a 'substantial show of shareholder support' and an indicator of the 'sharply rising investor engagement on climate change in Japan'. It is not immediately clear how larger investors voted. The California Public Employees Retirement System (CalPERS) voted in support of all three shareholder proposals. [Sources: Electric Power Development Co Ltd (J-Power) Notice of Meeting; Notice of the Opinion of the board of directors on the shareholder proposals; voting results 28/06/2022; ACCR media release 28/06/2022] Shareholder climate resolutions at four Japanese companies secured strong support Market Forces, together with a $22 billion investor coalition, filed shareholder climate resolutions at four Japanese companies: Mitsubishi Corporation; Tokyo Electric Power Company (TEPCO), Sumitomo Mitsui Financial Group (SMBC) and Chubu Electric Power Co. The companies targeted jointly own JERA (Japan's largest thermal power generator). None of the resolutions secured the necessary level of support to be approved. Market Forces has released a statement commenting on the results of each of the resolutions. The table below provides a summary of the key asks in each proposal, the vote result in each case, how some larger investors voted (where this information is known) and a summary of Market Forces' comments on each result. RESOLUTIONS VOTES IN SUPPORT HOW INVESTORS VOTED MARKET FORCES/INVESTOR COMMENTS Mitsubishi Corporation Proposal 5 (Emissions reduction targets): The proposal called for company's the Articles of Incorporation to be amended to require the adoption a business plan including Parisaligned short-term and medium-term greenhouse gas emission reduction targets across all Scopes, and for annual reporting on progress against the plan. The board opposed the proposal. 20.19% ▪ California Public Employees Retirement System (CalPERS) voted against both resolutions. ▪ Norges Bank Investment Management (NBIM) voted against both resolutions ▪ Storebrand voted in support of both resolutions: – Storebrand voted in support of Proposal 5 because the company only partially discloses Scope 3 emissions and has no Scope 3 emissions targets, and 'in light of the company's appetite to expand the LNG business which appears to contradict with its stated goal of net Market Forces' Megu Fukuzawa, said that the vote sends a 'clear directive to Mitsubishi that before the company moves forward with any new LNG plans, the company must justify those plans to demonstrate that they are in line with their net zero by 2050 commitment'. Market Forces considers that its engagement with the company led to a better understanding of the gaps in the company's existing net zero pathway and the measures needed to address these. The group has flagged it intends to continue to push companies to changes their policies and business plans to address concerns Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 6 ME_183543315_1 RESOLUTIONS VOTES IN SUPPORT HOW INVESTORS VOTED MARKET FORCES/INVESTOR COMMENTS Proposal 6 (Stranded assets risk): This proposal also called for a partial amendment of the Articles of Incorporation to require disclosure of how the company evaluates the consistency of each new material capital expenditure with its net zero by 2050 commitment. The board opposed the proposal. 16.22% zero in 2050, which is also Japan's national target, and its stranded asset risk, it is in shareholders' interest to better understand how the company intends to remain viable in the long term, and monitor the company in its pathway to net zero in 2050, with the help of critical climate information which would be ensured with the proposed article amendment'. – Storebrand gave similar reasons for voting in support of resolution 6. Tokyo Electric Power Company (TEPCO) Proposal 3 (stranded assets): The proposal called for the company's Articles of Incorporation to be amended to require annual reporting on 'how a net zero by 2050 pathway would affect the assumptions, costs, estimates, and valuations underlying the Company's energyrelated assets'. The board opposed the proposal. 9.55% (according to Market Forces) ▪ CalPERS voted against the resolution ▪ NBIM voted for the resolution in line with its global voting guidelines, because it considers that: 'The board should account for material sustainability risks facing the company, and the broader environmental and social consequences of its operations and products. Sustainability disclosures should be aligned with applicable global reporting standards and frameworks to support investors in their analysis of risks and opportunities'. ▪ Market Forces described the results as a 'rebuke from shareholders' against TEPCO's continued investment in fossil fuel development (eg through investment in JERA, Japan's largest power company). The group considers that these investments are contrary to a netzero emissions by 2050 pathway and expose the company (and shareholders) to significant transition risk (stranded asset risk). ▪ Market Forces also makes the point that given the government's significant stake (54.74%), the result approval rate is much higher than it first appears. Market Forces suggests that the 'real' approval rate is 21.1%, suggesting there was strong investor support. Chubu Electric Power Co Proposal 9 (stranded assets): calls on the company to amend its Articles of Incorporation to include a new requirement for the company to report annually on its 'asset resilience in line with a Net Zero by 2050 Pathway' ie to disclose its 19.9% (according to Market Forces) ▪ NBIM voted in support of Proposal 9 ▪ CalPERS voted in support of Proposal 9 ▪ Market Forces said the strong level of support was 'no surprise' given the level of shareholder concern about the company's continued investment in fossil fuel development/expansion (eg through Jera). ▪ Kiko Network's Yasuko Suzuki expressed the hope that 'the favourable percentage of votes for our proposals to Chubu Electric and TEPCO requesting the strengthening of the company's decarbonisation Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 7 ME_183543315_1 RESOLUTIONS VOTES IN SUPPORT HOW INVESTORS VOTED MARKET FORCES/INVESTOR COMMENTS 'assessment of how a net zero by 2050 pathway would affect the assumptions, costs, estimates and valuations underlying the company's energy related assets'. strategy (as well as the 26%, 18%, and 19% in favour (respectively) of the J-POWER proposals), would positively impact the business operations of both Chubu, TEPCO and JERA.' Sumitomo Mitsui Financial Group (SMBC) Proposal 4 (emissions reduction targets): The proposal calls on the company to set and disclose a business plan including Parisaligned, short-term and medium-term emissions reduction targets and to report annually on progress against these targets. The board opposed the proposal. 27% (according to Market Forces) ▪ NBIM voted against Proposals 4 and 5. ▪ CalPERS voted in support of Proposals 4 and 5. ▪ Storebrand voted in support of Proposal 4 because it considers the proposal: 'should serve to enhance the company's current commitments to net zero activities and help ensure stronger alignment between the company's net zero goals and its policies and actions. Adoption of the resolution would also provide shareholders with a better understanding of the company's management and oversight of related risks'. ▪ Storebrand voted against Proposal 5 because it considers the it 'appears too prescriptive, and is of a kind best left to management under the board's appropriate supervision, rather than incorporating it into the Articles of Incorporation'. ▪ 350.0rg Japan's Eri Watanabe commented that Proposal 4 received a higher level of support than a similar proposal at Mitsubishi UFJ Financial Group in 2021, despite proxy advice firms largely recommending shareholders vote against it, and despite rising fuel prices. As such, the result 'sends a strong message…that investors believe SMBC Group's current efforts to achieve net-zero are inadequate and should accelerate its actions'. ▪ Commenting on Proposal 5, it was noted that the first-time proposal received the same level of support as similar proposals this AGM season filed at US and European financial institutions. As such, the group considers that the company as well as other financial institutions should see the result as a signal that shareholders expect companies to demonstrate that they are taking concrete steps to transition away from fossil fuels. Proposal 5 (ensure underwriting/lending is consistent with the IEA's Net Zero Emissions Scenario): The proposal called on the company to amend its Articles of Incorporation to require that the company's lending/underwriting is 'not used for the expansion of fossil fuel supply or associated infrastructure'. 10% (according to Market Forces) [Source: Market Forces media release 29/06/2022] Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 8 ME_183543315_1 Disclosure and Reporting Top Story | Reporting against the revised ASX Corporate Governance Principles and Recommendations: New report finds highlights E&S and Diversity as key areas for improvement KPMG has released its analysis of the extent to which companies have adopted the Fourth Edition of the ASX Corporate Governance Principles and Recommendations. Below are our key takeaways around extent to which companies were found to have adopted recommendation 1.5 (Diversity) and recommendation 7.4 (E&S risks). Key Takeouts ▪ KPMG found that overall, though adoption of the changes introduced by the Fourth Edition of the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations (Fourth Edition) is generally high, there was wide variation in the quantity and quality of disclosure provided. Broadly speaking, smaller companies were found to have the most room to improve. ▪ On disclosure of environmental and social (E&S) risk under recommendation 7.4, KPMG raises concerns that it is likely that not all companies with material exposure to E&S risk are reporting it - a quarter of companies disclosed that they had no material exposure to social and/or environmental risks, a proportion that KPMG describes as 'unlikely'. In light of the level of investor and regulatory interest in sustainability reporting, and the prospect of that mandatory standards will be introduced into Australia, KPMG Partner Julia Bilyanska suggests companies may wish to review their current approach. ▪ Looking specifically at disclosure under recommendation 1.5 (Diversity), KPMG highlights there has been almost nil progress on the number of companies disclosing a diversity policy over the past six years. The report also flags that representation of women in the workforce and in senior roles has 'remained stagnant'. Noting that smaller companies continue to have the lowest levels of disclosure and female representation and the highest use of the 'if not, why not' exception, KPMG suggests they may need additional support to make progress. ▪ In a statement welcoming the release of reports, the Governance Institute of Australia called on companies act to urgently address the issues flagged, particularly with respect to disclosure of E&S risk and diversity. Governance Institute Chair Pauline Vamos said there was 'no time for stalling' on these 'critical issues'. ▪ Chair of the ASX Corporate Governance Council, Elizabeth Johnstone has indicated that the reports will assist in discussions around a 'possible fifth edition of the Principles and Recommendations'.