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Recent proxy resolutions show both shareholder and company misses
Maybe it’s just me and the people I follow around ESG, but proxy voting seems to have grown more exciting and has garnered increasing attention lately. In 2020, the SEC eased the entry point for ESG (and anti-ESG) shareholder proposals to make their way into a company’s annual general meeting. Over the past year, we’ve seen the US House Judiciary Committee and ESG hearings question proxy advisors like ISS and Glass Lewis for their influence. The three largest asset managers, BlackRock, Vanguard, and State Street, now have proxy voting choice programs, allowing individual investors to choose their voting strategies.
Right now, we’re entering that magical time of year between late February and June when these proposals make their way to shareholders. These non-binding votes still represent a significant amount of investor influence over the company, and the drama is undoubtedly high this year.
Now, this blog isn’t one to follow for regular proxy reviews. I recommend subscribing to Andrew Droste’s CorpGov Substack or listening to Free Float’s Proxy Countdown podcast to stay on top of these resolutions. Still, I thought it would be interesting to look at three recent proxy voting issues through the lens of ESG to see if materiality and long-term growth were considerations.
Let’s jump in!
Jack in the Box
The Accountability Board (TAB) filed a proposal for Jack in the Box, an American-based fast-food chain. Their website does not provide much information about their work or perspective, but this note on Stewardship gives us a good idea of what they are after.
A company's governance, social, and environmental practices should meet or exceed the standards of its market regulations and general practices and should take into account relevant factors that may impact significantly the company's long-term value creation. Issuers and investors should recognize constructive engagement as both a right and responsibility.
The resolution concerns Jack in the Box's lack of basic emissions disclosures to its peers, which may show a lack of understanding of the material impact.
Shareholders ask Jack in the Box (JACK) to determine and disclose its current greenhouse gas (“GHG”) emissions (for at least Scopes 1 and 2) as well as short-, medium- and long-term goals for reducing its emissions. Progress meeting the goals should then be disclosed annually.
This resolution, in particular, aligns very closely with the primary focus of the SEC’s new climate rule, which I wrote about last week. As a reminder, a company must disclose Scopes 1 and 2 if it is material. If you check Jack in the Box’s 2023 Sustainability Report (the first they’ve ever published) and its materiality matrix (page 11), they don’t think Greenhouse Gas Emissions are material.
From an ESG perspective, are they right?
For Scope 1, if Jack in the Box used gas to cook, this could be material, but it appears the company uses ovens. At scale, understanding and lowering any company’s utility emissions would have a cost-benefit, which is financially material. However, that’s more about efficiently managing energy usage rather than emissions or long-term growth. There is a section in their 2023 Sustainability report on energy usage, but it covers things I would consider table stakes, including activities like LED bulb replacements.
For fast food, I’m not necessarily convinced that Scopes 1 and 2 are as material as a Scope 3 issue like sourcing beef would be. I’m surprised TAB didn’t call out this particular emissions-related issue. Examining a material issue like beef and meat alternatives emissions for their respective environmental impacts could lead to an interesting transition plan. It would even align with Jack in the Box’s mission to “Make the world a more delicious place.” After all, Jeff Bezos’s Earth Fund is donating $60M to alternative protein as part of a more extensive food transformation investment at $1B.
Overall, plant-based proteins have emissions benefits. According to Our World in Data:
…plant-based foods emit fewer greenhouse gases than meat and dairy, regardless of how they are produced.
This article also notes other paths to pursue here, like engaging the meat producers in their processes to lower emissions and simply not eating meat. Regardless, unless Jack in the Box is thinking along these lines, which could start through the environmental lens, they might miss a material ESG risk in chasing Scopes 1 and 2 disclosures. There is no mention of this issue in their 2023 Sustainability Report, but there is a focus on supplier policy adherence to animal welfare.
Overall, I agree that focusing on Scopes 1 and 2 isn’t quite the most material thing Jack in the Box could be focused on. However, this disclosure has become table-stakes globally, similar to replacing LED bulbs. I could see how investors would be worried, but I was still surprised that this resolution passed at 54%. This was the first climate-based shareholder resolution to pass in 2024.
Side note: I have never eaten at a Jack in the Box!
Starbucks
An interesting shareholder resolution on dairy hit Starbucks this past week. The infamous (if PETA is to be believed) Proposal #4 for Starbucks (page 96) stated:
Shareholders request that Starbucks issue a report examining any costs to Starbucks’ reputation and any impact on its projected sales incurred as a result of its ongoing upcharge on plant-based milk. The board should summarize and present its findings to shareholders by the end of the third quarter of the current fiscal year. The report should be completed at a reasonable cost and omit proprietary information.
This one hits home as I am lactose intolerant. When I go to Starbucks, I always swap out my latte with plant-based milk, and there’s always an upcharge to do so. Starbucks’ response to the proposal (page 97) recommended voting “Against.” The reasons include that they already create drinks with non-dairy options, market conditions vary globally, and in some markets, there is no charge, there is no charge for ‘a splash’ of plant-based milk in coffee, and the company works to be sure these options are sustainably sourced.
It’s a thoughtful and accurate response to PETA’s resolution. In my experience, I regularly see lattes and cold coffee beverages with specific non-dairy options. However, it is interesting that swapping out non-dairy for a cheaper dairy alternative doesn’t make the drink cheaper.
On the other hand, as Starbucks notes, there are upcharges for non-dairy alternatives. This led me to conduct a non-scientific check between Dunkin’ Donuts’ and Starbucks’ approaches. Again, adding a splash to a black coffee is free, so this is an issue in heavier dairy drinks, like lattes. The upcharge from Dunkin’ Donuts in my area is $1.00 for a non-dairy option, while Starbucks is $.80.
This resolution did not pass and feels like a missed opportunity for PETA. Even with the focus on stakeholders, their supporting statement came across as more activist than business, calling out reputational risks and missed financial opportunities. I’m not convinced this is the right material approach to meet PETA’s goals.
A more effective way may be to convince Starbucks that transitioning to a low-carbon economy that considers dairy may impact its costs. According to Starbucks’ 2023 Global Impact Report, there are a few areas where this may intersect with the company’s ESG priorities, including:
Environmentally-responsible sourcing practices
Greenhouse gas emissions and energy efficiency
Nutrition and transparency
Research, development and innovation
In other words, PETA may have aligned this resolution to an earlier stage than where the company is and needed to be a little more ambitious in its ask and perspective.
A different approach for PETA would be to engage publicly traded companies that offer non-dairy alternatives to lower costs globally. This would be a great way to fulfill their mission indirectly through the resolution’s intent. Bizarrely, this focus doesn’t appear in their list of topics for shareholder campaigns.
Of note is that this is not the first time this proposal has been voted on. Starbucks has addressed it and moved on. One company, though, is pushing back against this type of shareholder activism.
ExxonMobil
Some long-term investors are keen to understand how energy companies will manage the transition, as this is a material issue with deep implications. Again, the new SEC rule focuses on material emissions, and the WSJ declares Step Aside, ESG. BlackRock Is Doing ‘Transition Investing’ Now, meaning the energy transition.
This brings us to a repeat resolution from Arjuna Capital and Follow This at ExxonMobil to understand the company’s reduction plan for emissions. Here is the text of the resolution:
Shareholders support the Company, by an advisory vote, to go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its greenhouse gas (GHG) emissions across Scope 1, 2, and 3, and to summarize new plans, targets, and timetables.
ExxonMobil does have Scopes 1 and 2 emissions reduction goals for 2025, 2030, and 2050 with an annual capital investment of $20B-$25B through 2027, so part of this ‘medium-term’ appears covered, but not for Scope 3. As you might expect, this resolution at ExxonMobil can potentially transform the company entirely away from its core business model.
Not only did the resolution not pass, but it never came up for a vote. ExxonMobil threatened to sue Arjuna Capital and Follow This, who withdrew the resolution. Despite this pullback, ExxonMobil is proceeding with the lawsuit.
Looking at ExxonMobil’s 10K, they clearly understand what’s at stake: the transition to clean energy is a risk to their hydrocarbon-based products.
Political and other actors and their agents also increasingly seek to advance climate change objectives indirectly, such as by seeking to reduce the availability or increase the cost of financing and investment in the oil and gas sector. These actions include delaying or blocking needed infrastructure, utilizing shareholder governance mechanisms against companies or their shareholders or financial institutions in an effort to deter investment in oil and gas activities, and taking other actions intended to promote changes in business strategy for oil and gas companies. Depending on how policies are formulated and applied, such policies could negatively affect our investment returns, make our hydrocarbon-based products more expensive or less competitive, lengthen project implementation times, and reduce demand for hydrocarbons, as well as shift hydrocarbon demand toward relatively lower-carbon alternatives.
This section also discusses the technology needed to create lower-carbon energy sources and the required policy and market investment. The leading strategy heavily relies on its Low Carbon Solutions (LCS) business unit “capturing and sequestering CO2 emissions from high-intensity industrial activities” to meet the world’s growing energy needs.
It seems pretty clear that carbon capture is their medium-term strategy, but if I were a long-term investor, I might look for something more tangible, as the risks around climate change, policy, and emerging litigation are present throughout the 10K.
As we saw last week with the SEC, these emissions may be material. Information is material if there is “a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote,” or “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”
If a long-term investor looks at this company and the global trends the company outlines in its 10K, would more information be material and help inform an investment decision? I’m going to leave this rhetorical.
Still, we’ll never know what support the vote would’ve received this year. On the other hand, the stakes of ExxonMobil’s litigation are high.
First, as last week’s read stated, energy and utility companies are among the highest polluters globally (S&P Global Sustainable1 echoed this here). While their Scope 1 and 2 typically outweigh even the largest market cap companies by a significant factor, their Scope 3, Category 11 is entirely off the charts. If you aren’t familiar with the GHG Protocol, Category 11 is Use of Sold Products, or in this case, when other people burn the fuel. However, the company is using a different upstream methodology for Scope 3 calculations, and even then, they estimate that Scope 3 is 540 million metric tons of carbon. They also state:
We do not set Scope 3 targets. As we discuss in the Life Cycle Approach module, using the GHG Protocol to understand how societal activities drive emissions is appropriate and useful; using it to measure and manage company or sector-wide emissions is flawed and counterproductive. It also ignores growing energy demand, enabling no comparison of alternative ways to meet that demand.
I agree with this to a point, and that point is ESG. We can’t just ‘shut off’ fossil fuels today because of interconnected risks, but you can also use this information to inform a responsible transition alongside information like growing energy demand. Surely, that would enable comparisons to alternatives.
Coincidentally (or not), each of the resolutions in this article intersects with some alternative.
Second, the litigation could prevent ESG-related and other material proxy resolutions from being brought forward for a vote. Granted, any vote, including this one, might not garner shareholder support for various ESG or financial reasons, but that doesn’t make the transition issue any less material and doesn’t change the long-term risk.
Third, if you’re a long-term investor and ExxonMobil wins this case, the question will be whether or not to remain an owner in companies you hope to influence since proxy votes will be limited. If that influence goes away, institutional investors and pension funds may remove energy companies that don’t manage their risks from their portfolio as the opportunity to engage disappears. Only the choice to divest will remain. In other words, this litigation might manifest what anti-ESG state Attorney Generals have been worried about this whole time.
If there are any lawyers for Arjuna Capital and Follow This out there, it is time to start leaning on the definitions of ‘reasonable investors’ and ‘materiality’ if you’re going to effectively argue this case. If not, the consequences are that investors will have a diminished voice in the coming years.
In the meantime, here’s the rest of the 2024 proxy season! 🍿