Glossary

The ABCs of Proxy Voting and Its Role in ESG

The ABCs of Proxy Voting and Its Role in ESG

The ABCs of Proxy Voting and Its Role in ESG


by: Erica Lasdon | April 26, 2022

Board Room Proxy Voting


What is Proxy Voting?

Proxy voting is the primary means for shareholders to communicate their views about a company’s management. At most public U.S. companies, shareholders can vote annually to elect board members and approve executive compensation packages and other strategic proposals put forward by the company. This voting peaks from April through June, when most annual corporate meetings occur.

For decades, U.S.-based public corporations have also faced shareholder proposals at a company’s annual meeting. They are proposed by shareholders who meet minimum holding requirements set by the U.S. Securities and Exchange Commission (SEC). Resolutions tend to focus on a single, concrete call to action, such as issuing a report or establishing explicit board oversight for Environmental, Social, and Governance (ESG) issues relevant to the company.  Rules require that the proposals be high-level and do not overstep management territory.

While non-binding, these proposals have been an important mechanism for interested investors to drive attention to ESG issues. Over the years, vote totals have risen out of the single digits for ESG resolutions. Still, many filed resolutions are withdrawn before being sent out for a broader shareholder vote. This entire process has formed the backbone for more active engagement between shareholders and company management. It has built a body of voluntary disclosure from companies that forms the basis for much of what we currently understand about material ESG business issues.


Long-term ESG Proxy Trends

Examining the trends in proxy voting is a powerful way to understand the general market views on corporate ESG practices. The overall trends are unmistakable and steady. The following charts¹ give a clear sense of how this process has driven the adoption of ESG in recent decades.

Graph showing record proportion of proposals receive significant support

Graph showing record proportion of E&S proposals are withdrawn, as more companies reach agreements with proponents

Graph showing environmental and social issues are joining the mainstream


What to Expect in 2022

The 2021 proxy season featured record support for proposals on environmental and social (E&S) issues and continued strong support for governance proposals, especially at midsized and smaller companies. It also saw growing opposition to director elections. Part of this trend is explained by the increasing support by institutional investors such as BlackRock and State Street for ESG resolutions and against directors presiding over perceived inadequate climate or diversity oversight. These investors are also increasingly open to supporting dissident board nominees, potentially signaling a new phase in shareholder activism connected to longer-range strategic concerns about climate and/or diversity.


This shift in voting practices is likely to continue in the upcoming 2022 proxy season. What is creating this shift?

In general, institutional investors are moving more quickly to vote against companies, many shedding their more cautious approaches in past years, which showed deference to corporate management recommendations on resolutions. Large investors like BlackRock and State Street demonstrate this approach by signaling intent in annual public letters to vote against companies that lag on issues like climate and diversity. 

Similarly, the proxy advisory services that provide influential analysis and recommendations to investors also signal ESG policy changes annually. Both ISS and Glass Lewis have signaled a more active ESG voting approach, especially on efforts to increase board oversight of crucial ESG issues like climate and diversity.²

We can perhaps get the clearest view of ESG during the 2022 season by looking at the leading edge of shareholder action, the investors filing the resolutions. The annual Proxy Preview published by three active groups (As You Sow, Sustainable Investments Institute, and Proxy Impact) highlights leading trends and gives specific details about pending resolutions. In March 2022, there were 529 filed resolutions, up 20% from 2021. The pie chart³ below shows the ESG topics at play this year:

Pie Chart of 2022 Shareholder Proposals showing ESG are top priorities

In his introductory letter to this year’s Proxy Preview, As You Sow CEO, Andy Behar, draws these three main messages from 2022 resolution proponents:

1) Climate change affects each company and its supply chain, employees, and customers. Every company must cut emissions in half by 2030, and leading companies are already on the way.

2) Racial justice, gender equality, diversity, and equity are critical for talent retention and recruitment. Companies are starting to act by using clear metrics to quantify the problem and inform action.

3) Political Spending has become riskier in the era of polarized politics. Some companies restrict spending while others are challenged to explain incongruent corporate policies and political spending.


What Should Companies do to Prepare?

Public companies now have a clear obligation to provide disclosure on key ESG topics, driven by this market expectation. Corporate boards should ensure they are prepared to provide proper oversight of ESG topics and may be asked to participate in shareholder engagement more actively than in the past. Management teams should ensure that they get forward-looking information on significant ESG developments to efficiently allocate corporate resources towards necessary improvements.


What About Private Companies?

Private companies and investors in the private markets do not face the direct challenge of a shareholder resolution or proxy vote concern about director elections or other corporate-backed proposals. However, proxy season trends offer a useful window into expectations private market participants face on other fronts. Increasingly, requests for similar ESG information are expected as a part of other types of corporate financing. Private equity investors, banks, and other capital providers also seek to understand how large and small firms manage their most relevant ESG issues.

There are no public records of proposals or votes and less pressure to report on ESG issues publicly. Still, surveys of investors and other participants in private markets show a similar rising tide of interest in understanding relevant ESG issues. Private companies and investors can use many of the same tools as public market peers and can sometimes find customized guidance for their asset class.


Conclusion

As companies and investors face questions from stakeholders about their strategy on climate change and other ESG issues, ClimeCo is here to develop solutions that fit your needs. For more information or to discuss how ClimeCo can drive value for your organization, contact us at info@climeco.com.

Here are some recent resources offering guidance on many of the topics discussed above:

Resource

Author

Useful for

Materiality Finder

SASB

Investors/companies looking to identify material ESG issues by industry

A Climate Disclosure Framework for Small and Medium-Sized Enterprises

CDP

Investors/companies looking to establish climate disclosure for smaller companies

Audited Financial Statements and Climate-Related Risk Considerations

Center for Audit Quality

Audit Committees looking to build climate literacy

Technical Note: Reporting on Transition Plans

CDP

Investors/companies looking to develop transition plans from current disclosure

Guidance on Diversity Disclosures and Practices

State Street Global Advisors

Investors/companies looking to establish or enhance diversity disclosure

Navigating the Risks of Corporate Political Spending

Center for Political Accountability

Investors/companies looking to establish or enhance political spending oversight



[1] “The Long View: US Proxy Voting Trends on E&S Issues from 2000 to 2018,” Kosmas Papadopoulos, Managing Editor, ISS Analytics, published on 1/31/2019 at the Harvard Law School Forum on Corporate Governance.

[2] “Heads Up for the 2022 Proxy Season,” Weil, Gotshal & Manges LLP, 12/22/21, https://governance.weil.com/latest-thinking/heads-up-for-the-2022-proxy-season-iss-and-glass-lewis-release-voting-policy-updates-for-2022.

[3] Proxy Preview 2022, p.5, available at https://www.proxypreview.org/.


About the Author

Erica Lasdon is Sr. Director, Capital Markets on ClimeCo’s Sustainability, Policy, and Advisory team based in Washington DC.  Erica specializes in applying ESG to financial company operations, with deep expertise in engagement, proxy voting, and investment functions across a wide range of asset classes. Erica holds a B.S. in Biology and a B.A. in History from the University of California, San Diego and served on the development team for the Sustainability Accounting Standards Board’s Level II exam for the inaugural FSA credential.

What Is The Role Of Renewable Electricity In Corporate Sustainability?

What Is The Role Of Renewable Electricity In Corporate Sustainability?

What Is The Role Of Renewable Electricity In Corporate Sustainability?


by: Garrett Keraga | March 28, 2022


In 2022, it seems that we’ve reached a crescendo of pressure from regulators, investors, customers, peers, and other stakeholders pushing companies along a sustainable path. Things that were once considered exceptional – such as pledging to reach net-zero carbon emissions or using 100% renewable electricity – have quickly become necessities for many companies to keep up with their peers. When we look back at the sustainability landscape over the last few years, it’s easy to see how this sudden boom of ESG has led to some confusion.

As companies enhance their ESG strategy and commit to public-facing initiatives, it becomes crucial to understand how different interventions factor into their corporate carbon accounting. How can carbon offsets be used? Where can companies account for renewable energy? What projects can be undertaken to decarbonize? And ultimately, which of these efforts should be prioritized in an ESG strategy? Companies need to be able to answer these questions and communicate their strategy effectively to stakeholders. In this blog, we explain the role renewable electricity has in corporate sustainability.


How does renewable electricity factor into corporate carbon accounting?

Renewable electricity is often one of the first levers considered when creating a corporate ESG strategy, and the global transition to clean energy is accelerating every year. Bloomberg reported that global renewable energy investment grew by 6.5% in 2021 to a new record of $366 billion. For companies, switching to renewable electricity can be just part of a decarbonization strategy, or specific goals around renewable electricity consumption can be set, such as those set through RE100. When companies plan out renewable electricity adoption, there’s a lot to decipher.

Global Investment In Energy Transition By Sector


First, companies need to understand how to account for renewable electricity in their carbon footprint. For this, as with all carbon accounting questions, companies will want to reference the Greenhouse Gas (GHG) Protocol, and here specifically – the Scope 2 Guidance. Scope 2 covers indirect emissions from purchased electricity and other purchased energy – basically, the emissions created by the generator of that electricity when the generator is not operated by the company conducting the carbon inventory. For most companies, this refers primarily to electricity from the grid.

Location-based Accounting: Within Scope 2, one option is to account for electricity emissions with a location-based emission factor, where reporting entities use an emission factor based on local grid mix to determine their emissions. This doesn’t allow for contractual instruments, such as Renewable Energy Credits (RECs), to be used to switch generation attributes and lower emissions.

Market-based Accounting: However, the other option – market-based accounting – allows for consumer choices in energy generation and contractual instruments to be reflected in the emission factor. In other words, continuous contracts with a supplier to use a renewable generation, or one-time REC purchases, can be accounted for in the market-based approach. Companies that are considering building renewable electricity into their ESG strategy should utilize a market-based carbon accounting approach for Scope 2.



What renewable electricity options are available to companies?

Option 1: RECs are a common entry point for companies starting to use renewable electricity. RECs represent a certified unit of electricity production from a generator. RECs must be retired on behalf of a specific entity, and once retired, that electricity generation cannot be accounted for elsewhere. RECs are often third-party-certified by entities such as Green-e® Energy. As more RECs are retired, the remaining grid mix, called the “residual mix” gets dirtier, further incentivizing companies to adopt renewable electricity. RECs can be simply purchased in bulk and used to switch a company’s entire electricity consumption to renewable sources each year. Similarly, companies can work with utilities to opt into low-carbon energy contracts, which often work by providing RECs to the purchaser. However, some critics argue that purchasing renewable electricity through RECs stunts companies’ impact on increasing the total amount of renewable electricity on the grid. Companies will also often seek to move beyond RECs to avoid the annual expenditure and price uncertainty in their renewable electricity supply.

Option 2: Onsite generation is another choice for companies, especially those that own property and/or their facilities. Rooftop solar is one popular example. Onsite generation can also occur in leased or rented spaces through collaboration with landlords. This strategy is most often employed in facilities or properties where a company has a long-term lease and plans to stay in a particular location for the foreseeable future. Companies should note that they can only take credit for renewable electricity that is generated onsite if they use power directly from their system or retire RECs generated by their systems on their own behalf. If RECs are sold, that company cannot take credit for the renewable electricity it produced on its site.

Option 3: Many companies who don’t have the assets to invest in onsite renewables opt instead to pursue a Power Purchase Agreement (PPA). In a low-carbon PPA, companies will pay a third-party to develop and maintain a renewable electricity system and sell that energy physically or in the form of credits back to the company. When credits are sold back to the company, but the electricity itself is consumed elsewhere or sold to the grid, these agreements are called Virtual Power Purchase Agreements (VPPAs). Typically, companies will size a PPA based on their energy consumption and will often develop a project along with other interested companies.

In all of these cases, renewable electricity can be accounted for in a company’s carbon footprint, as long as the company uses the market-based approach for Scope 2 accounting and retires the renewable generation credits on their behalf or directly consumes renewable electricity.  

Energy Attribute Certificate Pathways   
Source: GHG Protocol Scope 2 Guidance (linked above)


“Additionality” in renewable electricity – is it an effective or appropriate metric?

In the world of carbon offsets and project development, “additionality” is a strict qualifier that assesses whether a project was caused by intervention above and beyond regulation. To be additional, it must be determined that a project would not have happened without the intervention of the entity supporting the project. When evaluating what type of renewable electricity strategy to pursue, companies tend to ask themselves about additionality and whether they are supporting a new project – through a PPA, for example. But is this term really applicable to renewable electricity?

Ultimately, additionality isn’t a term that should be used to discuss renewable electricity. The GHG Protocol Scope 2 Guidance advises that Offset additionality criteria are not fundamental to, or largely compatible with, the underlying rules for market-based scope 2 accounting and allocation. Additionality is used to qualify projects that are an improvement over a baseline. For example, in carbon offset projects, what is being measured is a change in avoided GHG emissions from a theoretical baseline without intervention. In renewable electricity, direct energy use attributes are being claimed rather than separation from a baseline. It’s also a challenge to determine what is really “in addition” to regulation in the world of renewable electricity. On top of that, there are more aspects of additionality as used in project development, like proving that technology isn’t commonplace, which aren’t useful to apply to renewable electricity.

That said, companies may still face criticism if it’s perceived that they aren’t doing enough to support the development of new renewable electricity sources. Voluntary programs can be developed to address this concern, but for now, companies should stray away from the term “additionality” to avoid making a false claim. In the words of the GHG Protocol Scope 2 Guidance “Maximizing the speed and efficacy of voluntary initiatives in driving new low-carbon development is an important, complex, dynamic, and evolving process for program implementers, regulators, and participants.”. Supporting development of new renewable assets is an ongoing challenge that companies can help accelerate as they increase demand for renewable electricity.


Creating a corporate renewable electricity strategy

As companies face the challenge of adopting renewable electricity and developing a robust plan to meet stakeholder demands, ClimeCo is here to develop a strategy that is right for you. For more information or to discuss how ClimeCo can drive value for your organization, contact us at info@climeco.com.


About the Author

Garrett Keraga is a Manager on ClimeCo’s Sustainability, Policy, and Advisory team based in Burlington, Vermont. His sustainability work has included greenhouse gas accounting, carbon abatement planning, ESG strategy development, and disclosure advisory. He has worked with a large variety of industries, both across consumer-facing and industrial clients. Garrett holds a Bachelor of Science in Mechanical Engineering from the University of Vermont.

What is a Life Cycle Assessment?

What is a Life Cycle Assessment?

What is a Life Cycle Assessment?


by: Gary Yoder and Jaskaran Sidhu | February 22, 2022


Team Working on LCA


Solutions
considered essential to decarbonization reduce greenhouse gas (GHG) emissions, yet rarely come without other environmental impacts. For example, while vehicle electrification will increase battery production, the mining of lithium has a substantial environmental impact. So how do we evaluate whether each trade-off on our path to net-zero is worth it? A Life Cycle Assessment (LCA), which offers a framework for quantifying the potential environmental impacts of a product from cradletograve (i.e., from growth/extraction of raw material inputs all the way through a product’s disposal), allows us to make that determination.
 


Benefits of
LCAs?
 

Unlike GHG footprints or other Environmental, Social, & Governances (ESG) metrics that typically quantify enterprise-level impacts and show year-to-year progress, LCAs often focus on the potential environmental impact at a specific product or a facility level. Such information can be important to customers, suppliers, employees, investors, and regulatory entities. 

ClimeCo has performed a variety of LCA projects across multiple industries and scopes. The goals of an LCA can vary; the following two projects provide examples of two different approaches to LCAs that ClimeCo has recently completed for our clients.  

Wide-angle bottom view of a contemporary construction of an oil refinery or a modern fuel factory facility in an industrial zone, with a round bridge, plenty of pipes, iron beams, tanks, and stairs


LCA Example #1

Confidential Industrial Manufacturer: Benefits of Practice Change vs. Historical Performance at a Facility 

ClimeCo carried out a cradle-to-grave carbon intensity (CI) LCA for four products made at an industrial facility.  

The Objective: Communicate Carbon Capture Benefit 
One of the many applications of an LCA is its ability to demonstrate the environmental benefits achieved by adopting different operational practices. A detailed analysis of GHG emitted through the product lifecycles showed the reduction in CIs achieved by capturing previously vented process CO2 for sequestration. These CIs, and their recent reductions, will be used in customer communications and marketing efforts, differentiating the environmental “value” of the products from those offered by competitors.    

Another Use: Evaluate Decarbonization Options 
LCAs can be a reliable methodology for demonstrating GHG benefits achieved through existing decarbonization actions – as was the case for the scenario above – and for evaluating various potential reduction measures prior to their implementation. When used in combination with tools like Marginal Abatement Cost Curves (MACC), LCAs can help assess reduction pathways along with their associated monetary cost.  

Financial Incentive Opportunities 
Identifying GHG performance improvement opportunities can open doors to participate in current and upcoming federal- and state-level programs that come with significant financial incentives. These include California’s Low Carbon Fuel StandardCanada’s Clean Fuel Standard, or the IRS carbon sequestration tax credit (45Q), each requiring full product LCAs.   

J-Band asphalt paving roads and reducing need for maintenance

LCA Example #2

J-Band® – Benefits of Product vs. Alternatives 

ClimeCo collaborated with Asphalt Materials, Inc. (AMI) to complete an LCA-based sustainability assessment of J-Band®, AMI’s void reducing asphalt membrane (VRAM) product.  

The Product 
AMI designed J-Band to reduce road maintenance and extend the lifetime of asphalt pavement roads by strengthening the longitudinal (centerline) joint, traditionally a problematic site for road deterioration. The deterioration results from the intrusion of air and water due to inherently lower asphalt mixture density at the joint. Over time, the joint naturally becomes the weak link in the entire road surface, requiring periodic repairs before complete road replacement. To combat this, J-Band® is a polymer-modified asphalt product applied to the prepared surface prior to applying the new hot-mix asphalt (HMA). When the HMA pavement lifts are applied, heat from the hot-mix drives J-Band® into the available voids, sealing the joint area from below. Due to established jurisdictional practices and specification requirements, J-Band® is used in a smaller percentage of asphalt paving projects in the U.S., with traditional solutions, such as joint adhesive, pave wide trim back (PWTB), and infrared (IR) heaters, being more common.  

The Product’s Competitive Edge: Performance and Cost 
AMI has demonstrated that J-Band® creates a better joint compared to the alternatives, eliminating the need for frequent, significant joint repair, and prolonging the life of the road by at least three additional years. Based on this performance, AMI has shown that J-Band® has a lower lifetime cost, with its upfront costs surpassed by reduced asphalt materials, fuel, and labor costs.  

A Sustainability Edge, too? 
Is the same true for J-Band’s lifetime environmental and social impacts? The product requires energy and material inputs to manufacture and apply – are these impacts surpassed by the benefits of reduced maintenance and extended road lifetime? ClimeCo completed a comparative LCA, evaluating J-Band against three traditional longitudinal joint solution alternatives to answer this question. The comparative LCA approach meant impacts common to all alternatives could be excluded, such as from the production of hot-mix asphalt, transporting the asphalt to the job site, and the paving equipment. The following table shows the life cycle stages included in the analysis.  

Life Cycle Analysis Stages

The Analysis 
ClimeCo quantified GHGs, criteria air pollutants (AQ), and worker safety impacts across road manufacturing, product transport, joint solution application, and road maintenance. The developed calculator tool clearly documents assumptions and data sources. It is customizable for key project details, such as project length, distance to the project site, and distance to perform maintenance. 

The Results 
Under the assumed baseline conditions, J-Band demonstrated better sustainability performance on all metrics compared to the longitudinal joint solution alternatives. For more information on this project scope and results, please see the following PowerPoint presentation.   


Using LCAs for a More Sustainable Future
 

As these two project examples show, LCAs can be targeted to answer specific questions and meet specific needs. However, because each LCA is context-specific and fine-tuned to its application, one LCA cannot be compared to another. To manage this limitation, ClimeCo’s standard practice is to use conservative assumptions and to be transparent with methodologies, ensuring trustworthy, well-documented LCA results that align with reality.   

Whether you are looking to enhance a product or process, develop sustainability marketing claims, or meet regulatory or reporting requirements, ClimeCo has the expertise in applying LCAs to support informed decision-making across these areas. 


About the Authors

Gary Yoder is a Vice President at ClimeCo, providing environmental compliance services to many clients. He specializes in the complexities of air quality compliance but also supports ClimeCo’s sustainability projects and initiatives. Gary holds a Bachelor of Science degree in Geography/Pre-Meteorology from Ohio University and a Master of Science degree in Meteorology from North Carolina State University. 

Jaskaran Sidhu is an Analyst on ClimeCo’s Sustainability, Policy, and Advisory team based in Toronto. Jaskaran’s work focuses on life cycle analysis and carbon impact quantification for ClimeCo’s corporate clients. Jaskaran holds a Master of Engineering in Mechanical and Industrial Engineering from the University of Toronto and a Bachelor of Engineering in Mechanical Engineering from Panjab University.