About the National Association of Manufacturers Report

Julie Gorte, Senior Vice President, Sustainable Investing at Impax Asset Management

A paper sponsored by the National Association of Manufacturers purports to show that shareholder resolutions do not benefit shareholders. The study alleges that while climate change is real, resolutions related to companies reporting on business management and risks in a world undergoing a low-carbon transition do not improve value for shareholders. The authors then select—perhaps a better term is cherry-pick—ten resolutions filed over a four-year period from 2013 to 2017. They don’t say how they picked those ten, which is an early indication that this study may be flawed. According to the Sustainable Investments Institute, 425 climate-related shareholder resolutions were filed during that 4-year period and 142 of those resolutions were filed with companies in the Oil, Gas and Consumable Fuels industry. Of that 142, 36 resolutions specifically addressed company reporting on the 2⁰ transition. 

So why pick only ten resolutions? Why those ten? Why are only three of the ten about the subject the authors claim to be examining? Crickets. 

Despite setting the table by discussing climate-related resolutions at energy companies, six of the ten resolutions chosen by the authors were not climate resolutions; they were sustainability reporting resolutions. And three of the ten were not filed at energy companies; two were pharma companies and one was a chemical company. 

The study chose to use a technique known as an event study, a technique that measures whether market prices respond to a specific news event. This technique “is often performed in ways that render it meaningless,” according to an economic paper from NERA.  In this case, the authors choose to define the event window as beginning with the publication of a shareholder resolution and ending on the date that the shareholder vote is announced, which usually occurs shortly after the annual shareholder meeting. While the latter is sometimes—but certainly not always—newsworthy, the former almost never is. In short, this is an “event” that almost never appears in the news. Proxy statements, which can be found in the SEC’s Edgar Database under the label of DEF-14, are rarely covered in the financial or any other media. So, measuring reactions to this very dubious “event” is almost guaranteed to find no impact, because it usually goes unnoticed.  

Moreover, defining the “event” as the shareholder resolution and its vote misses the point of the filing altogether. The thing that these climate-related resolutions ask for is that the company publish a plan, at reasonable cost, informing shareholders of how the company’s business might change in response to a changing climate. At the close of the study’s event period, the company hasn’t done anything: the only “event” is the vote, or what proportion of the shareholders who voted on the resolution supported or opposed it, or abstained. And since these resolutions are all nonbinding, even a majority vote doesn’t compel the company to publish such a report. Anything that would affect company value, in the eyes of investors, would be in the report.

A final methodological flaw in the report is that the authors chose to report on only nine of the ten resolutions they picked. They don’t say why they didn’t report on all ten. What did they find? They found that there was no impact on companies’ share prices from having one of the resolutions they studied on their proxy ballot for a vote. 

Pax World and other shareholders file shareholder proposals not to get companies to tell us what they think the future of climate change will be—another unfounded assertion in the paper—but to understand how companies are likely to be affected by the world’s transition to a lower-carbon economy, and what the company is doing to address the related risks and opportunities. What really would inform investors of how well the company will weather the economic transition isn’t the shareholder vote, it’s the company’s strategic response to how it will manage that transition. Our objectives are to improve how the company performs in the long term, not how it performs in the weeks between the publication of a DEF-14 and the vote on proxy items.

Even the authors of the paper note that climate change is real. Estimates of value at risk from climate change range from over $2 trillion to over $24 trillion, and that is something investors pay close attention to. We ask for this information for the same reason we need financial reporting, which until the 1930s was not required, and companies rarely did. We need information to make reasonable and informed decisions regarding companies’ ability to add value, and the risks they face. Without information, investment performance is largely a matter of luck. Shareholders deserve better than a game of chance.

Read the original article here.