Pension Sense blog | July 13, 2021
Sometimes extraordinary things happen in the most ordinary places.
A company boardroom, for example, is typically the setting for corporate execs to create strategies, set goals, and review day-to-day business operations. It’s business as usual. This also holds true for publicly traded companies, where the board of directors meet once a year with their shareholders (the company’s owners) to review the business. Normally, the actions at these meetings create little fanfare and few front-page headlines. But this past fiscal year was anything but normal.
Because our number-one job at CalSTRS is to protect the pensions of California’s public educators, we, as a significant global investor with long-term investment strategies, take an active role at these annual general meetings. We want to make sure the publicly traded companies we’re invested in are planning appropriately for the future. This is one way we protect our long-term investments. The meetings provide a valuable opportunity for us to let the board of directors know where we stand on each agenda item. Typically, we make our voices heard by casting a vote—which in the investor world is known as a “proxy vote.”
Part of our responsibility as a co-owner of a publicly traded company is to cast our proxy votes (or “proxies”) with the same care and attention we provide to all our other investment assets. While our strategies and methods of engagement may vary with each company we’re invested in, our goal is always the same: to influence long-term value creation and sustainable business practices.
History has shown that our engagement activities, including proxy voting, have resulted in stronger relationships with our companies and better financial outcomes. We currently own stock in more than 9,000 companies and our portfolio is valued at over $300 billion. And because we are an involved and responsible shareholder, we vote by proxy at each company’s annual general meeting. In fact, this past fiscal year we cast more than 101,000 proxy votes.
In the United States, these annual general meetings are primarily held in April and May, hence this busy period of the year is referred to as “proxy season.”
Not a normal proxy season
This fiscal year, perhaps more than any previous year, it has become readily apparent that financial performance and climate change have become inextricably linked. You don’t have a winning performance strategy if you haven’t adequately planned for the future, and that means addressing climate change, which is widely accepted as the greatest threat to our future. That is the message we shared via our votes at many companies this proxy season. Our actions not only upended some boardroom meetings in unprecedented ways, they have captured the attention of the media, other investors, climate-change activists and many more.
Here are two standout examples of how proxy votes made a difference this season:
ExxonMobil, one of the world’s largest energy companies and a part of our investment portfolio since Exxon and Mobil merged in 1999, has failed to develop a strategic business plan that will address the global transition from highly polluting energy sources (such as fossil fuels) to cleaner forms of energy (such as those with lower greenhouse-gas emissions). At their annual general meeting in May 2021, there was a board of directors election. Year after year, these elections have been uncontested and the standing board members are reelected or they essentially hand-pick their successors. Business as usual. This time, however, the company’s shareholders let the board know it was time for change.
A small investment-management firm called Engine No. 1 decided to promote an impressive alternate slate of nominees for ExxonMobil’s board of directors, and we were the first in line to support their candidates. We cast our proxy votes in favor of the proposed new directors and so did the majority of the other shareholders. Much to the surprise of ExxonMobil, three of the four Engine No. 1 nominees won. This was an extraordinary turn of events that continues to attract global attention.
We believe these new directors can help the company better prepare for a future that is less reliant on fossil fuels and kinder to our planet—and we will continue to monitor their progress.
For several years, we have been collaborating with an investor-led initiative called Climate Action 100+ and our shared mission is to ensure the world’s largest corporate greenhouse-gas emitters effectively address climate change. In 2018, we became a co-lead investor of the Climate Action 100+ engagement with Phillips 66, a U.S.-based energy company.
While Phillips 66 has made some efforts to discuss climate-related issues with investors, it has failed to comprehensively disclose its governance and strategic plans for managing climate change impacts. The company also has not disclosed specific goals for reducing greenhouse gas emissions, which is in direct contrast with energy companies and other businesses that have already announced their target dates for achieving net-zero emissions (that is, removing all human-produced greenhouse gas emissions from the atmosphere through reduction measures).
Small commitments to climate action are no longer enough; to underscore that point we filed a shareholder proposal requesting Phillips 66 to evaluate and report on how its lobbying activities align with the goals of the 2015 Paris Agreement. At their annual general meeting in May 2021, a majority of the Phillips 66’s shareholders supported our proposal: 62% cast their proxy votes in our favor. This was a great victory and will help drive Phillips 66 to take more effective action and further align its business strategies with the Paris Agreement.
The power of engagement
The 2021 proxy season has been a record-breaking year for various shareholder resolutions, particularly environmental, social and sustainable governance investment issues. As the largest educator-only pension fund in the world, we have the power to make changes through our engagements with even the most resistant companies. We are a long-term investor and we will be focusing on climate-change issues for the long haul. Our efforts not only prepare us for the future, they help maximize our investment returns for California’s public educators for years to come.