Case study by LGS

Investor: Local Government Superannuation Scheme (LGS)
HQ: Sydney, Australia
Operations: Asset owner
USD AUM: $8.3 billlion

What was asked of Rio Tinto

Voted on at the AGM held on 2 May 2018, the resolution asked for Rio Tinto Ltd (RIO), listed on the Australian Securities Exchange (ASX), to provide a report on the climate and energy advocacy position of third-party industry groups that RIO funds to see whether they differ from RIO’s own stated and formal commitment to meeting the Paris Agreement. It was asked that the report includes the criteria that RIO would use to assess discontinuing membership of any industry group whose position is staunchly contrary to that of RIO.

The resolution was filed by the Australian Centre for Corporate Responsibility (ACCR), alongside the main co-filers: LGS, AP7 and the Church of England Pensions Board. Before the AGM, significant global investors with a combined AUM of approximately US$3.5 trillion had publicly announced that they were supporting the resolution.

LGS’ perspective

LGS chose to co-file on this resolution for the following reasons:

1. RIO has multiple acute high ESG risk issues to address and investors’ previous engagements have not met expectations.

As such, the next step was to lodge a reasonable, governance-focused resolution at the 2018 AGM.

2. RIO’s climate change disclosure has been inconsistent, incomplete and less than the standards of its industry peers.

LGS supported the Aiming for A shareholder resolution at RIO’s 2016 AGM. However, from monitoring RIO’s climate reporting since then we held concerns about its commitments to these strong reporting standards. For example, RIO’s CDP report stated involvement in 11 industry groups, in its public report there were four and at its AGM it said it was involved in hundreds.

Additionally, there was no specific mention of adopting the Task Force for Climate-related Financial Disclosures (TCFD) framework or reporting on industry group association activities. RIO’s main competitor, BHP Billiton, volunteered a similar reporting on lobby groups in 2017 following investor engagement.

3. LGS signed up to the PRI’s 2015 statement entitled Investor expectations on corporate climate lobbying.

Payments to industry lobby groups may seem immaterial from RIO’s P&L perspective; however, in line with this investor expectations statement, LGS believes that lobbying influence is pervasive in the transition to a low-carbon global economy under the Paris Agreement, to which RIO has a formal commitment. For example, in Australia, RIO provides significant funding to industry groups, such as the Minerals Council of Australia, whose strident pro-coal policy advocacy position has helped create the prolonged energy and climate policy stalemate in Australia.

As such, shareholder risk from RIO’s membership can arise from:

  • ineffective governance over the industry group activities, which can result in the accusation of greenwashing with negative reputation impact;
  • contributing to the deterring of the much-needed investment in new energy generation across Australia (and globally); and
  • the resulting political deadlock in turn has been associated with the recent strong increases in electricity prices.

More broadly is LGS’ shareholder value concern as a long-term highly diversified investor. Over the last year we have witnessed a doubling of Australian wholesale electricity prices. This has created an additional cost on Australian business and industry of some $4 billion per annum. This causes negative flow-on effects for Australian companies’ profitability, debt servicing as well as our country’s trade competitiveness and economic growth. Additionally, there is the cost for Australian households, the members on behalf of whom LGS invests. In total, Australians are paying $6 billion more for electricity than they were a decade ago.

Company response and outcomes

The following was observed leading up to RIO’s AGM:

  • While the co-filers did get multiple meetings with the company’s chair and executive, LGS found RIO’s response to be drawn out and at times not fully cooperative. It was felt that RIO would not actually address the substance of the request and was underestimating the extent of the concerns around lobbying activities.
  • RIO did not allow the resolution to be heard at the Rio Plc AGM (only the Rio Tinto Ltd AGM), causing disquiet among investors that they were not being treated equally.
  • RIO drip fed commitments in reporting seemingly after feedback from selected investors. This was not viewed as good governance practice and the commitments fell well short of the original reasonable request. This galvanised the views of investors behind the resolution.

In the end, over $4 billion of RIO’s registry, or 20% of votes, supported the resolution. This was by far the most significant for vote for a non-board endorsed shareholder resolution in ASX history and it sent a strong signal to the RIO board.

LGS’ expectations going forward

Following the AGM, it is now crucial to monitor RIO’s reporting and governance of its industry groups, especially given that the company appeared to be close to agreeing to the request that the co-filers originally sought by the end of the AGM negotiation process. Going forward, LGS has encouraged RIO to adopt leading practices in climate change reporting which proactively and strategically responds to changing standards and expectations. With the strong representation of investors on this resolution, LGS is hopeful that RIO will better appreciate the shareholder concern around this area.

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    Converging on climate lobbying: aligning corporate practice with investor expectations

    May 2018