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The recent dispute between responsible investment charity ShareAction and HSBC Holdings plc (HSBC) over the ‘spirit’ of a climate change resolution has highlighted the importance of shareholder engagement and, more specifically, the need to ensure that both management and shareholders are on the same page with regards to not only what resolutions state, but also the intent that lies behind them. As the 2022 AGM season begins in earnest, this is something that companies and investors alike will need to keep in mind, especially given that ESG resolutions are expected to be a hot topic this year. Shareholders are unlikely to look kindly on companies that—deliberately or not—interpret resolution wording to the ‘letter’, to the detriment of a resolution’s spirit.

The ShareAction-HSBC dispute

On 22 February 2022, ShareAction HSBC of ‘breaching the spirit of the agreement’ that the charity had settled with the FTSE 100 bank back in March 2021. Although ShareAction’s senior campaign manager, Jeanne Martin, welcomed HSBC’s of an absolute target for the oil and gas sector in its , she questioned HSBC’s decision not to include targets relating to its capital markets activities, which constitute the bulk of the bank’s financing to the sector. As a result, she considered the limited nature of the climate disclosures ‘to be a breach of the spirit of the agreement that was reached with HSBC, ShareAction and investors in March 2021’.

The initial agreement was the result of considerable pressure from a consortium of investors led by ShareAction ahead of the HSBC’s 2021 AGM, which saw the consortium a resolution calling on the bank to set and publish a strategy and targets to reduce its exposure to fossil fuel assets on a timeline aligned with the goals of the Paris agreement. In addition, the resolution demanded that HSBC ‘disclose progress against its targets and strategy in its annual report on an annual basis, starting from 2022 onwards, including a summary of the framework, methodology, timescales and core assumptions used’.

After what HSBC termed as ‘constructive and extensive dialogue and engagement’ with ShareAction and other co-filers of the shareholder requisition resolution, the bank to the pressure of its investors and agreed to table its own resolution at its 2021 AGM on the subject in return for the withdrawal of the initial shareholder requisitioned resolution. HSBC’s resolution, which more than 99.7% support from investors, was as follows:

‘THAT, to promote the long term success of the Company, given the risks and opportunities associated with climate change, the Company should:

(a) Set, disclose and implement a strategy with short and medium term targets to align its provision of finance across all sectors, starting with Oil & Gas and Power & Utilities, with the goals and timelines of the Paris Agreement.

(b) Publish and implement a policy to phase out the financing of coal-fired power and thermal coal mining by 2030 in markets in the European Union/Organisation for Economic Cooperation and Development, and by 2040 in other markets.

(c) Report on progress against that strategy and policy on an annual basis, starting with the 2021 Annual Report and Accounts, including a summary of the methodology, scenarios and core assumptions used. This reporting will omit commercially confidential or sensitive information and will be at reasonable cost.’

The resolution’s wording bears considerable resemblance to the consortium’s withdrawn shareholder requisitioned , and it seems that the consortium was pleased with the letter of the resolution, ShareAction its passing in the aftermath of the vote.

However, somewhat prophetically, the charity warned that ‘the devil is in the detail and the next six months are crucial to ensure that this commitment is translated into robust sector policies’. Once HSBC’s climate targets were released in its , ShareAction was not the only one to believe that the spirit of the resolution had been sacrificed on the altar of a narrow interpretation of the resolution’s wording. Climate change activist group Market Forces was similarly unimpressed, HSBC’s new climate change targets ‘an insult to all who value a stable long-term climate’—its UK Campaign Lead, Adam McGibbon, even going as far as to ‘congratulate HSBC for finding a new and innovative way to fudge their emission reduction targets’.

The activist group not only highlighted the omission of capital markets from the bank’s climate, but also argued that HSBC’s climate targets contained ‘a range of loopholes that undermine their credibility’, including that:

• ‘The policy still allows HSBC to finance new and expanded oil and gas projects and their owners, despite the International Energy Agency (IEA)’s conclusion that meeting a Net Zero by 2050 target means that no new coal mines, plants or oil and gas fields can be permitted as of last year…

• The policy defers setting detailed targets for other sectors – including coal – until 2023, further delaying a transition despite the need for a rapid shift away from fossil fuels.

• The policy is “focused on upstream companies, and integrated or diversified energy companies.” This risks omitting oil and gas companies focused on the midstream (e.g. pipelines) and downstream (e.g. refining, storage) sectors.

• Its Power and Utilities emissions target is based on emissions intensity, which is no guarantee of absolute emissions reduction from power plants and their owners.’

In response to the criticism, HSBC’s Chief Sustainability Officer, Celine Herweijer, on 25 February 2022 that the bank hoped to disclose targets for capital markets in the future ‘once the industry standard for financed emissions—the (PCAF)—has launched its methodology for accounting for capital markets activities later this year’.

However, this vague statement was unlikely to satisfy ShareAction, with Martin stating that: 

‘The IEA [(International Energy Agency)] last year made clear that net-zero by 2050 means no new fossil fuels. HSBC’s decision to ignore this warning should raise red flags about the bank’s commitment to net-zero. HSBC is Europe’s largest provider of financing to top oil and gas expanders such as Saudi Aramco and ExxonMobil. Expecting these companies to stop investing in new fossil fuels because HSBC gently asks them to is simply not credible. HSBC should restrict financing for new fossil fuels – and do so now.’

The Ghost of Resolutions Passed

This ShareAction-HSBC dispute highlights questions of interpretation in relation to resolutions put forward by management, especially if such resolutions are the result of laborious—and often contentious—engagement processes between companies and their shareholders. How does a company’s management ensure that it is on the same page as its shareholders with regards to the ‘spirit’ of a resolution? This is particularly important if the shareholder in question has withdrawn its owns shareholder requisitioned resolution to make way for the management version. Moreover, if it transpires that both had differing interpretations of this ‘spirit’, what recourse is available to shareholders beyond holding the company to account at its next AGM?

On this latter question, Alex Cooper, Corporate/Finance and Climate Change Lawyer for the Commonwealth Climate and Law Initiative (CCLI)*, had the following to say:

‘When a company follows the letter of a binding resolution but ignores its ‘spirit’, it should expect its commitments and statements to be subject to increased scrutiny by shareholders, who may consider greenwashing claims. Where, as with the HSBC resolution, the actions required are “to promote the long term success of the company”, shareholders may view the failure to meet the “spirit” of that resolution as indicative of a failure by the board to fulfil its fiduciary duties in the context of climate change.

When a company has not completely ignored a resolution, the risk of litigation may be small, but it should expect to face increased shareholder activism. A large number of climate-related resolutions have already been proposed in 2022, and, as seen during the 2021 AGM season, directors may risk losing re-election votes if their companies are seen to be avoiding action on climate change.’

HSBC’s preference for the letter over the spirit is not without precedent. In its , under its approved 2016 remuneration policy, the bank allowed its incumbent executive directors to continue paying 30% of their salary in lieu of a pension entitlement. This is despite the fact that the 2018 UK Corporate Governance Code (UCGC 2018) for pension contribution rates for executive directors to be aligned with those available to the workforce.

Initially, HSBC had that only new executive directors would see their pension entitlement capped at 10% (in line with the average of its workforce). However, following pressure from investors, who believed that the bank was ignoring the spirit of the new UCGC 2018 rules, HSBC stated that it would take ‘into account recent developments in market practice and shareholder expectations’, and ensure that the pension allowances of incumbent executive directors would also be capped at 10%. The bank announced these changes to its new remuneration policy ahead of its 2019 AGM in an effort to nip a growing shareholder revolt in the bud, with the result that 97.4% of votes were in its favour.

The above example not only illustrates how a company can ignore the spirit of new rules to protect the interests of their existing executives, but also how investor pressure can be brought to bear in order to ensure that the spirit is acknowledged, albeit retrospectively, by the company. However, it does also highlight the limitations of shareholder engagement. It is unlikely that HSBC would have budged had a shareholder revolt not been brewing against its new remuneration policy, which is only voted on every three years, at its upcoming AGM.

That’s the spirit

In its recent activity, ShareAction seems to have learned from its HSBC experience. On 6 March 2022, ShareAction that it was successful in its shareholder campaign to ensure that Unilever plc (Unilever) used independent benchmarks when reporting on the healthiness of the food it sells following months of engagement between the company and another investor consortium led by ShareAction. In response to shareholder pressure—and on the prerequisite that the consortium its shareholder requisition resolution—Unilever agreed to publish annual assessments of the healthiness of its products on a global basis, as well as for 16 key strategic markets, in line with government-endorsed nutritional criteria. The first report is to be disclosed in October 2022. ShareAction noted the following in its press release:

‘S�󲹰��𴡳��پ��Dz�’s investor coalition will have a key voice in this ongoing process. Having withdrawn the resolution in acknowledgement of Unilever’s commitments, the group has indicated they will explore the possibility of further action if the expected outcomes are not met.’

More recently, ShareAction a shareholder requisitioned resolution alongside eleven institutional investors, including some of Switzerland’s largest pension funds, calling on Credit Suisse to ‘improve its climate risk disclosures, bring its coal, oil and gas policies in line with leading practice in the sector, and publish short- and long-term targets to reduce its exposure to coal, oil and gas assets, on a timeline consistent with the 1.5C goal of the Paris Agreement’.

The reads as follows:

Add an article 8.d to the articles of association as follows:

Article 8d Climate change financing

1. The management report submitted to shareholders should contain, in addition to information on the Company’s performance and activities during the past financial year and the other elements required by the provisions of the laws and regulations in force, additional disclosures on the Company’s strategy to “align [its] financing with the Paris Agreement objective of limiting global warming to 1.5°C”.

2. The report should include additional disclosures on the Company’s short-, medium-and long-term steps it plans to take to reduce its exposure (defined as project finance, corporate lending, capital markets underwriting and facilitation, and investments) to coal, oil and gas assets on a timeline consistent with its own alignment objective.

The fact that the investors felt the need to define additional areas of disclosure (including capital markets), given the limited nature of HSBC’s climate disclosures, is quite telling. If the resolution passes, Credit Suisse will have little room to manoeuvre, as even if the Swiss bank chooses to interpret the resolution to the letter, this will not be enough to circumvent such specific wording. As investors become ever more sophisticated with regards to the putting forward of such resolutions, it is likely that opportunities for companies to ignore the spirit through narrow interpretations of resolution wording will become increasingly rare.

The saga continues

During February 2022, the consortium led by ShareAction  a new shareholder requisitioned resolution calling on HSBC to:

• 'Close the loopholes in its coal phase out policy;

• Identify phase out dates for unconventional oil and gas (oil sands, fracking, and ultradeep water) and Arctic oil and gas;

• Update its definition of the Arctic in line with the Arctic Monitoring and Assessment Programme (AMAP);

• Publish a public set of core red lines and decarbonisation expectations for the assessment of the transition plans for major oil and gas producer clients

• Set out a clear escalation plan to outline the steps that HSBC will take if clients fail to meet the minimum thresholds for their transition plans with an established deadline in place;

• Cease financing for any new oil and gas projects.'

On 17 March 2022, ShareAction revealed that the consortium withdrew the resolution following new promises from HSBC, including to ‘update the scope of its fossil fuel targets to cover capital markets activities by Q4 2022’ and  a Climate Transition Plan during 2023. However, the consortium warned that ‘it will take further action in 2023 if unsatisfied with the bank’s implementation of its commitments’.

As the 2022 AGM season begins in earnest, it will be interesting to see if there is any wording on these promises set out in HSBC's Notice of AGM, which is to be disclosed on 25 March 2022. 

*The is a project examining the legal basis for directors and trustees to take account of physical climate change risk and societal responses to climate change under prevailing statutory and common laws in Australia, Canada, South Africa, and the UK. For more information on the CCLI’s approach to climate change, see its on Directors’ Duties and Disclosure Obligations, produced in collaboration with the Climate Governance Initiative.