Shareholder activism: how to fight climate change denialism on boards

Corporate Australia must learn to better engage with shareholder activists – especially around climate change – before it’s too late, UNSW Business School research shows.

Since 2010, the pool of funds deployed in shareholder activism campaigns around the world has quadrupled from approximately US$50 billion ($73 billion) to more than US$200 billion ($291 billion).

In Australia, there exist a handful of Australian shareholder advocacy organisations that engage with significant fossil fuel companies about the inconsistency between our profit models and a safe path, across areas of environmental, social and governance issues (ESG).

But with the window for meaningful action on climate change closing fast, shareholder activism is likely to intensify further, and businesses need to engage with advocacy organisations in a meaningful way.

A recent study by Conor Clune, Senior Lecturer in the School of Accounting at UNSW Business School, sheds new light on how business can work with shareholder advocacy organisations to create positive change.

What makes shareholder activism effective?

As part of the goals surrounding sustainable development, several frameworks focused on Corporate Social Responsibility (CSR) have emerged to encourage companies to adopt more stringent CSR management and reporting practices. These included reporting frameworks, such as those designed by the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC), and management frameworks like UN global compact.

But these frameworks remain voluntary. This is leading a growing movement by civil society – advocacy organisations such as the Australasian Centre for Corporate Responsibility (ACCR) – to police the adoption of the principles and practices embedded in these frameworks by companies, says Dr Clune.

In a recently published co-authored paper: Framing Engagement that Resonates: Organising Advocacy for Corporate Social and Environmental Accountability, Dr Clune explores how such organisations can work collaboratively with companies to improve the adoption of these frameworks.

The authors explain how organisations primarily use benchmarks to pressure companies to improve reporting and management in this space on topics like supply chain transparency, tax transparency, responsible investment in the pension fund and insurance sector.

While research has shown that an increased number of advocacy organisations operate in this space, questions remain about how and why they are useful. Dr Clune’s recent paper examines this research gap by finding how advocacy organisations organise engagement around CSR management and reporting, and exactly when and why such commitments prove successful.

Given the central role these frameworks play in influencing how advocacy organisations promote the implementation of CSR management mechanisms, Dr Clune says it is surprising how little research examines their development.

How to achieve mutually desirable outcomes

In their paper, the authors examine the internal activities of a Dutch advocacy organisation VBDO, and their findings illustrate that VBDO is able to challenge companies to improve CSR policies successfully.

How? The paper identifies that VBDO bases its engagement on CSR issues that are topical and that companies are already struggling to address. “So when VBDO approaches companies on these issues, they are generally receptive,” says Dr Clune.

Also, their engagement mechanisms are constructed using the best-practices that existing CSR frameworks propose. “So companies recognise that VBDO is not creating standards it suggests companies adopt. Instead, it is seeking to police, through its engagement, practices developed by the UN or other supra-national organisations,” continues Dr Clune.

Interestingly, VBDO also allows companies to hold itself (VBDO) accountable for its action. “This again is not always the case in this space. So essentially there was mutual accountability operating here which was crucial for companies to trust VBDO,” adds Dr Clune.

So the advocacy organisation can establish mutually desirable outcomes at the start of its engagements, and from there work on achieving a goal.

Finally, VBDO works closely with (and supports) CSR managers who often struggle for legitimacy for their actions within companies, explains Dr Clune. “This saw VBDO secure an ally within the company it was engaging which proved important for change to materialise,” he says.

The authors argue that increased attention should be placed on how companies respond to engagement processes instigated by advocacy organisations, in the bid to improve the adoption of CSR reporting and management processes across businesses.

Climate change remains the biggest challenge

In Australia, advocacy organisations like the ACCR promote informed shareholder engagement and advocacy for more just and sustainable corporate activity. But of all the issues it faces, Brynn O’Brien, Executive Director at the ACCR, says climate change is the most urgent.

“Climate change, as a systemic issue, is the biggest threat to everyone and we are not doing enough to lower emissions. We see that as the biggest threat to the financial system and investment sector in particular because of its systemic nature, and so our conversations are about essentially trying to manage the investment sector’s ability to manage risk,” says Ms O’Brien.

“The window of tolerance for high emitting activities is rapidly closing. So, our engagements with companies are becoming more urgent, and we’re taking more significant changes to their business models,” she adds.

But there is another systemic issue that Ms O’Brien says is hindering engagement and progress. “There is a bias in the investment sector towards trusting boards of companies and backing them, even when the evidence is that the boards can’t be trusted to transition or to manage an area of risk well.”

“Trying to overcome those biases and that practice is a challenge for us, but we are increasing our ability to do that,” says Ms O’Brien.

For the full story on How businesses should manage shareholder activism, visit BusinessThink.

/Public Release. The material in this public release comes from the originating organization and may be of a point-in-time nature, edited for clarity, style and length. View in full here.