Impact Climate Change: rise of shareholder activism and board responsibility in the Netherlands

The COVID-19 pandemic has increased the awareness of sustainability and climate change at listed companies, many of which have found that a positive ESG-policy and relationship with stakeholders signficantly impacted business during the pandemic. The pandemic made clear what kind of extreme impact and disruption can be caused by external circumstances. It also widened the gap between company performance, which experienced relatively weak share-price performance. According to a report of Alvarez & Marsal (A&M) ‘Activist Investors in Europe: Who Will they Target Next?’, there will be a signficant rise in investor activism due to low valuations on one side and ESG concerns on the other.

A hot topic in the boardrooms of many Dutch and European companies, shareholder activism is when minority shareholders use legal, strategic and publicity means to promote their interests in listed companies. Because most shareholders do not actively exercise their shareholder rights (e.g. the right of control), much can be achieved even with an equity interest of less than 5%. Research shows that despite the lack of mandatory regulation and the use of shareholder proposals, shareholders in the Netherlands increasingly care about ESG issues and in particular environmental matters. For example, many big institutional investors (and shareholders) like ABP, Aegon Asset Management, APG, NN Investment Partners and Robeco are part of Climate Action 100+, which is a five-year initiative designed to engage important greenhouse gas emitters and other companies that are able to drive the clean energy transition and help achieve the goals of the Paris Climate Agreement. Most Dutch companies publish full transcripts of their general meetings, providing a unique opportunity to evaluate the developments that each company has made vis-à-vis corporate sustainability. For example, since 2018, there has been an increase of ESG claims against European corporates by a factor of 2.5 times.

Through strategy and remuneration policies, shareholder activism can have a positive impact on the value, performance and  decision-making of  a company. Shareholders increasingly call for companies to address ESG issues (e.g. climate change) and for non-financial criteria (e.g. energy transition) to be included in the remuneration policy. Shell is one company that has made big steps in this direction by including energy transition targets in its long-term remuneration policy based a constructive dialog with its shareholders.

This is an interesting development, given that shareholders usually opt for profit and high stock value in the short term, while the company benefits more from a long-term strategy. This new form of shareholder activism underscores the urgency for creating more long-term opportunities and better long-term strategies to make business more sustainable.

Shareholders have multiple tools to make a mark on the ESG performance of Dutch companies. The most prominent of these tools are discussed below.

Shareholder activism generally starts with the shareholders engaging in a dialogue with the boards of the company in a private setting. This could take the form of informal one-on-one discussions with  the company’s board (or CEO) to discuss strategy and measures to maximise shareholder value, or by putting items on the agenda for shareholder meetings.

In order to influence a company from within, some organisations become shareholders solely for this purpose.

The impact of climate change on companies and vice versa were the main topics discussed at shareholder general meetings in the Netherlands this year. For example, at the request of a number of institutional investors, including Dutch asset managers Aegon asset management and Robeco, LyondellBasell included two climate-related discussion items on the agenda of their 2021 general shareholders meeting. The shareholders wanted to exchange views with the board and other shareholders about the company’s climate goals and strategy, and requested that the company’s climate strategy be submitted to the general meeting for an advising annual vote: they wanted to have their ‘say  on climate’.

The downside to this tool is that the board can be reluctant to go along with the requests of shareholders at general meetings. For example, in response to the agenda item that the shareholders proposed, the board of LyondellBasell stated they did not think the general meeting was the appropriate forum in which to discuss the company’s climate goals and strategy. (They preferred one-on-one discussions with shareholders.) They also said they saw no point in an annual vote on climate strategy. The request for a ‘say on climate’ was raised for discussion at the general meetings of multiple Dutch companies and received a lukewarm response. ING-Group and Signify stated that they already had an ongoing dialogue with their shareholders about climate strategy. And the board of DSM stated that its integrated sustainability strategy made it inappropriate to submit one topic from that strategy (i.e. climate change) to the general meeting for an advisory vote. Only Heineken committed itself to investigate the shareholders’ proposals.

When shareholders are not satisfied with a company’s response to issues raised in private discussions or the general meeting, a public campaign may be a necessary result. Typically, this includes the use of traditional media and social media, and initiating “name and shame” actions in order to force the company into action. This can also include teaming up with other shareholders  and institutional investors and gaining support from the investor community at large by publishing investor presentations or setting up websites dedicated to the campaign.

Activist shareholders are analysing how boards and management teams oversee environmental and social performance, how ESG oversight is allocated among board committees, and whether a board has sufficient expertise in environmental issues. Such themes include calling for enhanced director independence, separation of the CEO and board chair roles, declassification of the board and even the resignation of the CEO.

When all else fails, shareholders can turn to litigation, which occasionally happens in  the Netherlands.
Shareholder litigation typically takes place in inquiry proceedings before the Enterprise Chamber (Ondernemingskamer), a chamber of the Amsterdam Court of Appeal specialised in corporate proceedings. A shareholder holding sufficient shares, either alone or jointly with other shareholders, can initiate inquiry
proceedings at the Enterprise Chamber and request that the Chamber order an inquiry by independent, court- appointed investigators into the company’s policies. The Chamber can order several measures to address the issues at hand, such as dismissing a controversial director or appointing a third ‘super’ director.

For activist shareholders in the Netherlands, the attraction of such an inquiry is its comparatively low expense. Since the proceedings before the Enterprise Chamber are relatively quick and informal and the company (in the first instance) pays the costs of the inquiry, launching an inquiry to change corporate policy can be relatively low-cost in relation to the effect it may have.

Increasingly, Dutch courts are also enforcing actions against climate change. The Royal Dutch Shell case was the first time in history a court held a large company directly responsible for having a dangerous impact on climate change. The ruling was based on duty of care, flowing from international treaties such as the 2016 Paris Climate Agreement and the Dutch Corporate Governance Code. The court eventually ordered Shell to lower emissions by 45% by the end of 2030. Although not initiated by shareholders, this case shows the active role Dutch courts have taken in enforcing action against companies that do not meet their international treaty obligations.

Over the years, activist shareholders have been forced to shift their approach from staging confrontations with companies about strategies at general meetings (e.g. by proposing agenda items), to engaging privately and publicly with boards (not least through litigation).

It is expected, however, that institutional investors will continue to insist on a clear strategy to reduce greenhouse gas emissions during operations and the production chain, and to include targets, progress reports and periodic evaluations as to whether climate strategy needs to be tightened in response to internal and external events. Additional  corporate  disclosures  on  environmental and social issues can provide these shareholders with a substantial amount of new material to use in their campaigns. Consecutive editions of sustainability reports issued by companies over the course of several years will provide investors with the ability to compare the ESG performance of companies over time and with other companies.

In the Netherlands, when preforming their duties directors and supervisory officers must direct their attention
on the interests of the company and of the enterprises connected with it. This principle has been explicitly implemented in Dutch law since 2013.

This responsibility means that directors and supervisory officers have to pursue the continued long-term success of the company and, in doing so, must take into account the interests of all stakeholders of the company and its business, including employees, shareholders, suppliers, customers and creditors.

Over the past decade, this focus area of directors and supervisory officers has apparently been broadened  from the company and its direct stakeholders, to the company having a duty of care to implement social and environmental issues in its business conduct. Dutch Corporate Governance Code 2016, which is applicable to listed companies based in the Netherlands, states that the management board, when seeking long-term value creation strategies, should pay attention to environment and socially focused matters among other issues.

In order to retain the sympathy of consumers and investors over the long run, companies must already focus on sustainability. The COVID-19 pandemic accelerated this focus on sustainability among consumers, media and investing public. The dilemma for the board is that the investment and financing involved with the transformation towards a sustainable business model will impact profitability and competitiveness in the short term. Companies are waiting for the appropriate financing and tax facilities & laws from the EU and local government.

For the financial sector, the first step to answer this call was taken in March 2018, when the European Commission adopted the Action Plan on Financing Sustainable Growth. The Action Plan has three objectives:

• to reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth;
• to manage financial risks stemming from climate change, environmental degradation, and social issues; and
•  to foster transparency and long-termism in financial and economic activity.

Regulations following the Action Plan include the EU Taxonomy Regulation (EU Regulation 2020 / 852), which sets down a unified EU classification system with harmonised criteria for determining whether an economic activity is environmentally sustainable; and the Sustainable Finance Disclosure Regulation (EU Regulation 2019 / 2088), which sets out rules on transparency and requires financial-market participants to  disclose how  they consider sustainability risks in their investments. As a result of these regulations, ESG principles will be embedded in legislation. This development reveals that the era is over where companies are non-committal about whether to adopt adequate ESG or climate change policies. Stakeholders (e.g. active shareholders) and also external public interest groups should pay close attention to the steps companies are taking to address environmental and social matters. At the same time, regulators are in the process of implementing ESG principles into legislation.

The result is that companies, and possibly also managing directors, face additional litigation exposure. There
is a growing number of pending cases concerning ESG principles being initiated against companies across the globe. To avoid such claims and to be prepared for risk management in relation to new legislation, management boards will have to consider taking responsibility by implementing protocols and taking relevant measures (e.g. informing investors on how ESG principles are implemented in the company’s business conduct) while pursuing the long-term success of the company. Rather than being reactive, directors and officers must be ESG- conscious, if only as a strategy to avoid potential disputes.

The COVID-19 pandemic, with its significant impact on stock value and ESG awareness, will accelerate  the rise of shareholder activism and litigation initiated by external public interest groups with regard to ESG principles such as climate change. In view of the costly transition towards new, sustainable business models and the potential disadvantages faced by first movers, there is a tension in companies between the desire for profit  in the short term versus success in the long run. As this development is rapidly evolving, shareholders and investors are expected to target companies, directors and officers with more litigation. As a result, directors and officers must take action to anticipate this shareholder activism and litigation. At the same time, boards must be aware of on-going legal and social developments and accept higher responsibility in managing new risks in relation to climate change.