With increasing expectations on companies' ESG progress, performance and ambition, annual general meetings (AGMs) provide a perfect avenue for investors, shareholders, activists and broader community members to question, critique and bring to light the way organisations are managing ESG-related risks.

Chairs and CEOs find themselves at the frontline - explaining, justifying or even defending their ESG and climate stance to a host of investors, shareholders, activists and broader community members.

Today, ESG-related risks have evolved from their early perception as non-financial, ethical issues, to a complex set of core financial and legal risks and opportunities for businesses, governments and not-for-profit organisations. Shareholders have a right to information on a company's ESG progress and performance and ascertain how company directors are safeguarding business value by responding to these risks, such as climate change.

Additionally, with heightened regulatory scrutiny around ESG, shareholders' questions on the management of ESG risks are relevant to safeguarding a business from litigation, fines and potential extensive reputational damage.

ESG on the agenda

Questions and criticism of a company's ESG progress, performance and ambition at an AGM can vary in form – from frontline picketers and visible activism, to shareholder resolutions on climate-related disclosures, and pointed questions on particular projects or financing for non-Paris aligned activities.

One only needs to look at the annual reports of shareholder activists like the Australasian Centre for Corporate Responsibility (ACCR) or Market Forces to see the growing momentum of ESG-related (and particularly climate-related) shareholder resolutions at AGMs. Further, there have been at least 15 'Say on Climate' advisory votes put to shareholders since March 2022 across a range of industries including mining and resources, transport, infrastructure, financial services, energy and manufacturing. Say on Climate resolutions provide shareholders with a non-binding vote on the companies' annual disclosure of climate-related risks, targets and transition plans.

In examining trends at company AGMs, lines of ESG-related questioning often follow some key themes:

• Climate performance – resolutions that critique a company's general climate performance, seeking enhanced disclosures by high-emitting corporations on the robustness of their climate strategy and ambition – and progress against those metrics in real terms.
• Board and key management personnel – Many stakeholders are becoming more critical of board directors' experience and history with high-emitting corporations, and similarly, whether they carry the necessary skill to help steer a company through the transition to a net zero economy. As an added layer, stakeholders will scrutinise ties between remuneration for key management personnel and ESG-related KPIs, to ensure ESG performance is front and centre for KMP.
• Transition activities – questions that seek to clarify companies' plans to transition their activities (or financed activities) to net zero. Investors have in the past criticised companies for their lack of ambition, or the effectiveness of climate scenarios on which they have based their strategic response to climate risks.
• Business activities that contradict the Paris Agreement – shareholders are particularly critical of any new projects or financing that would contradict the Paris Agreement, such as new or expansionary thermal coal, oil or gas projects.
• The 'say-do' gap – similar to above, shareholders will question the compatibility of a company's ESG ambitions, stated plans to achieve those ambitions, and how these may be at odds with other activities the company is are undertaking.
• Human rights and social Issues – questions that speak to a company's human rights record, regarding issues such as meaningful engagement with indigenous communities; predatory behaviour to underserved communities or general corporate diversity and inclusion policies and targets.

Is your company ready for questions at your AGM?

In responding to the global momentum to transition the economy to net zero emissions, many Australian companies scrambled to sign a host of pledges, alliances and agreements to 'join the cause'. These include Equator Principles, various net zero alliances, investor groups, climate coalitions, renewable energy use pledges, accounting standards, and more. Each agreement contains a host of obligations, from first principles to hard-line commitments, which must be embedded into an organisation's operations.

For those facing questions at AGM, an understanding of both what these commitments mean, and how they are being operationalised, is critical. It is not enough to refer a stakeholder to a particular section in a 200-page annual report. Companies should be able to demonstrate complex and nuanced understanding of the commitments they have made, and should understand climate disclosures like a subject matter expert.

Moreover, if your company is engaging in activity that might contravene your ESG-related targets, or any principles contained in an agreement – you must be able to explain this. Shareholders are weary of leaning on commercial privilege as a defence, and expect more from companies regarding their activities – particularly on matters relating to ESG. If an erroneous exception has been made, it must be aired, justified or remedied as soon as possible – otherwise investors cannot be confident that such a decision won't be made again.

Additionally, while climate is a certain focus for many investors, there is also rising interest and scrutiny from shareholders on the 'S' of ESG. For example, Australia's Modern Slavery regime attributes board responsibility for producing an annual statement. As such, boards should be able to speak to a company's supply chain, and due diligence processes with expertise. Additionally, there are many issues that touch both the environmental and social dimensions – for example, factoring in indigenous consultation in the planning and development phase of a project. Moreover, issues like the use of artificial intelligence, and protecting biodiversity are also on the horizon for regulators, governments and investors alike.

How should my company prepare for its AGM?

MinterEllison can assist in preparing companies for their AGM by analysing their strengths and potential exposures, supporting the development of their AGM preparation and implementing practical solutions to prepare for the breadth of critique and inquiry that companies face.

1. Educate and uplift board capability on ESG governance and disclosures

Against the backdrop of a rapidly evolving risk context, Board members should be able to speak to an organisation's ESG-related progress, performance and ambition as well as management – if not better. Understanding the nuances of ESG-related disclosures, both from a legal, and best practice perspective, ensures that board members are able to answer thorny questions with confidence.

Moreover, understanding any gaps and issues is critical to enhancing business performance. Enhancing climate capability enables a board to closely scrutinise and uplift any anomalies in ESG-related performance.

2. Communicate an iterative approach to managing ESG including climate-related risks

While companies have developed more comprehensive responses to climate risk in recent years, companies should be careful not to treat the issue as a 'new' one – one to which your company has only recently produced a comprehensive response. Instead, they should be clear on the narrative they may have built over a number of years.

Though it is true that external pressures have increased the thoroughness of recent reporting and stoked new ESG-related products, services or initiatives services, many companies have had the management of ESG-related risks on the horizon for a number of years. Leaning on the learnings of previous work shows a level of organisational maturity, and long-standing commitment to ESG. This is appreciated over a knee-jerk approach which treats climate risk as a brand new phenomena to which a company has never previously responded.

Additionally, if recent climate-aligned activities are used to overstate a company's green credentials, then an organisation can become vulnerable to greenwashing, and attract the ire of a number of stakeholders.

3. How do you meaningfully engage with critical stakeholders?

Consider whether your organisation has a formalised approach to engage with critical stakeholders. Feedback from activist shareholders and others can provide an opportunity to inform organisational strategy and help a company transition to net zero in a politically sensitive manner.

Acknowledging, listening, understanding and responding are four distinct stages that must be covered in a company's engagement with stakeholders who are critical of ESG performance. If your critical stakeholders are an organised group, consider engagement prior to the AGM to better understand their wants or demands, and formulate an appropriate response to their critiques.

If spontaneous protesting occurs at the AGM, it is important not to overreact. Many activists play a pivotal role in championing ESG progress, and bringing attention to important causes. If bringing attention is their objective, allow them to be heard and respond in an appropriate manner. Best practice is when board directors are polite, courteous, and focus on the problem highlighted, rather than the people yelling the message.

4. Seek advice early

Preparing for an annual general meeting requires the board to be across a significant amount of information on company activity from the past year.

From an ESG standpoint, preparing this information can particularly sensitive in the context of increasing regulatory pressures, legal obligations contained in alliances and commitments, and an understanding of ESG-related litigation trends – particularly in regards to greenwashing.

Having the right information and context at your fingertips, and similarly, ensuring that your briefing documents are constructed in the right way is crucial to putting your best foot forward in light of heavy ESG criticism.

This often requires strong collaboration between internal teams, who are delivering the work, to help get the content for the messaging; while simultaneously tempering those representations with advice that helps to track external activity unfolding in the broader market, including trends in litigation, activism and even media coverage.

When gaps or vulnerabilities are identified, MinterEllison can work to protect and enhance business value by providing expert advice on how to solve complex issues – be they in the product lifecycle, ESG risk governance, strategy implementation or disclosures.