Some ESG critics may be tempted to see falling average support for shareholder proposals this past proxy season as a sign of declining interest. Ben Maiden says industry professionals see a different picture
The 2022 proxy season has had a touch of the Rorschach test about it, based on some of the headline figures from voting on the year’s ESG-related shareholder proposals.
According to a report from Proxy Impact, the Sustainable Investments Institute and As You Sow, the six months to the end of June saw a record-breaking 282 votes and 34 majority votes (equal to the same period last year) backing ESG shareholder proposals seeking disclosure and action from US companies. This backs the widespread narrative of recent years that ESG-linked investing and pressure on companies to meet expectations on issues such as climate change and diversity continue unabated.
On the other hand, data from Diligent (see Average support for ESG proposals) shows that although record numbers of environmental and social shareholder proposals reached proxy statements, average levels of support were lower this year. Environmental proposals received an average of 33.6 percent of votes cast, down from 41.2 percent in 2021. Social proposals in the first six months of 2022 received an average of 24.7 percent of votes cast, down from 36.2 percent last year.
Some observers might see these figures as evidence investors are losing focus on ESG matters amid the war in Ukraine, supply-chain crises and broader economic uncertainty, as well as pushback from some lawmakers.
Behind the numbers Professionals from both the shareholder advocacy world and corporate advisory firms see more than the numbers, however. The record number of proposals getting to votes at AGMs this year reflects continued activity from the proponent community, they note.
Importantly, this also follows the guidance update from the SEC’s division of corporation finance last fall on the process – under Rule 14a-8 – through which it decides whether to give no-action relief to companies that seek to exclude shareholder proposals from their proxy statements.
The division rescinded three staff legal bulletins that had been introduced during the Trump administration in a move widely seen as making it less likely that it would grant such relief, in turn meaning that a wider array of ESG proposals would make it onto proxy statements.
This was indeed the result, professionals say, and it meant some proxy statements featured resolutions seeking to place prescriptive or far-reaching demands on companies – resolutions the SEC would have allowed companies to exclude in previous years. This includes proposals asking for concrete steps to reduce greenhouse gas emissions, such as by ceasing to underwrite or finance projects, rather than simply seeking disclosures around the risks issuers face from climate change or their targets.
Hannah Orowitz, Georgeson
Observers also note that there has been a growing openness among companies – including their IR and governance teams – to negotiate with proponents, thereby potentially having resolutions withdrawn rather than go to a vote. The result is that proposals making it as far as AGMs are more likely to include more prescriptive resolutions that companies are unwilling to reach an agreement on and investors are less likely to support, even if they address the same areas of concern as other proposals they favor.
This argument gained additional currency when BlackRock in late July issued a report on its proxy voting during 2021-2022. The asset manager this proxy year supported 22 percent of the environmental and social shareholder proposals it voted on globally, down from 47 percent last year.
The report’s authors write: ‘Whereas last year we saw climate-related shareholder proposals that addressed material business risks and often requested reports providing information... in 2021-2022 [BlackRock Investment Stewardship] observed and assessed several notable themes that ultimately reduced our support for some shareholder proposals.
‘For instance, such proposals sought decommissioning fossil fuel assets, elimination of financing and insurance underwriting for fossil fuel projects and cessation of fossil fuel exploration and development. Many of these more prescriptive proposals attracted lower levels of investor support more broadly.’
Not all on the same side Another factor contributing to lower average support for environmental and social proposals is thought to be an increase in conservative proposals. Research from Georgeson finds twice as many proposal submissions that are critical of the ESG landscape: 52 in 2022 compared with 26 in 2021.
Hannah Orowitz, senior managing director and US head of ESG with Georgeson, notes that some of these conservative proposals appear similar to other ESG-related proposals but that their supporting statements indicate a different perspective, although other resolutions are more clearly differentiated in their language.
Some professionals have questioned whether investors might mistakenly vote for those proposals that seem similar, but they appear to have attracted less support than their ESG-supporting counterparts. According to Georgeson, 43 conservative proposals went to a vote, garnering an average support of 9.5 percent. Such results would help lower the overall average support for proposals filed under the ESG umbrella.
One takeaway, Orowitz suggests, is that it may help investors identify proposals critical of ESG if companies disclose the names of proponents in their proxy statements, something they are not currently required to do.
Danielle Fugere, As You Sow
Social issues Orowitz also notes a ‘thread of equity considerations’ in social-related proposals that were approved this past season, including two targeting pay gaps. One area that has seen a boom entails proposals seeking racial equity or civil rights audits.
SOC Investment Group, working alongside the Service Employees International Union, was the prime mover behind such proposals when they first appeared in 2021. Between them they filed such measures at eight major financial institutions last year and the proposals, without securing majorities, gained increasing levels of support. This past proxy season, racial equity and civil rights audit proposals also came from other groups. Tejal Patel, corporate governance director with SOC Investment Group, says that this year 24 such measures have come to a vote and eight have passed. For example, almost 63 percent of votes cast at Johnson & Johnson’s AGM in April backed a proposal from Mercy Investment Services urging the board to ‘oversee a third-party audit… [that] assesses and produces recommendations for improving the racial impacts of its policies, practices and products, above and beyond legal and regulatory matters.’
Johnson & Johnson had urged shareholders to vote against the measure. The board wrote in its 2022 proxy statement that ‘diversity, equity & inclusion is built into our credo and has long been a core value of the company’. A request for comment from the company was not returned at the time of the vote.
Patel welcomes the involvement of other proponents of such resolutions and says there is a need for racial equity audits in a variety of industries.
She says companies were more willing to engage this year, which led to what she describes as a fairly collaborative process. Other companies adopted a ‘wait and see’ approach but early victories for proposals at companies such as Apple helped move them to engage, she adds.
It’s political After the main proxy season ends, IR and governance teams at a growing number of US companies gear up for ‘off-season’ investor engagement that can alert them to potential investor concerns or proposals, helping set the stage for the 2023 proxy season.
Danielle Fugere, president and chief counsel of As You Sow, expects to see more requests for banks to spell out their plans for transition to net-zero greenhouse gas emissions and a continued focus on pay equity and executive pay.
Among other things, Fugere is keeping an eye on developments in how companies handle reproductive healthcare issues following the US Supreme Court’s overturning of Roe vs Wade. Almost a third (30.2 percent) of votes cast at TJ Maxx parent company The TJX Companies’ AGM in June supported a proposal requesting that TJX release a report by the end of 2022 ‘detailing any known and any potential risks and costs to the company caused by enacted or proposed state policies severely restricting reproductive rights, and detailing any strategies beyond litigation and legal compliance that the company may deploy to minimize or mitigate these risks.’
The proposal was filed late last year but the vote took place a month after the leak of a draft of the Supreme Court’s ruling. A request for comment from the company was not returned following the vote.
According to As You Sow, there were fewer shareholder proposals this past proxy season about general oversight and disclosure of election spending and lobbying. But it notes resolutions ‘that trod new ground, seeking not just oversight and disclosure but [also] the assessment of misalignment between stated company policies and actions taken by politicians the companies support.’ Political spending on the US mid-term elections this fall is expected to attract attention, too.
According to an SEC filing, 44 percent of votes cast at AT&T’s annual meeting in May supported a measure brought by As You Sow calling for the company to produce a report ‘analyzing the congruence of the company’s political and electioneering expenditures during the preceding year against publicly stated company values and policies, listing and explaining any instances of incongruent expenditures, and stating whether the company has made, or plans to make, changes in contributions or communications to candidates as a result of identified incongruencies.’
Investors won’t be tolerating a lack of ESG reporting or targets
An AT&T spokesperson declined to comment at the time beyond the company’s proxy statement, in which the board writes that the company ‘operates in highly regulated markets, and we believe it is in the stockholders’ best interests that we continue to be engaged in the political process to educate policymakers about issues that affect our core business. Further, in participating in the political process, we do so with best-practice-level accountability and disclosures.’
Andrea Ranger, Green Century Capital Management
Get ready Overall, the advice to companies is simple: get ready. ‘Corporate secretaries and IR teams need to be proactive and look at trends in social proposals to figure out how they can get started [addressing those issues] before they receive one,’ says Andrea Ranger, shareholder advocate with Green Century Capital Management.
‘Investors won’t be tolerating a lack of ESG reporting or targets,’ says fellow shareholder advocate at Green Century Annalisa Tarizzo, adding that responding to investor inquiries can help a company avoid a resolution.
Annalisa Tarizzo, Green Century Capital Management
Similarly, Eugene Tsuji, senior director of the corporate governance consulting group at Morrow Sodali, comments: ‘As long as there is a good faith effort from the proponent and the firm, it can often lead to withdrawal [of a proposal].’
Eugene Tsuji, Morrow Sodali
Gabrielle Wolf, director with Innisfree M&A, notes that employee engagement is also helpful for companies. For one thing, she says, employees are often shareholders. In addition, ESG-focused institutional investors are increasingly asking about corporate culture and how workers are treated in the belief that better treatment leads to better operational performance. Employee engagement is also a good way to learn about issues facing the company before word gets out to investors, she adds.
The numbers around a proxy season can paint a variety of pictures and change from year to year, but fundamentals for IR and governance teams in terms of relationships with investors remain the same – even if they increasingly apply to other stakeholder groups.
Ben Maiden is editor-at-large of IR Magazine online sister publication Corporate Secretary
