Values-based investors have counted many recent proxy season successes in ESG matters, achieved through engagement and litigation. Ben Ashwell explores whether that’s about to change
On May 21, 1971, shareholders at General Motors’ (GM) annual general meeting voted on an unusual resolution put forward by the Episcopal Church. Shareholders were asked to consider whether GM should withdraw its workforce from South Africa entirely, given that ‘many potential GM customers, employees and dealers here and abroad’ would be offended by the policy of apartheid. The resolution received support from 1.29 percent of the company’s shareholders – including one board director.
Several other religious groups took note, however, and supported the Episcopal Church’s anti-apartheid campaign, leading to the creation of the organization that is known today as the Interfaith Center on Corporate Responsibility (ICCR).
‘[The groups] were very much motivated by their commitment to social justice – it wasn’t financial at all,’ recalls Tim Smith, who led ICCR from 1971 to 2000, before joining Boston Trust Walden as senior vice president of ESG and shareholder engagement. ‘Companies said, We understand your moral passion but we’re responsible to shareholders.’
Unfazed, ICCR ramped up its shareholder advocacy throughout the 1970s and 1980s. By 1986 the organization had filed anti-apartheid resolutions at 185 companies. That year, 50 US corporations – including GM – announced that they would be withdrawing their businesses from apartheid South Africa.
ICCR’s work on apartheid demonstrates the iterative process required to influence a broader investor base, garner public momentum and – eventually – emphasize that an issue can be material from an ethical and financial perspective. For shareholder advocates today, the journey is strikingly similar – and may be about to get harder.
Working with passive investors On the face of it, the investment community is more united than it has ever been in asking corporations to consider material ESG issues. BlackRock, Goldman Sachs, Citigroup and Bank of America all signed the Business Roundtable statement last year that called for a shift from shareholder capitalism to stakeholder capitalism. The average support for ESG resolutions from the 50 largest asset managers during last year’s proxy season was 46 percent, up from 27 percent in 2015, according to Morningstar.
That should bring them much closer to the SRI investors that have seen their assets under management increase from $639 bn in 1995 to $12 tn in 2018, according to data from US SIF. But this year BlackRock, Goldman Sachs, Citigroup and Bank of America will all face shareholder resolutions – filed by shareholder advocates As You Sow and Harrington Investments – that ask how they will apply the Business Roundtable’s statement to their own businesses. For many shareholder advocates, there exists a paradox: gaining the support of large passive institutional investors can make a big difference to a resolution building momentum, but it doesn’t mean those institutions get a free pass for their own corporate ESG performance, portfolio construction or proxy voting.
For Mindy Lubber, president and chief executive of sustainability non-profit organization Ceres, this isn’t too much of a concern. She has seen ‘radical change’ from the ‘days when we were almost laughed at by the largest money managers.’
Ceres brings together more than 175 institutional investors, representing $29 tn in assets under management, in eight working groups and on campaigns such as Climate Action 100+, a five-year initiative to target greenhouse gas emitters and bring them in line with the Paris Agreement.
‘There are still some topics – like guns, nuclear weapons or any number of sin stocks – that are values-based,’ Lubber says. ‘But the largest investors couldn’t have been brought into the broader ESG debate if it was just about values. For them, it has to be about material risk and opportunity.’
Both Ceres and ICCR have seen a significant uptick in year-round engagement between values-based investors and large passive funds that have increased the size of their stewardship teams in recent years. ‘There’s a group of natural allies – such as CalPERS, CalSTRS, the New York State Comptroller and others – that we have engaged with and worked with for many years,’ says Josh Zinner, CEO of ICCR, which now has more than 300 members. ‘But we’re also trying to engage the large fund managers as a key part of our strategy. Once you get that support, it really turns the tide.’
ICCR has noticed a particular uptick in engagement between large passive funds during the last two years, a spokesperson confirms.
Fine margins The margins by which some ESG resolutions get defeated are pretty small. Of the 23 ESG resolutions that achieved between 40 percent and 50 percent support in the 2019 proxy season, 19 would have passed if supported by Vanguard, 15 would have passed if supported by BlackRock, four would have passed if supported by T Rowe Price and one would have passed if supported by JPMorgan.
The influence of these large asset managers was in evidence at Sturm Ruger’s proxy meeting in 2018, held shortly after the Parkland school shooting that left 17 children dead. Members of ICCR, led by Colleen Scanlon, chief advocacy officer at Catholic Health Initiatives, submitted a resolution asking the gun manufacturer to develop safer firearms and monitor gun violence. The resolution received majority shareholder support, helped in no small part by the backing of BlackRock – Sturm Ruger’s largest investor – and ISS.
Of course, taking an issue all the way to the proxy meeting is expensive and time-consuming: according to commentators at the SEC’s roundtable on the proxy process in 2018, the cost per shareholder proposal for companies is approximately between $87,000 and $150,000.
It’s preferable to influence issuers through engagement, as Mercy Investment Services did with Dick’s Sporting Goods in 2018, also on the topic of gun control. The investment group, which manages investments on behalf of the Sisters of Mercy nuns group, filed a resolution with Dick’s Sporting Goods in December 2017, requesting that it stop selling assault rifles and raise the minimum purchase age to 21. The company’s management invited Mercy Investment Services to meet with it in January, and by February it had announced that it was taking the steps outlined in the original resolution.
In the spirit of bringing together investors with different perspectives and motivations to lead concerted issue-based campaigns, ICCR operates the Shareholder Exchange, an online platform that facilitates the tracking, co-ordination and evaluation of its members’ corporate engagements. The exchange is currently used by more than 550 users from ICCR’s coalition, and it tracks corporate dialogues, resolutions and proxy solicitations, investor letters, press campaigns and other tools of corporate engagement.
The iterative process of gaining support Naturally, the issues that values-based, faith-based and SRI investors advocate on almost always fall within the ESG moniker. The number of ESG-focused shareholder proposals filed at US companies has grown by 12 percent since 2010, according to a recent study from the Sustainable Investments Institute (Si2). During the same period, the average support has increased by 40 percent, rising to nearly 26 percent last year.
One of the reasons for the increase in support is the ability of shareholder advocates to wield greater influence. ‘Religious investors are still committed to advancing social justice and environmental issues but if you look at their language, they’ve got much better at couching these issues in business terms,’ Smith says. ‘Twenty years ago, some of the language was more divisive. Now these groups can discuss social issues, such as the opioid epidemic, in a way that resonates for businesses.’
Andrew Behar is CEO of As You Sow, a non-profit whose engagements have changed policies at the likes of PepsiCo, Apple, Coca-Cola, Dell and ExxonMobil. He’s also the sponsor of this year’s shareholder resolution at BlackRock regarding its commitment to the Business Roundtable Statement. He describes the process of advocating on an issue through shareholder resolutions as an iterative process that evolves over time.
‘We’re always writing proposals that are considered to be about non-material issues when we start writing them,’ he says. ‘We always get low votes in the first year because nobody understands the issue.’ But over the course of years of refiling the resolutions and engaging in dialogue with the issuer and its shareholders, the tide of public sentiment can change – just like it did for ICCR on apartheid. As the momentum builds on an issue, Behar says it’s common for resolutions to be handed over to larger asset managers, such as the public pension funds CalSTRS, CalPERS and the New York State Comptroller, for sponsorship or co-sponsorship. But this entire process relies upon being able to file and refile shareholder resolutions that have been voted down – a process that is in jeopardy for many shareholder advocates.
Proposed changes to rule 14a-8 In November 2019 the SEC voted in favor of proposed amendments to rule 14a-8, which governs the shareholder proposals that make it onto the ballot. The proposal has proved controversial, with thousands of comment letters submitted during the comment period. Two of the most concerning changes for interviewees for this article are to shareholder proposal resubmission thresholds and ownership thresholds.
Supporters of the proposed change – including the US Chamber of Commerce and the Business Roundtable – suggest that the current rules are outdated. Shareholder ownership thresholds have not been updated since 1998 and resubmission thresholds have largely stayed the same since 1954.
The SEC has proposed a significant increase to the amount of support a resolution needs to have received during its prior submission, provided that submission was in the last five years. According to a study by Si2, 30 percent of the 4,300 ESG resolutions filed between 2010 and 2019 would not have been eligible under the SEC’s proposed rule.
Business groups suggest the rule change will prevent companies from facing costly resolutions on very similar grounds during a short period. But investor groups – including As You Sow, Ceres, the Council of Institutional Investors, ICCR and US SIF – suggest it will stifle shareholder democracy and would prevent resolutions from building momentum over time, as these groups have successfully managed up to now.
Regarding ownership thresholds, the SEC last revised its policy in 1998. Since then, shareholders have needed to own $2,000 of a company’s stock for at least one year in order to file a resolution. The SEC’s proposed change would require the following ownership thresholds:
In the event a resolution is co-sponsored, all shareholders named on it would be required to pass this threshold. Interviewees for this article suggest they would be open to an increase in ownership thresholds that is in line with inflation since 1998, but that the proposed change would reduce the number of shareholders that could afford to submit resolutions. The comment period for the rule change closed in February and it remains to be seen how the SEC will respond.
For the faith-based, values-based and SRI investors that have been ramping up their advocacy efforts as ESG has come to the foreground, these are uncertain times. While they are largely encouraged by engagement with the big passive funds that can be so pivotal – though still skeptical of their true integration of ESG – the ability to drive change at the ballot box casts a shadow of doubt over what the future holds.
