ESG Q&A with Greg Reppucci, senior director of sustainability at Morrow Sodali
This year was a record one for the number of shareholder proposals that went to a vote at companies – and the number was significantly greater than in 2021.
We most notably saw a significant increase in the number of environmental and social shareholder proposals that went to vote this year. The increase in proposals was a result of several factors:
The success of many proposals in 2021, which encouraged proponents to submit similar proposals to additional issuers this year
Continued refinement of proposals to become more nuanced in an effort to push companies further on environmental and social initiatives
The SEC’s revision of its no-action relief, which allowed certain proposals to go to a vote that would have likely received no-action relief in previous years.
Despite the volume of proposals increasing, however, we saw a general decline in the average level of support for environmental and social shareholder proposals, which also seems to have been a result of the factors discussed above.
A good portion of proposals this year were carry-overs from last year, although several of these pushed into additional industries – including proposals related to values-aligned political contributions, climate-related reports and racial equity/civil rights audits. Racial equity/civil rights audits were particularly of focus this year, as these proposals seemed to reach multiple industries.
We also saw a number of new proposals this year that pushed for more action from companies in a more nuanced or prescriptive fashion, including proposals that requested companies to adopt policies not to fund or underwrite new fossil fuel initiatives or requested reports or action on targets related to Scope 3 emissions, and several that requested reports on costs and impacts of certain issues on shareholder returns. These proposals, as well as several others, appeared too restrictive for many shareholders.
We saw a notable increase in the level of support for racial equity/civil rights audit proposals this year, though most other topics – on the whole – generally declined in the level of support relative to 2021. This decline appeared primarily to be driven by 2022 proposals being more prescriptive and/or nuanced – requesting companies to take specific actions that previously were not requested – or were driven by submissions of proposals at companies that had already taken significant action on the topic of focus. Some of the newer proposals I mentioned above did not have significant success: several averaged support of less than 20 percent.
Before we discuss several proposals that are being contemplated, we are also focused on working with clients to implement the recently adopted pay-versus-performance disclosure rule for this coming year. We believe this disclosure should stay outside of the compensation discussion and analysis in the proxy statement.
Regarding proposed rules, one is the SEC’s proposed revisions to several definitions associated with no-action relief, which we anticipate resulting in the SEC granting no-action relief less frequently. While it is unclear how these revisions will impact voting results, the marketplace will ultimately be responsible for determining whether or not proposals have been implemented by issuers.
Though not yet announced, we are also still awaiting a proposed update to human capital disclosures. In November 2020, the SEC implemented a principles-based rule for disclosure of human capital management in the form 10K that resulted in issuers adding some additional information on their workforces.
The SEC is likely to revise this further and issuers should anticipate more structure from the SEC in terms of the type of information that may be required in a 10K filing – including disclosure of certain metrics.
It has been several months since this was first announced, but we continue to see significant focus on the SEC’s pending new climate disclosure rules, which will have a marked impact on issuers’ disclosure of climate-related information. While the rule is generally based on TCFD recommendations, which institutions are already requesting issuers align disclosure to, there are several additional nuances the proposed rule has that will require additional information from issuers.
One in particular is the potential impact the rule will have on the timing of disclosures for certain firms. Most companies typically disclose climate-related information in their sustainability reports, which are often published several months after the 10K is filed.
The rule’s current language suggests these disclosures will have to be part of the 10K, so companies will have to significantly accelerate their reporting processes to incorporate disclosures. That means working with subject matter experts, internal audit and controls to ensure the appropriate resources are available so climate-related information can be reviewed and disclosed in parallel with financial disclosures.
Lastly, in March the SEC also published the cyber-security rules proposal related to additional disclosure on cyber-related events, as well as the role of the board’s oversight on cyber-related issues. If implemented, these requirements will not only likely have an impact on the level of disclosure issuers currently provide on risk management, but the expected timing of some of the disclosures may also similarly be of concern for issuers – particularly if there are ongoing investigations associated with a cyber-related incident.
When we think about these pending rules, ultimately it is essential for the board and management to be in sync in terms of understanding how their company is addressing these issues. Strong narratives around a company’s approach to addressing each topic and how the board oversees these topics will be critical. Especially as we wait for these rules to be finalized, companies have significant opportunity today to develop, implement and be prepared to articulate on a clear strategy.
Environmental and social issues are top of mind for many today. For companies, it is essential to recognize the importance of managing the issues most relevant to the company. We can see today how these topics transcend society and how companies need to navigate the growing pressures for opinions or involvement in issues of societal relevance.
Regardless of how a company intends to, or does not intend to, respond to a topic or address an issue, it is crucial for the company to have a strong strategy and disclosure foundation for the most relevant topics. This way, companies can help guide the narrative back to the efforts the company has undertaken and can point to how societal issues may or may not be something a company does (or does not) tie back to the company.
Morrow Sodali is a leading provider of strategic advice and ownership services to corporate clients around the world. The firm provides corporate boards and executives with expertise, resources and services relating to ESG, corporate governance, shareholder and bondholder communication and engagement, capital markets intelligence, proxy solicitation, shareholder activism and mergers and acquisitions.
From headquarters in New York and London, and offices and partners in major capital markets, Morrow Sodali serves approximately 1,000 corporate clients in 80+ countries, including many of the world’s largest multinational corporations. In addition to listed and private companies, its clients include financial institutions, mutual funds, ETFs, stock exchanges and membership associations.
