Over the course of the last several years, the Pickering Energy Partners ESG Consulting team has seen a variety of trends emerging related to ESG and proxy voting.
Over the course of the last several years, we have seen trends emerging related to ESG and proxy voting. 2021 saw an unprecedented level of support for shareholder proposals on ESG topics and emerging opposition to director elections. Following the flood of ESG proposals supported in the previous proxy season, the 2022 proxy season functioned more as a reset. The U.S. experienced a 133% increase in the number of environmental and social shareholder proposals filed with companies this season after the Securities and Exchange Commission (SEC) amended its no-action letter guidance in November 2021 to prevent the exclusion of proposals that concern “material” ESG factors1. However, average support for ESG measures dwindled from the record high of 41% for the year ending June 2021 to almost 33% for the year ending June 20222.
While average shareholder support for ESG resolutions may have tapered off, this does not mean investors failed to hold companies accountable for their ESG commitments. The number of resolutions achieving majority support rose to 40 in 2022 from 36 in 20213.
Additionally, votes against directors became more widespread, as investors avoided relying on shareholder proposals to express their views on ESG-related risk. Declining support was especially evident among the Russell 3000, where 65 directors failed to receive majority support, up from 53 and 62 both seasons prior4.
BlackRock, State Street, and Vanguard (the “Big Three”) command about 79% of all U.S. ETF assets5. Through the 2021 proxy season, the Big Three lent their support to a record number of ESG shareholder proposals. This past year, they turned their attention to directors, sending a clear message that directors who fail to maintain sufficient oversight of ESG issues risk being unseated.
Currently, ~25% of BlackRock’s assets under management (AUM) are invested in issuers with science-based targets or equivalent. The firm has set a goal of 75% of AUM by 2030. In the 2021 proxy season, BlackRock voted against 255 directors (up from 55 in 2020) and failed to support the management of 319 companies for climate-related reasons in 2021 (compared with 53 in 2020).
The firm began expanding the opportunity for certain clients to directly participate in proxy voting decisions in October 2021, and in 2022 made the following policy changes:
This year, Larry Fink released a letter highlighting a systematic change to proxy voting. According to Blackrock, the new options give institutional clients in separately managed accounts (SMAs) (but not pooled vehicles) the ability to exercise their voting decisions on the topics or at the companies that matter most to them. Most notably, Finks’ letter reinforced “this new ecosystem will also pose challenges for CEOs and their companies. Those of us who lead public companies will have a broader set of shareholders with whom to engage. Companies may need to develop new models of engaging with asset owners on their most important voting matters. This may take time to evolve.” In other words, the already complex world of proactive shareholder engagement just became more complicated, primarily because it now includes a broader range of stakeholders.
In the 2022 proxy season, general social topics as well as specific topics such as “Diversity and Employment” emerged as key areas of focus, per BlackRock’s votes on shareholder proposals. “Energy” and “Political Activities” decreased in the number of votes.
In 2021, Vanguard adopted a “Say on Climate”6 approach, requiring companies to publish annual disclosure of greenhouse gas emissions, progress on goals, & plans for reducing emissions and managing climate-related risks. This proposal also requests the right for shareholders to cast recurring votes on the company’s climate plan or report. A publication by Vanguard states, “In our view, boards are responsible for representing the interests of shareholders by ensuring they are familiar with material climate change-related risks, fostering debate and challenging management assumptions, and shaping informed decisions about company strategy and risk oversight”7. The firm plans to use engagements to better understand public company boards’ oversight of climate risks and opportunities, their climate mitigation plans, and whether their disclosures are effective and comprehensive, and provide shareholders with decision-useful information, including progress on the goals companies have set.
In 2022, Vanguard made the following policy changes:
In the 2022 proxy season, general social topics as well as specific topics such as “Diversity and Employment” emerged as key areas of focus, per Vanguard’s votes on shareholder proposals. Votes on “Climate Change” topics also increased by 43%. “Energy” and “Political Activities” decreased in the number of votes.
To close out the year, Vanguard announced that it was withdrawing from the Net Zero Asset Managers Initiative, a sub-unit of the Glasgow Financial Alliance for Net Zero. Vanguard’s decision followed a “considerable period of review,” according to a company statement, which indicated that this action “will help provide the clarity our investors desire” about everything from the role of index funds to financial risks in the context of climate change8.
In 2021, State Street Global Advisers (“State Street”) announced that they planned to launch a targeted engagement campaign with the most significant emitters in their portfolio to encourage disclosure aligned with their expectations for climate transition plans. These expectations cover 10 areas including decarbonization strategy, capital allocation, climate governance, and climate policy. Capital allocation alignment was defined as the integration of climate considerations, capital expenditure on low-carbon strategies, carbon pricing, and investments in decarbonization. In 2022, the firm added a section outlining the role of the ESG Committee in the proxy voting process. Beginning in 2023, State Street plans to “hold companies and directors accountable for failing to meet [disclosure] expectations.”
Similar to the other Big Three, State Street voted on more general social topics and specific topics such as “Diversity and Employment” over the last year. “Charitable Donations” and “Climate Change” also increased in terms of the number of votes. Voting on “Energy” and “Human Rights” topics decreased.
It would be remiss to discuss trends in proxy voting without addressing the perspective of the proxy advisers, ISS and Glass Lewis. Asset managers, such as the Big Three, lean heavily on the guidance published by these advisers and vote in line with the guidance up to 90% of the time9.
Going into 2023, proxy advisers are stepping up their efforts on the climate front. Over the last year and a half, both Glass Lewis and Institutional Shareholder Services (“ISS”) have applied increasingly more scrutiny in their analyses of companies’ climate plans. This has resulted in increased adverse recommendations toward management-sponsored “say on climate” proposals10.
Below, we detail the most recent changes to the proxy voting guidelines published by ISS. Going into 2023, there will be increased scrutiny on disclosure of climate risks and targets, diversity across all levels of the organization (including at the board level), and director accountability.
Companies must begin preparing for shifting tides during the 2023 proxy season. We expect to see an increasingly higher degree of support for ESG-related shareholder proposals and a larger number of directors voted against on the basis of lack of climate oversight. Management teams need to prepare their boards or risk being blindsided in 2023.
We recommend that management starts by ensuring that the board is aware that a new wave of ESG-related proposals is coming. This can include discussions during regularly scheduled meetings or even providing specific educational sessions for board members. The most successful companies start this process early and treat it as a continually evolving exercise.
Next, we recommend that management teams should focus on analyzing institutional investors’ proxy voting guidelines and the guidance put out by proxy advisers like ISS and Glass Lewis. This can help management teams identify the material issues that investors care about and ensure that ESG reports, supplementary policies and disclosures, andproxy language, address these issues.
It is essential to ramp up engagement efforts with institutional investors and stewardship teams. In engaging with institutional investors, it’s critical to be mindful that more investors are interested in ESG and as a result are expanding their stewardship teams or hiring ESG research analysts. Additionally, turnover on the buy side may mean that there are new sector and generalist portfolio managers to get in front of. Over the last three years, we’ve seen a trend of companies conducting governance roadshows and proactive outreach to investors’ stewardship teams not only ahead of proxy season, but also on an ongoing basis throughout the year. These meetings are used to educate not only stewardship teams but alsoportfolio managers on companies’ approach to ESG.
Increasingly, we are also seeing these investor engagements include members of the Board of Directors. Investors are beginning to expect board members to be able to talk fluently about the ESG issues a company is facing, why it is facing those issues, and what the company’s plans are to address them. Management teams can prepare their directors by ensuring they are well versed in the company’s ESG risks and opportunities, strategy and targets, and how the company compares to peers. Management teams can help ready directors for tough questions by conducting mock meetings and discussions.
Going into 2023, engagement strategies need to reach beyond just major institutional investors, to the LP and retail investor communities. Institutional investors’ clients are increasingly interested in ESG and are putting pressure onasset managers. Retail investors are also becoming influential due to changing generational sentiment around climate and social issues. Companies are starting to adopt strategies to engage and educate retail investors through social media, digital trading platforms, etc. It is important for companies to identify trends emerging across these additional stakeholder groups and adopt strategies for engaging with each group.
Lastly, to meet the expectations of investors in 2023, management will need to demonstrate clear board oversight and accountability related to ESG issues. This means developing and adopting a board-approved ESG strategy, clarifying the board’s role with respect to ESG, and consistently communicating the company’s ESG story.
1 The Proxy Voting Annual Review, Insightia
2 The Proxy Voting Annual Review, Insightia
3 U.S. Proxy Voting Season Spotlight: ESG-Focused Shareholder Resolutions, Sustainalytics
4 The Proxy Voting Annual Review, Insightia
5 Big Three’s Grip on $6.7 Trillion ETF Market Slips for a Sixth Year, Bloomberg
6 How we evaluate Say on Climate proposals, Vanguard Investment Stewardship Insights
7 How we evaluate Say on Climate proposals, Vanguard Investment Stewardship Insights
8 Vanguard pulls out of climate-finance alliance, InvestmentNews.Com
9 ProxyInsight by Insightia
10 The Proxy Voting Annual Review, Insightia