As has been seen at AGMs throughout this year, voting decisions on ESG resolutions are getting more nuanced.
To the casual observer, sustainable or responsible investing may appear to involve a relatively straightforward set of decisions. When votes are called at shareholders’ meetings, supporters of strong ESG principles will know pretty much automatically where to cast their ballots – in short, for things that are good for people and planet and against ones that are bad.
But often the reality is of dilemmas in which decisions are far from clear cut. Many factors have to be weighed in the balance. The right choice is not always obvious, and finding it can be difficult.
The good news is that the discovery process is not merely a question of choosing the lesser of two evils. It can have a much more positive outcome than that, as we shall see.
First, however, there was a textbook case of this type of dilemma earlier this year, when UK retail giant Sainsbury’s faced demands from some shareholders fully to sign up to the Living Wage Foundation scheme. Despite already paying the Living Wage to directly employed staff, Sainsbury’s would have been required to extent this to staff supplied through agencies.
Agree to disagree
It would also, said Sainsbury’s, have committed the company to going along with future decisions by the Foundation, effectively outsourcing management deliberations in a key area.
The proposal was defeated, having gathered the support of 17% of shareholders. Its sponsor, the responsible investment campaign group ShareAction hailed support from major investors as a big step forward. Campaign Manager Rachel Hargreaves said: “Today’s vote sent a powerful message from shareholders that Sainsbury’s should make a Living Wage commitment to all of its workers. Investors have shown that they can and do support pay rises for the low paid.
“Equally, we’re disappointed that a large proportion shareholders chose to prioritise short-term returns over the real long-term issue: rising inequality in our society.”
But those who voted against will not take criticism lying down. One such is Kimberley Lewis, Head of Active Ownership at Schroders. “To say the Sainsbury’s vote was over-simplified is an understatement,” she said.
Opponents of the proposal suggested higher pay would mean either job losses or higher prices. Lewis said: “Retail is one of the lowest margin sectors. For Sainsbury’s, its white-label line is where there is wriggle room on price, so a consequence of pushing up wages may have been to increase prices paid by less-affluent members of the public.”
She added: “In the case of Sainsbury’s, the company was targeted despite being a leader on living wages. On this occasion, although we agreed with its goal and the benefits of paying a living wage, we felt that the detail of the resolution was not appropriate to the specific circumstances.”
A powerful bargaining counter
Shareholder votes attract a lot of attention when the proposal is contentious, but Paul Lee, Head of Stewardship and Sustainable Investment Strategy at investment consultancy Redington, warned: “The vote on the resolution is not the be all and end all. Most important is communication with the company concerned.
“The vote is a pretty black-and-white instrument, a ‘yes or no’ decision. So many issues are much more nuanced. The vital thing is to have a dialogue with the company and take the opportunity to explain your decision.”
He added; “That said, voting is really important. It’s your clients’ legal right and you’re almost duty bound to exercise it.
“In the UK it is relatively rare to have shareholders’ resolutions, in contrast to the US. The Sainsbury’s example was a really interesting one.”
The potential of an adverse vote can be a powerful bargaining counter in changing corporate behaviour. Caitlin McSherry, Director of Investor Stewardship at Neuberger Berman, the employee-owned investment manager, gave the example of Cigna, a US-based healthcare and insurance company.
“It had received shareholder proposals covering gender pay issues for several years. We believe equitable, diverse workforces are key to a company’s success and in 2020 we looked at the most recent proposal and said we would support it,” explains McSherry.
The proposal prompted action. “During the rest of the year, the company made a number of enhancements including to its disclosure on pay equity and produced a diversity scorecard. At the 2021 annual meeting, we deemed disclosure was now adequate and opposed the proposal.”
In October 2021, Cigna unveiled its first such scorecard, stating: “In each section of the scorecard, we include a summary of our progress to date, using key data and metrics, and also provide a roadmap for where we hope to make additional progress going forward. This approach will not only help keep us accountable, but share our progress externally with key stakeholders and partners.”
An interesting feature of the 2022 US AGM season has been the withdrawal of proposals, based on pledges to address concerns. According to sustainable investor network Ceres, 110 climate-related commitments were made by US companies this year, in exchange for resolution withdrawals.
At times, these negotiations between investors and companies can involve classical ploys, with both sides trying to outguess the other and making “sighting shot” proposals designed to moderate the other’s position. Lee at Redington said: “What amounts to a negotiation with the company happens all the time. You tell the board you will be voting against them, they modify their behaviour, you can support them.
“I have been doing ESG stewardship for 20 years. You talk to a company and get it to shift. Quite often, the company’s initial position is some way from where it is prepared to end up.”
There is consensus that too much emphasis is placed on votes, rather than on the fruits of continuous engagement. McSherry at Neuberger Berman said: “Voting is just one tool in our toolbox. And the topics themselves are not always straightforward. We always remember we are managing these assets on behalf of our clients.
“We attach great importance to active dialogue with companies. We are seeing more proposals with what you might call layered requests. We can then say, for example, that two out of three proposals are very important to us. These will differ from investor to investor.”
She added: “These issues can be very complex. Some companies may do very well on, for example, 60% of the topics, and we are confident they will continue to progress. But we have to vote at this time. So, do we support the proposal or not? It all comes down to judgment.
“The real issue is how we arrive at a desired outcome. The vote is just one way to get there.”
Such dilemmas are likely to become more, not less, common, said Lewis at Schroders, and will not be confined to retailing. “Look at the social care sector, which is similar in terms of costs being related to a lot of lower-wage employees. These matters may not always be best solved by shareholder resolutions, as they can be a blunt instrument. This is a sector that is also in need of public funding. We discussed this point with the Living Wage Foundation in a recent conversation.”
She added: “We have long-standing and continuous engagement with companies, and analyse each specific resolution using our own fundamental research, taking into consideration the potential impact on all key stakeholders. Were we to conduct analysis in isolation of the broader context, we would be doing an injustice to what we are trying to achieve.”
UBS Asset Management recently analysed resolutions and voting for the second quarter of 2022, a time in many public companies round the world held their shareholder meetings. It noted that investors are now seeking more detailed disclosure requirements and ambitious carbon reduction plans, going well beyond broad net zero commitments.
Furthermore, “an increase in socially themed proposals was primarily driven by racial and civil rights audits”, and “many asset managers and proxy advisors increased the stringency of their existing voting guidelines not only in relation to gender, but also with regard to the introduction of ethnicity targets for specific markets”.
The firm acknowledged the dilemmas for those exercising stewardship. UBS noted: “Underlying some of these trends is a growing challenge for investors. By voting shares on ESG-related resolutions at AGMs, investors get ever more closely involved in the running of companies, whether they like it or not, as shareholder proposals increasingly request corporate action beyond disclosure and long-term ambitions or targets.
“The prescriptive nature of some of the shareholder proposals adds complexity for investors and, in our view, requires credible stewardship, combining effective voting engagement and investment capabilities and insights.”
“We have to be authentic”
McSherry at Neuberger Berman highlighted the importance of engagement teams working in partnership with portfolio managers and analysts. “It is incredibly important to decide what you believe about topics and then to evaluate proposals beyond the topic category, such as the environment, human rights and so forth.”
Lewis at Schroders, looking back at the Sainsbury’s vote, highlighted the complexities for shareholders: “We are very passionately concerned not just about wages for lower earners. We look at all the benefits on offer, such as food discounts, hours worked, transport subsidies and store conditions. Focusing on just one indicator does not do the cause of positive impact any good.
“Balancing different stakeholder interests is precisely what we seek to do. Over-simplification of the issues involved is unfortunate.”
She concluded: “We have to be authentic about what we do. We strongly believe that businesses should treat their stakeholders fairly, but if we made a vote because it is popular or for fear of a negative headline, we would be doing the stakeholders a dis-service.”