Support for ESG-focused US shareholder resolutions fell in 2023, with investors divided on quality amid regulatory complexity.
It was an interesting proxy season for the US this year, with environmental and social shareholder resolutions seeing a noticeable drop in support.
Data published by Proxy Preview noted that just eight out of 335 US proxy proposals tied to environmental and social issues secured a majority vote, compared to 36 in 2022. Overall average support for environmental and social proposals dipped below 25% (as of July 2023), down from an average of 33.8% in 2021.
When trying to figure out the why, a few reasons spring to mind for Lindsey Stewart, Director of Investment Stewardship Research at data and research provider Morningstar. These include investors getting more specific in their ESG-related requests, and, of course, the anti-ESG backlash in the US led by Republican politicians.
“It could also be because investors have limited resources to scrutinise the increasing volume of such proposals being filed,” adds Paul Hunter, Head of Policy at Pensions & Investment Research Consultants (PIRC), a UK-based proxy voting advisor.
In light of these factors, Morningstar’s Stewart admits he was “expecting a slight decrease in support this season – but it’s been huge”.
Perhaps less surprising was the fact some of the world’s largest – and most ESG-cautious – asset managers reduced their support for ESG-related shareholder proposals this season.
In BlackRock Investment Stewardship’s (BIS) ‘2023 Global Voting Spotlight’ report, it was noted that the asset manager supported just 7% of 399 shareholder resolutions on ESG-related themes globally, a decrease from 21% in 2022 and 47% in 2021.
Vanguard’s support for environmental and social proposals also fell to 2%, down from 12% in 2022.
Both argued there has been a reduction in the quality of ESG-related shareholder proposals filed.
“Because so many proposals were overreaching, lacking economic merit, or simply redundant, they were unlikely to help promote long-term shareholder value,” BlackRock said in its BIS report, adding that it does not support shareholder proposals that are “inconsistent” with long-term financial value or where the intent is to “micromanage” companies.
“Most of the proposals on climate and natural capital and company impacts on people failed to acknowledge the improvements companies have [already] made to their disclosures and practices,” it added.
BlackRock supported a 2022 proposal filed at Amazon, which requested a report on packaging materials and plastic use. Following a majority vote, the company responded by enhancing its packaging disclosure to include single-use plastic data by December that same year.
Another plastic-focused shareholder proposal was added to Amazon’s ballot in 2023, this time asking the company to expand on its increased disclosure by setting a plastic packaging reduction goal.
BlackRock deemed the proposal too similar to the resolution filed the year prior, choosing not to support it, although 32% of Amazon’s other shareholders did.
These determinations are a “clear signal that there’s been a change in how some investors are assessing the quality and credibility of ESG-related shareholder proposals”, Stewart tells ESG Investor.
Quality over quantity?
The subjectivity of ‘high quality’ becomes clearer when experts speaking to ESG Investor counter that there has not been a reduction in the quality of ESG shareholder proposals this season.
“Historically, we have always had a high level of support for ESG shareholder proposals – this season was no different,” says Michael Herskovich, Global Head of Stewardship at BNP Paribas Asset Management (BNPP AM).
“Our level of support shows that we did not think proposals were too prescriptive or lacking quality.”
The asset manager supported 88% and 96% of environmental and social shareholder resolutions globally this year, respectively. BNPP AM also increasingly challenged proposals filed by company management, logging an average opposition rate of 37%, up from 33% in 2022. It rejected 55% of resolutions relating to executive pay levels and 48% of director appointments, the latter often due to the lack of diversity.
“The quality of shareholder resolutions is a valid concern,” says Hannah Shoesmith, Head of Engagement at asset manager Schroders.
“Given the volume of resolutions, the onus is on investors to understand whether they add value. However, broadly speaking, we believe the majority of issues being addressed are material.
“In general, we’ve seen ESG-related shareholder resolutions make a good effort to focus on issues that affect the long-term sustainability of the company,” she says.
Andrea Ranger, Shareholder Advocate at Green Century Capital Management, notes that her firm has “strong ESG-related proxy voting guidelines”.
“We’re not seeing a change in quality, so we try to support most or almost all of the ESG-related proposals we vote on.”
She says it’s not surprising larger asset managers like Vanguard and BlackRock are now being more cautious with their voting, noting that they have been specifically targeted by the anti-ESG movement.
“In many cases, they [Vanguard and BlackRock] didn’t support proposals that they supported the year before. The argument about reduced quality may be a cover, frankly,” Ranger says.
Last year, Vanguard withdrew from the Net Zero Asset Managers initiative (NZAM). In the weeks prior to this decision, Republican attorneys-general opposed the index fund manager’s application to the Federal Energy Regulatory Commission to extend its authorisation to acquire shares in US utilities, arguing that its NZAM membership would impact the cost and reliability of energy supplies.
Also in 2022, Florida’s Chief Financial Officer withdrew US$2 billion from BlackRock due to the asset manager’s ESG investment policies. Additionally, BlackRock was included in Republican Comptroller for Texas Glenn Hegar’s ‘blacklist’, due to its refusal to do business with fossil fuel companies.
“Many ESG risks – like climate change – are systemic, financial and physical risks that are material to businesses and their investors,” Ranger says, emphasising the importance of long-term investors having high ESG-related ambitions in their corporate engagements and voting.
In the BIS report, Joud Abdel Majeid, BlackRock’s Global Head of Investment Stewardship in the US, said simply measuring stewardship by the number of votes for or against a proposal “is an oversimplification of the issues that investors must contemplate”.
“The binary nature of a proxy vote cannot reflect the complexity and multitude of considerations that go into a vote decision, drawing on company disclosures and our engagements with company leadership,” she added. “It fails to reflect the unique circumstances in which a company operates, and the progress made to better align their practices with delivering financial performance over the long-term.”
Threading the needle
In the US, if a company has valid concerns about a shareholder proposal, it is perfectly within its rights to file a ‘no action’ request at the US Securities and Exchange Commission (SEC).
Companies can submit a ‘no action’ letter within 14 days of a shareholder resolution being filed for the following reasons: false or misleading statements, relevance, ordinary business, duplication (i.e., covers the same themes as another proposal already on the ballot), and substantial implementation.
However, changes made to shareholder proposal rules in the last few years has opened the door for wider ranging ESG-related resolutions to make it to the ballot, while simultaneously restricting the ability of companies to successfully pursue ‘no action’.
Under Trump, the US SEC tightened rules for filing a shareholder proposal, meaning it was far easier for a company to allege a proposal was micromanaging and thus take it off the table. Proposals had to very specifically relate to a company’s business, as opposed to wider business conditions.
In 2021, the SEC’s Division of Corporation Finance rescinded three bulletins released under the Trump administration which allowed proposals containing any specific request relating to timeline or actions to be excluded, thus making it far more difficult for shareholders to successfully put forward, for example, a proposal asking a company to set a net zero commitment and medium-term decarbonisation targets.
According to research published by Morrow Sodali, a provider of strategic advice and shareholder services, the number of ‘no action’ challenges brought by companies during the 2023 proxy season fell to 184 compared to 241 in 2022, representing a 24% decrease. However, the SEC also sided with companies 46% of the time, compared to 28% the year before.
This 180° pivot has contributed to the growing discussion around what makes a high-quality and credible ESG-related shareholder proposal, according to Green Century’s Ranger. She notes that, while the rule change has been very helpful for ESG-focused investors, there remains a degree of opacity to the SEC’s decision-making when assessing a ‘no action’ claim.
“Clarity is always helpful to better inform a shareholder proponent that has run afoul of their rules, so they don’t make the same mistakes the following year,” she says.
Chubb claimed it was an attempt at micromanagement and the SEC agreed.
Ranger says that Green Century “always builds a business case” to underpin its ESG-related concerns before putting forward a shareholder proposal.
“We’re not trying to tell companies exactly what to do, but we will indicate guidelines, standards and best practices companies can follow to fulfil our proposal.”
Sanford Lewis, Director and General Counsel at Shareholder Rights Group, an association of individual and institutional investors defending the rights and freedoms of investors to protect their investments, is a legal adviser to several shareholder proponents who file ESG-focused resolutions.
To avoid being accused of micromanagement, shareholders must “straddle the line” between avoiding being too prescriptive and not being so vague that a company can claim substantive implementation, meaning they believe they have already fulfilled the requirements of the proposal, he explains.
“This has been a very difficult needle to thread for shareholders,” Lewis says.
But what is considered too prescriptive?
Herskovich from BNPP AM says they may consider a resolution too prescriptive if a proposal asks for a raft of extreme and specific changes with a “very aggressive timeline”, such as halting fossil fuel production within 12 months and investing a specific amount of capital into renewable energy.
“A long-standing example [of micromanaging] is a shareholder once tried to ask a hotel company to install low-flow showerheads in all of its hotels to conserve water, which is considered micromanagement,” says Lewis.
“But asking the company to describe what it is going to do to improve its water conservation, using the installation of low-flow showerheads as a potential example of solutions, is not too prescriptive.”
Lewis also says proposals that are “too granular” for all shareholders to understand and reasonably weigh in on can be considered micromanagement.
“When a blanket or overly prescriptive approach is used by some filers of shareholder resolutions, this negates company nuances and other contextual circumstances which could result in negatively impacting the long-term value of the company,” according to Shoesmith.
She says Schroders recently voted against a shareholder resolution at a US small-cap company which asked for Scopes 1-3 emissions disclosures.
“Further to engagement with the company, we were confident that they were committed to disclosing Scope 1 and Scope 2 emissions in the near-term,” she says. “However, the company’s resources would be significantly stretched by the requirement to also disclose Scope 3 in the same timeframe, even though this is an eventual goal.”
Schroders determined that its influence would be more impactful through future engagement, rather than supporting a resolution it believed would place “an undue burden” on the company and ultimately not add value for shareholders.
It is important to note that, just because the US SEC has determined a proposal to not be micromanaging, that doesn’t mean asset managers have to agree when it goes to vote.
“An asset manager choosing to vote against a proposal they deem to be too prescriptive – even if the SEC has said it’s not – shows that the system is working as it should, giving shareholders the freedom to decide what they think about these proposals instead of shutting them out of the proxy,” Lewis says.
Nonetheless, Morningstar’s Stewart says that investors do need to adopt “more strategic thinking” before filing ESG-focused shareholder proposals going forward.
“Shareholders globally have different regulatory contexts, different definitions of materiality and what is permitted within fiduciary duty, so they are all going to have differing ideas as to the kinds of ESG-related shareholder proposals they will support.
“How far along the road are companies on these issues? Is the shareholder looking to make very ambitious requests that most of the investor community isn’t necessarily minded to support? Do they need to take a more incremental approach to secure improvements?” he posits.
“I don’t think we can maintain this phase of hundreds of shareholder proposals being filed every season that the market doesn’t necessarily see as having the quality to support.”
The rules for US shareholder proposals are set to further evolve, Lewis from the Shareholder Rights Group points out.
In 2022, the SEC proposed additional amendments to modify the standards for shareholder proposal exclusions under substantial implementation and duplication.
“These will help to simplify the issue of threading the needle, because they will do away with companies being able to make a philosophical argument against shareholder proposals,” says Lewis.
“Instead, the pending rules will consider the essential elements of proposals more objectively. How was it written? What does it ask for? Has the company already met these points or not?”
In parallel, however, the destabilising issue of the anti-ESG movement continues to concern experts.
Republicans are also currently attempting to reform the proxy voting and shareholder proposal processes, as well as limit the SEC’s authority to regulate shareholder proposals to keep ESG-related issues off the ballot.
“Their success would be devastating for the ESG movement in the US,” says Lewis.
But filing a shareholder proposal is not the only tool investors can wield to ensure investee companies are aware of and integrating ESG-related themes into their business management, reminds Hunter from PIRC.
“There are many ways shareholders can affect change, all the way from private meetings with the company, to collaborating with other investors and being more public with their concerns.”