Commentary

Reflections on the 2022 Proxy Season

Iancu Daramus, Responsible Investment Associate, Fulcrum Asset Management, highlights ongoing shifts in the nature of resolutions and voting by investors.

Companies’ general meetings have in recent years seen a sea-change in the breadth of issues investors are asked to opine on. Going beyond procedural problems such as appointing of auditors and the issuance of shares, topics such as ending fossil fuel financing, conducting a ‘racial equity audit’ or quantifying the monetary benefits of diversity initiatives are increasingly present on the ballot. And with contentious meetings that have in some cases led to congressional hearings and activist flash mobs, the scrutiny on shareholder behaviour has also increased.

In 2022, Fulcrum continued to encourage companies to step up on sustainability through our votes, by supporting resolutions calling for reduction in emissions or plastic packaging, action on labour standards and human rights, or improved transparency with regards to political lobbying. We supported circa two-thirds of shareholder proposals highlighted as important by NGO ShareAction in their latest ‘Voting Matters’ rankings of asset managers.

A nuanced approach

While we believe this voting record compares favourably to many peers, the aim is not to support 100% of resolutions, but to apply nuance, reflecting our own views about what is likely to be material in a given company or sector, as well as independent analysis.

For example, relative to 2021, there was a slight decrease in our support for environmental resolutions which partly reflected an increase in shareholder proposals which we deemed as being too prescriptive.  We have generally supported shareholder proposals calling on companies to report on efforts to reduce plastic use (at Amazon) or deforestation in the supply chain (at Home Depot), or to set targets for their emissions (at transport company UPS or oil majors Shell and Equinor). However, it is likely that companies themselves, rather than shareholders, are in a better position to determine the specific strategy changes needed to deliver on the overall targets. We were therefore more reluctant to endorse prescriptive proposals – e.g. halting all new fossil fuel financing by major banks.

Such resolutions often appealed to the International Energy Agency’s Net Zero Emissions by 2050 scenario, which suggested that already sanctioned oil and gas projects are sufficient in a world which swiftly implemented policies to bring emissions to net zero. However, we believe the key conditional (if policies, then no exploration needed) does not currently hold true, particularly in the aftermath of Ukraine. Absent such policies – which would simultaneously see both demand for fossil fuels drop and supply of clean energy ramp up sufficiently fast – unilateral financing restrictions may have unintended consequences in terms of price spikes.

Restrictions are not a one-size-fits-all rule, but there can be exceptions: we recently joined forces with investors managing over US$1 trillion in assets, calling on French financial giant BNP Paribas to stop the financing of new oil and gas fields. In our view, a cleaner loan portfolio would help improve cost of capital, reduce reputational risk and support the bank’s ambitions for sustainability leadership.

Direct director aim

2022 was the first full proxy season where the Glass Lewis Climate Policy, chosen as Fulcrum’s default set of voting recommendations, was in operation. An important rationale for choosing this policy was to go beyond whatever shareholder resolutions happen to be on the ballot, by codifying certain high-level principles that we would expect all or most companies to meet.

Having independent directors (particularly on key board committees), disclosing your company’s greenhouse gas emissions, ensuring remuneration criteria do not undermine a company’s sustainability objectives – these are some of the requirements that can trigger a voting sanction. By sanctioning a director or their pay, we believe we may sometimes send a stronger signal than merely by supporting shareholder proposals (which are often advisory).

Increased polarisation

Another notable feature of discussions around the past proxy season is increased polarisation. Some critics accuse asset managers of abdicating or abusing their responsibilities (by relying on proxy advisors, instead of doing their own due diligence or allowing full voting control to the end beneficiaries of funds).

However, many areas of investing require balancing in-house and external expertise. A fund manager may model the creditworthiness of a particular company in detail, but for a portfolio of hundreds or thousands of names, the opinion of credit ratings agencies is likely to feature more prominently. Similarly in the context of voting, the informational requirements grow exponentially (for some asset managers the resolution tally can range up to hundreds of thousands per proxy season).  Proxy voting agencies can help bridge this gap by providing independent analysis and benchmarking of companies, as well as a degree of customisation.

Far from abdicating responsibility, our stewardship committee regularly reviews contentious votes: in 2022, we overrode the recommendations of our proxy advisor in around a third of the 150 votes discussed, where we believed company-specific circumstances merited additional consideration.

Beyond compliance

A separate critique is whether encouraging companies to go beyond mere legal compliance in areas such as sustainability means that asset managers are pursuing a ‘political agenda’ divorced from shareholder value. In response, it is worth revisiting arguably the most influential articulation of this idea – Milton Friedman’s famous injunction that ‘The Social Responsibility Of Business Is to Increase Its Profits’ (incidentally, an article partly prompted by sustainability-related shareholder proposals filed in the 1970s). Friedman made an impassioned case for maintaining a focus on shareholder primacy at the expense of more vaguely defined stakeholder or societal goals.

Less appreciated, however, is Friedman’s full formulation of the duty of the corporate executive: “to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” (my emphasis). Clearly, when it comes to sustainability, both the law and social expectations are evolving.

Consider that over 80% of global GDP and 90% of global emissions are now covered by net zero targets, or that employee survey repeatedly show sustainability is one of the motivating factors in the workplace. In short, it is increasingly clear that sustainability considerations affect companies’ abilities to attract and retain talent, to remain competitive (witness the recent cleantech race between the US, China and Europe turbocharged by the US’ Inflation Reduction Act) and to reduce regulatory risk.

Aim for the middle ground

Companies without disclosures and targets are less likely to feature in the growing pools of capital managed to some form of climate/environmental objective; and there is emerging evidence that companies with high carbon intensity are more likely to be screened out by investors starting to demand “compensation for their exposure to carbon emissions risk”.  As such, while it may not always be a legal obligation for companies to first disclose and then set targets for emissions, we would argue that companies choosing to not do so risk falling behind peers – thereby destroying shareholder value.

Stewardship efforts should aim to encourage progress in the market, without losing sight of materiality. Institutional investors should use the tools at our disposal – voting, direct and collective engagement, capital allocation – to pursue this ‘golden middle ground’.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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