Systemic Risk on the Ballot 

Shareholder Commons tallies systemic risk-related proposals in companies, while ESG resolutions are set to decrease in this year’s AGM season in the US.

Investors are in the early adoption phase of filing shareholder resolutions on systemic risk, with 64 companies set to face such proposals in upcoming annual general meetings (AGMs), according to research from NGO Shareholder Commons.   

The first report of its kind, ‘Portfolios on the Ballot 2024 (POTB) outlines shareholder resolutions that include the rationale of managing systemic risk through protecting or improving systems that support the economy, thereby enhancing the financial performance of a universal owner’s diversified portfolio.  

Another report published by NGO ShareAction includes many of the same proposals, such as one at General Motors to assess the biodiversity impact of deep-sea mining, and one at McDonald’s calling for compliance with World Health Organisation (WHO) guidelines on antimicrobials.  

Although investors have been talking about systemic risk and universal ownership for almost 30 years, they have been struggling to operationalise it, Shareholder Commons CEO Rick Alexander explained to ESG Investor. As more shareholder proponents start to file proposals on these issues, this is now beginning to change. 

“Investors are nervous, because it involves saying to a company, ‘we are a shareholder, and we want you to do something that isn’t necessarily good for you’,” he said. “So, it does feel like a step change in advocacy.”  

A proposal at Walmart, for example, asked for the company to establish a living wage policy providing workers with minimum earnings to meet basic family needs. “Company compensation practices that fail to provide a living wage are harmful to the economy and therefore to the returns of diversified shareholders,” the proposal read.  

But while the picture is shifting, prevailing interpretations of fiduciary duty continue to primarily consider financial risk and return, with the consideration of non-financial factors only permissible if they demonstrate financial materiality to the portfolio.  

“The legality is firmly established that a diversified portfolio should be stewarding assets with systemic risk in mind, because it is an avenue to achieve greater value to clients,” said Alexander. “There are also many jurisdictions where companies could consider non-financial factors.”  

A system stewardship approach would be effective for universal owners such as Vanguard, State Street or BlackRock, for example, as it would increase the value of their asset pool. However, culture changes within those firms is typically difficult, the CEO conceded – especially since they have come under the pressure of the US’ anti-ESG movement. 

Filer deterrent 

A separate investor report published by shareholder advisory firm SquareWell Partners this week found that anti-ESG sentiment likely played a role in the sharp drop of ESG proposals observed so far this year within US companies.  

Between January and April, ESG shareholder proposals at S&P 500 companies dropped by around 40% compared to the same period in 2023. This marked a shift from the trend of record-high volumes in ESG shareholder proposals observed in 2022 and 2023. The number of social proposals has decreased by a quarter and governance proposals have halved, while environmental proposals have remained the same year-on-year.  

“We don’t know exactly why the number is dropping at S&P companies, but it could be a number of things, like the company improving its sustainability practices, or the investor choosing to engage the company privately instead of filing shareholder proposals,” said Carmen Ng, Director for Environment and Social at SquareWell. “In the US, it could also be there is a lot of politicisation of the topic and anti-ESG sentiment going around.”  

SquareWell Partner Ali Saribas also noted a substantial increase in the number of shareholder proposals questioning the value of ESG. Even though some may look like standard ESG proposals on the surface, upon closer inspection, they do have an anti-ESG intent, he explained. 

“You actually see some ESG investors supporting these proposals because they may not fully understand who is filing them, or their real intentions,” Saribas added. “These included proposals from independent board chairs, which looked like good governance but were intended to attack CEOs on their ‘woke’ views, or human rights-related proposals at electric vehicle companies from organisations with vested interest in delaying the climate transition.”  

Another key finding from the SquareWell report was a new focus on artificial intelligence (AI) transparency proposals within companies.

AI is becoming more common, and people are increasingly aware of its potential risks and impacts – both positive and negative, raising concerns around ethics, biases, privacy and equality,” said Ng. “Investors are beginning to discuss the concept of a ‘just transition’ in digital transformation. They want to know if companies are effectively leveraging AI and managing the associated risks and opportunities, and whether they have adequate policies and processes in place to address those.”

Earlier this month, the International Corporate Governance Network published an engagement guide on AI, providing advice to investors on how to engage companies on a ‘just transition’ in AI.  

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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