Taking the Temperature of US Investors

Heidi Welsh, Executive Director at the Sustainable Investments Institute, explains why support for climate-related resolutions may have waned at US AGMs this year.

The US 2022 proxy voting season has broken records for shareholder submissions, surpassing 2021’s 733 total by 191.

While not all of the 924 submitted proposals will reach ballot – the Harvard Law School Forum on Corporate Governance predicts 621 will make it through – this year’s proxy season already demonstrates the impact of the Securities and Exchange Commission’s (SEC) decision to make it harder for companies to block resolutions.

Last November the SEC’s Staff Legal Bulletin 14L removed complicated requirements imposed by the Trump administration that allowed board directors to exclude certain shareholder proposals on grounds of micro-management.

As a result, proposals that genuinely address a significant social or environmental issue cannot be as easily excludable.

Changes to the SEC’s interpretive guidance will see the number of proposals withdrawn fall from 82 in 2021 to 34 this year, says Heidi Welsh, Executive Director at the Sustainable Investment Institute, a not-for-profit organisation researching organised efforts to influence corporate behaviour on social and environmental issues.

“However, that doesn’t mean more will pass,” Welsh says. “There were historically high votes last year; average support for climate proposals topped 50% which is almost unheard of. From 30 years of observing proxy voting seasons, what typically happens after high levels of support is the resolutions become more demanding. As a result, some of the support [for environmental resolutions] has fallen back this year.”

Prescriptive proposals

Welsh is referring to a May statement released by BlackRock which argued this year’s climate-related proposals were “more prescriptive or constraining on companies and may not promote long-term shareholder value”, and as such they would be less likely to vote in favour.

The world’s largest asset manager says while it supported 47% of climate resolutions last year, these related to “how the energy transition will affect a company’s long-term business model and financial performance, supported by quantitative information such as Scope 1 and 2 greenhouse gas (GHG) emissions and short-, medium-, and long-term targets for emissions reductions”.

Following the SEC’s revised guidance, Walsh notes that so far 68 of the 101 resolutions submitted about carbon asset risk address emissions, compared to 29 at the same stage last year.

More than two dozen ask companies to set goals, with a new focus on all types of GHG emissions, including Scope 3.

This is just the sort of proposal BlackRock refuses to get behind.

The asset manager states: “We note that many of these more prescriptive climate-related proposals are attracting lower levels of investor support. The nature of certain shareholder proposals coming to a vote in 2022 means we are likely to support proportionately fewer this proxy season than in 2021, as we do not consider them to be consistent with our clients’ long-term financial interests.”

Welsh says it is still too early to determine the impact of BlackRock’s position since the season closes in August, but she says asset managers are not obstructing shareholders’ efforts to push companies to make concerted plans on climate change.

“I would not say that asset managers are necessarily hindering progress. We are still experiencing historically high support levels.”

Anti-ESG resolutions

While climate change continues to dominate the headlines, it has not accounted the lion’s share of shareholder proposals this year.

Of the 286 proposals put to vote by 7 June, 30 relate to environmental issues, 107 to social and 149 to governance. So far, six, 10 and 18 have passed in each respective category.

While these are low success rates, Welsh says it is “important to note that there are more anti-ESG proposals that do not receive any support, and these are counted in the averages”.

The Harvard Law School mid-season review reveals a notable increase in what it calls “conservative proposals” which are largely critical of ESG policies.

Based on its examination of three primary proponents of these proposals – Steven Milloy, The National Legal and Policy Center and the National Center for Public Policy Research – the number of conservative resolutions increased from 26 in 2021 to 52 in 2022.

For example, the National Center for Public Policy Research, through its Free Enterprise Project (FEP) – put forward proposals at Walmart and Comcast addressing what the activists call “discriminatory company policies”.

FEP takes issue with Walmart’s diversity, equity and inclusion policies, which “give preference to individuals based on surface-level characteristics such as race and sex”, while its Comcast proposal criticises the company’s equal employment opportunity policy “for not prohibiting discrimination against centre/right employees”.

FEP Director Scott Shepherd says: “It may be good business and a kind act to help poor and deserving associates or others who could benefit from extra opportunities they have lacked. It is illegal, racist and immoral to limit that assistance on racial grounds, or to devote shareholder funds in racist ways to create artificial equalities of outcome.”

The Walmart resolution received just 0.5% of the vote, while the Comcast vote achieved 1.44%.

Welsh says these types of anti-ESG proposals are generally unpopular.

“There were a lot of resolutions from folks who don’t support looking at environmental and social issues, mainly on the social side of things. They get almost no support and they don’t reflect the general direction of travel,” she says.

Political lobbying

What did garner support this year were proposals focusing on political spending.

The Harvard Law School reports that as of 7 June 2022, these types of resolution accounted for 26% of all the estimated 399 social shareholder proposals filed. This represents an increase on 2021, where political spending proposals accounted for 23% of social proposals filed.

Welsh says shareholders want transparency not just on how money is spent but also on whether political support and lobbying is consistent with company policy.

“Almost every large company has a policy about board oversight and disclosure on government spending, but there is less transparency on lobbying. Proponents are asking for more insight into who these companies support and whether their political allegiance contradicts company policies.”

Following the US Supreme Court’s decision permitting restrictions on access to abortion, several companies faced shareholder resolutions asking them to report on the impacts of reproductive healthcare legislation.

Retailers Walmart, TJX and Lowe’s all faced such proposals which received 12.78%; 30.16%; and 32.21% respectively.

Welsh says: “The state-level lawmakers are passing an increasingly right-wing agenda. The big one is  abortion rights and there are also laws restricting healthcare to transgender children. Proponents have really started to zero in on the inconsistencies between company policies and what these right leaning or right-wing politicians are supporting.”

Focus on racial justice

By 7 June, at least three shareholder proposals were filed questioning how companies’ political contributions align or conflict with stated racial justice commitments, which reflects what the SI Institute calla “the surge in filings” relating to racial justice.

There has been a 40% increase on last year’s resolutions asking for race audits which cover how companies treat employees, their recruitment and retention levels, and their external race policies relating to suppliers and customers.

The Harvard Law School says not only are racial audits designed to help inform investors about their current and future investments from a social and financial perspective, but are also intended to help companies craft their policies and practices to achieve their social justice goals.

All but six resolutions were put to companies for the first time, which is in large part attributable to a campaign by SOC Investment Group to raise awareness that “addressing racism creates both profit and justice”.

Welsh says: “The racial justice audit proposals last year were at financial companies as a consequence of their long history of discriminatory lending and redlining. This year proponents expanded resolutions to different companies, asking retailers, drug companies such as Altria, and those in the tech sector to provide an audit.”

The overall voting rate in favour of racial justice audits is at 46% and there have been eight majority votes so far, including at Altria where 62.16% of shareholders were in favour.

Welsh says that the level of support for positive environmental and social resolutions during recent AGM seasons demonstrates that investors recognise these issues are “materially important to a company’s success”.

However, she notes this is in “direct contrast” to the position taken by some Republican politicians in the US who are openly hostile to ESG principles.

Former Vice-President Mike Pence referred to ESG strategies as “pernicious”, while Florida Senator Marco Rubio is backing legislation that “would require corporate directors to prove their ‘woke’ corporate actions were in their shareholders’ best interest in order to avoid liability for breach of fiduciary duty in shareholder litigation over corporate actions relating to certain social policies”.

At the same time, Ron DeSantis, the Republican Governor of Florida, is at war with Disney over his plans bill to limit the teaching of sexuality and gender identity in the state’s public elementary schools through what has become known as the ‘don’t say gay’ bill.

Welsh says: “The question is: will companies and investment managers push back against the politicians? Will they spend their money differently to help elect different people? I am not confident, because at the state level, there’s very little sign of that.”

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