Investors are choosing to vote against corporate directors underperforming on ESG.
Major changes have altered significantly the way asset managers have sought to improve the ESG practices of major companies, a new report assessing the 2022 round of annual general meetings (AGMs) has shown.
Until this year, investment firms wielded their influence largely by backing shareholder resolutions, often focused on encouraging greater disclosure, or the setting of targets or timelines, notably for CO2 emissions reductions. But in the most recent proxy voting season, the focus has shifted to using their leverage to vote against directors considered to be insufficiently committed to ESG in principle, especially among the large index houses.
At the same time, another change has been the growth in the US of measures, often initiated at a state level, to limit the use of ESG factors in investment decisions, reflecting the growing politicisation of sustainable finance. Alongside this, the report notes that the 30 proposals seeking climate-change reporting at US-listed companies that were subject to a vote won average support of 30.8% this year, almost half the 50.1% average seen in the 2021 season.
The changing face of ESG voting is detailed in the latest annual proxy review by corporate governance, risk and compliance, and ESG solutions provider Diligent. It has found a sharply divided landscape, with some asset managers setting increasingly stringent ESG-related targets for companies, while politicians and others agitate to have such targets downgraded or abandoned altogether.
As such, the scene is very different from that of 12 months ago. Rebecca Sherratt, Diligent’s Publications Editor, said: “The 2022 proxy season experienced its fair share of highs and lows, with surging energy prices, rising interest rates, and an anti-ESG backlash meaning that both issuers and shareholders were forced to operate in a significantly different environment than even a year ago.
“And yet, despite the unexpected circumstances presented this season, shareholders were more determined than ever to hold companies to account on their ESG commitments.”
She noted that the divisions were widening, meaning “following the significant support ESG proposals won in the previous proxy season, 2022 proved to be a season of uncertainty and instability”.
New tools and new challenges
According to Diligent’s report, there were a number of reasons put forward for this. Going into the US voting season, BlackRock, the world’s largest asset manager, said climate-related proposals from shareholders were tending towards the “overly prescriptive”, constraining boards unnecessarily.
All that said, asset managers pressed ahead in other fields. “Investors gleefully wielded a new tool this proxy season as the racial equity audit shone a light on corporate social equity programmes,” said Diligent. “These proposals, which seek analyses of a company’s impacts on non-white stakeholders and communities of colour, were first introduced in the 2021 proxy season.”
The number of such proposals increased almost threefold in the 2022 proxy season. On the other side of the debate, according to Diligent, “the anti-ESG movement also operated with renewed vigour”.
It added: “In recent months, West Virginia, Texas and Florida are just a handful of states that have taken steps to limit the ability of fund managers to take ESG considerations into account when making investments.”
The report cites the pro-market National Center for Public Policy Research, which has said companies should cease to promote ESG policies relating to the appointment of a diverse workforce and has approved of decisions by Republican-run US states such as Louisiana and Missouri to withdraw business from BlackRock on grounds of its incorporation of ESG factors into its investment processes.
Higher level of scrutiny
One of the most dramatic shifts highlighted by Diligent is the switch in focus from supporting shareholder resolutions on ESG to targeting directors. Sherratt said: “Support for ESG resolutions may have dwindled, but that didn’t mean that investors failed to hold companies to account on their ESG commitments.”
Votes against directors became more widespread this season. She added: “Declining support was especially evident among the Russell 3000, where 65 directors failed to receive majority support up from 53 and 62 in both previous seasons.”
Of the ‘big three’, BlackRock showed the same level of supportive votes in 2022 for director appointments, 88.5%, as last year, while Vanguard actually increased its approvals slightly, from 92.1% to 92.4%.
State Street saw a marked drop in supportive votes, from 86.2% to 84.7%.
The report noted: “Investors have directed a higher level of scrutiny towards audit committee chairs, with ten in the US alone failing to receive 50% support in 2022 and 223 receiving less than 80% support.”
“Better definition of ESG”
Erin Dwyer, a Partner at Tapestry Networks who focuses on audit, said: “I think the best thing an audit committee can do – both to minimise votes against its members, but more importantly, as a good governance practice – is to provide as much detail as is practical in the proxy statement related to their decision to ratify the external auditor.”
Amanda Carty, General Manager, ESG & Data Intelligence at Diligent, warned: “Investors overlook governance at their peril […] Tesla’s board recently approved a proposal allowing investors to nominate directors, for instance. Imagine the potential impact this could have on board composition, board decisions, and votes.”
Commenting on the report, Josh Black, Editor-in-Chief of Insightia, a Diligent brand, said: “Debates about the role of ESG in managing corporations have long taken place between allocators [such as pension funds] and asset managers, and investors and directors have become more public over the last few political cycles and particularly in the run-up to these [US] mid-term elections.”
On a broader note, he added: “Over the past few months, we have repeatedly heard from investors, allocators, and ESG advocates that they welcome the opportunity to better define ESG investing and to demonstrate its effectiveness at protecting and creating shareholder value.”