April 12, 2022

Shareholders File More ESG Proposals Than Ever Ahead of This Proxy Season

Company diversity and climate change are the biggest issues for investors this year.

Reported by Anna Gordon

After 2021’s dramatic proxy season, it’s clear that institutional investors are ready and willing to wield their power to change companies. Board members, who were once thought to be untouchable, are now feeling the heat.

“It used to be, five or 10 years ago, very rare that mainstream institutional investors would vote against a board member. But increasingly, investors are holding directors personally accountable,” says Amy Borrus, executive director of the Council of Institutional Investors.

The Data

As of April 7, investors have filed 539 shareholder proposals related to ESG issues, according to data obtained from the Sustainable Investments Institute. This is a slight increase from last year’s 535 ESG proposals, according to Institutional Shareholder Services’ Proxy Season Preview. (Institutional Shareholder Services is the parent company of Chief Investment Officer.) As of now, at least 201 proposals have also been withdrawn, likely meaning that companies were amenable to the investors’ proposals.

Proposals regarding climate change are the most common, numbering 111, or approximately 20.6% of the total. Proposals aimed at companies’ political activities are a close second, with 108 proposals.

Based on withdrawal rates, companies seemed most amenable to issues related to diversity. Of the 47 workplace-related proposals, 31 were withdrawn (66%). Proposals to adopt net-zero goals, in which a company pledges to produce zero carbon emissions by a certain date, were also more likely to be withdrawn. Companies are least amenable to issues related to human rights and working conditions. Despite 78 human rights proposals being filed so far, only 16 have been withdrawn, adding up to just over 20%.

Nevertheless, workplace conditions proposals are expected to have a better chance of making it past SEC scrutiny this year when compared to previous years. The SEC enacted new guidelines indicating that it will be more receptive to proposals relating to workplace issues, according to Proxy Preview, a comprehensive report on proxy season organized by multiple nonprofits. Traditionally, workplace issues had been deemed a part of ordinary business, and the SEC frequently omitted them.

“The November SEC Staff Legal Bulletin 14L suggests fewer proposals will be omitted on these grounds if they raise public policy issues, though, and the outcome of challenges to the decent work resolutions may show how far the Biden administration’s SEC will go,” states Proxy Preview.

There are also a growing number of anti-ESG shareholder resolutions being proposed in 2022. There are 33 resolutions proposed that were deemed as “anti-ESG” by the Sustainable Investments Institute. The National Center for Public Policy Research has submitted proposals calling on at least five companies to report their employee training curriculums, arguing that diversity training harms white people.

Corporate political activity is also a popular topic among shareholder activists this year. Many are calling on companies to disclose data regarding campaign spending and lobbying efforts. At least 37 proposals asked for increased accountability when it comes to generalized lobbying. Another 20 proposals focus specifically on lobbying related to climate change.

Climate

Climate change continues to be the issue getting the most attention from investors this proxy season. This year, it should be even easier for shareholders to engage companies.

Last month, the SEC proposed a rule that would require companies to disclose climate risks in their periodic disclosures. The SEC’s general trend towards more climate-friendly policies under the Biden administration has meant that an increasing number of climate-related proposals are able to make it past SEC scrutiny.

“We’re really pleased that the proposal is calling for companies to disclose their direct emissions,” says Aeisha Mastagni, a portfolio manager with the California State Teachers’ Retirement System in their Sustainable Investment & Stewardship Strategies Unit. Mastagni also serves on the board of directors for the Council of Institutional Investors. “We will likely push the SEC a little bit further on scope three emissions,” she says, referring to emissions that are not directly created by a company but that stem from the company’s value chain.

Engine No. 1, the investment manager that started the proxy battle that ultimately unseated three Exxon board members last year, is also prioritizing climate issues this proxy season.

“For us, a big focus this year continues to be in oil and gas, agriculture and transportation,” says Yusuf George, the hedge fund’s managing director. “It’s going to be incredibly busy. In addition to climate-related issues, we will also be focused on diversity, equity and inclusion issues and making sure that companies are being both transparent and accountable to the to the targets that they’ve set.”

Diversity

Institutional shareholders like CalSTRS and the California Public Employees’ Retirement System are also putting a significant effort into targeting diversity issues this year. CalSTRS made headlines when it promised to vote against entire boards of directors when the companies have no women on their boards.

“Our effort this year is to try to send a consistent message to the marketplace. If you’re a company in 2022 and you still have an all-male board, that’s not OK with us,” says Mastagni. “We think that voting against directors is one of the most powerful tools we have at our disposal. And so we’re going to start using it.”

Like Mastagni, Simiso Nzima, the managing investment director of global equity at CalPERS, who oversees the pension fund’s proxy efforts, cited diversity as one of the major priorities for the pension fund.

According to Nzima, diversity engagement by pension funds has often focused on bare minimum thresholds that no longer are acceptable to CalPERS. He says that often companies would have a single woman or person of color on their boards and call themselves “diverse.”

CalPERS has stated that when a company’s demographics are not reflective of society, it puts the company in a bad position that will trickle down to the company’s financial health and performance in the pension fund’s portfolio. Nzima cites multiple studies showing that diverse companies generally outperform the market to back up this claim.

“Companies have to be much more reflective of society,” says Nzima. “If we engage with them on diversity and they are not being responsive, one of the things that we do is vote against directors.”