In the complex world of proxy voting, a little background context goes a long way.  The Wall Street Journal’s Editorial Board recently cited a one-year decline in voting support for ESG-related shareholder proposals as evidence that asset managers are “backtracking” from environmental and social issues and showing “growing reluctance to follow the direction of the proxy-adviser [sic] duopoly.”

This narrative rests on a series of misconceptions.

Curiously, the Journal understates the scope of the trend it trumpets. In fact, a decline in support for ESG shareholder proposals has been ongoing for several years now — concurrent with a dramatic rise in the number of proposals, and a dramatic shift in both what those proposals request of companies and where they are being submitted. Over the same period, many asset managers have increasingly applied environmental and social considerations within their engagement programs and other areas of stewardship beyond shareholder proposals. The Journal also appears to fundamentally misunderstand the role of proxy advisors, and how asset managers utilize their research and voting recommendations.

Viewed in context, the decline in voting support says far more about the types of proposals going to a vote, and the degree to which core elements of ESG have already been embedded in corporate oversight, than it says about asset managers’ “zeal” for environmental and social considerations. To the extent that this trend reflects a change in how institutional investors make proxy voting decisions, the evidence indicates an increasingly nuanced approach, not pushback against proxy advisors or a “retreat” from ESG issues.

More Proposals, Less Support

The trends that emerge in any given proxy season are largely incremental. It is rare for proposal volumes, types, or support levels to abruptly change across the board. However, an SEC decision in November 2021 fundamentally altered the playing field for U.S. shareholder-submitted proposals, which is where ESG issues have historically been most prominent on the proxy ballot. In particular, the SEC made it harder for companies to block proposals that:

  • raise “significant social policy” issues with no direct relevance to the company in question; and/or
  • micromanage companies by requesting that they take specific actions.

Since this change, the overall number of shareholder proposals at U.S. companies has sharply increased, from 411 during the first half (when the vast majority of companies hold their AGMs) of 2021 and 522 in 2022, to 580 in 2023. Most of this increase involves proposals on environmental and social topics, which have swelled from 37% to 55% of the total. Meanwhile, average voting support for environmental and social shareholder proposals has gone down each year since 2021.

“ With many ESG practices now firmly established across the market, the proposals going to a vote increasingly cover topics where there is far less market consensus regarding the link to shareholder value. ”

 

The decrease in voting support could stem from several factors, including  anti-ESG sentiment in the United States, and the growing number of so-called “anti-ESG” proposals. However, over the same period, many asset managers have formalized or tightened their approach to oversight of issues like climate, human capital management and board diversity within their proxy voting and engagement policies; continued to expand their in-house ESG stewardship and investment teams; and shown a growing willingness to look beyond shareholder proposals and include ESG performance and oversight considerations in their assessment of director elections and Say-on-Pay votes — clear evidence that they are not “backtracking” from these issues.

Instead, the most significant factor explaining the decline in support appears to be the growing number of ESG proposals focused on highly-specific requests that lack widespread market consensus regarding the link to shareholder value, and/or submitted at companies where the topic is not financially material.

Proposal Requests & Investor Expectations

Beyond the increase in volume resulting from the 2021 SEC change, the types of ESG proposals being voted on have changed significantly in recent years. That’s partly because many of the environmental and social issues with widely-accepted links to shareholder value have already been addressed, particularly at the companies where they are most relevant; and partly because more and more ESG proposals are being submitted by groups that are not primarily investors and may not share typical investor views of financial materiality.

Prior to the SEC decision, advocacy organizations and NGOs typically submitted roughly one in twenty (5%) shareholder proposals each year. In 2023, they submitted nearly one in four (24%), representing the bulk of the recent surge in environmental and social proposals. It would be inaccurate to state that these groups never have the best interests of shareholders in mind when submitting resolutions. However, these groups often have broader social policy missions and those missions may or may not align with those of long-term investors.

“ Rather than “backtracking,” many asset managers are expanding the scope of their ESG stewardship beyond shareholder proposals. ”

At the same time, as ESG-minded investors have become increasingly knowledgeable about environmental and social issues and their financial implications, they have become more discerning in their proxy voting and less willing to support proposals they do not view as well-crafted or addressing financially material issues, regardless of ideological alignment.

Rather than “backtracking,” many asset managers are expanding the scope of their ESG stewardship beyond shareholder proposals. Defined board and committee oversight of environmental and social issues is becoming the norm — and where investors identify shortcomings, they are preemptively engaging with boards to raise their concerns and, if companies are unresponsive, in some cases voting against the directors they deem responsible. Companies have also seen compensation proposals, contested elections and M&A transactions face ESG-centric scrutiny.

Case Study: Emissions  Reductions Proposals

In this context, it is not particularly surprising that voting support for shareholder proposals has declined. Take greenhouse gas (GHG) emissions reduction target proposals, for example. Following the SEC change, the number of proposals on the topic spiked, from 4 in proxy season 2021 to 29 in 2023, while average voting support has gone down each year.

Historically, these proposals had called for companies to develop their own targets and focused on issues like Scope 1 and Scope 2 emissions, which are under management control with more widely-accepted risks to shareholder value for companies in relevant industries. That approach appears to have contributed to shaping market practice: last year, 94% of S&P 500 companies disclosed Scope 1 and 2 emissions, and 85% had established targets to reduce them.

“ The decline in voting support for environmental and social proposals shows that asset managers are likely approaching their proxy voting decisions from a rational, economic perspective — and that many of their ESG concerns are already being addressed. ”

But with many such ESG practices now firmly established across the market, the proposals going to a vote increasingly cover topics where there is far less market consensus regarding the link to shareholder value, like downstream Scope 3 emissions that are beyond management’s control; or call for companies that have already taken steps to go even further, for example, by replacing relative emissions reduction targets with new absolute targets. In some cases, these proposals prescribe specific goals or outcomes, which many asset managers believe should be left to management and the board.

It’s not just the proposal requests that have changed, but where they are being submitted. Several years ago, emissions proposals were targeted almost exclusively at companies in heavily-emitting industries, such as oil and gas or utilities. More recently, they have appeared at companies that are less directly emissions-intensive, such as financial institutions. Overall, less than half of last year’s emissions proposals (41%) were submitted at companies where the Sustainability Accounting Standards Board (SASB) viewed GHG emissions as a material risk.

In effect, the multi-year decline in voting support for emissions and other ESG shareholder proposals isn’t telling us about asset managers’ views on ESG – it’s telling us about their assessment of these proposals’ merits. Moreover, it’s telling us that the institutions choosing to incorporate environmental and social considerations are likely approaching their proxy voting decisions from a rational, economic perspective — and that many of their ESG concerns are already being addressed.

It’s the Economics, Stupid

There is a persistent misconception that support for any ESG-related issue must be ideological in nature. To the contrary, asset managers generally make voting, engagement and stewardship decisions based on their assessment of how the issues involved impact the bottom line over the long term. The same general approach, grounded in financial materiality and allowing for consideration of each company’s unique circumstances, including performance, size, maturity, risk exposure, governance structure and responsiveness to shareholders, underlies Glass Lewis’ benchmark voting recommendations. This benchmark policy is designed to reflect the current, predominant views of local-market institutional investors on corporate governance best practices, via a bottom-up approach that involves extensive discussions with a wide range of market participants, including institutional asset management and pension fund clients, public companies, public company organizations, academics, and subject matter experts, among others.

In those discussions, we’ve heard countless different (and legitimate) opinions about whether specific topics are relevant to shareholder value and how they should be addressed. Although most institutions with multi-decade investment horizons are likely to argue that flooding and wildfires could have a financial impact on an insurance underwriter, or that the presence of slave labor in a popular retailer’s supply chain could damage its brand, many opt to base their votes on a more traditional set of governance considerations, eschewing environmental and social factors — an approach that Glass Lewis actively facilitates through its Corporate Governance Focused thematic voting policy, one of the many tailored options our clients can employ as-is or as a base to build out their own custom policy.

“ An asset manager’s decision to support an ESG proposal typically reflects a value-focused analysis of what, exactly, the proposal is requesting in the context of the company’s specific circumstances, using proxy advisor recommendations as one of many inputs. ”

Even among the many asset managers that do incorporate the long-term financial implications of ostensibly ‘non-financial’ issues in their assessment, the decision to support a given proposal covering those issues typically reflects a value-focused, case-by-case analysis of what, exactly, the proposal is requesting in the context of the company’s specific circumstances. That one disagrees with their assessment does not invalidate it.

The Role of Proxy Advisors

Another persistent misconception evident in the Journal’s narrative relates to the role, and purported ‘agenda’, of proxy advisors.

To be fair, the Journal is partially correct in stating that “fund executives are second-guessing” proxy advisors. They certainly are — but this is not a new development. Rather, it is how asset managers routinely use proxy advisor recommendations: as one of many inputs in forming their own vote decisions. Faced with tens of thousands of votes across their portfolios each year, proxy advisor research allows institutional investors to cut down on document review and identify the proposals that warrant in-depth, in-house analysis.

Further, the Journal’s suggestion that asset managers have ever merely “follow[ed] the direction” of proxy advisors is plainly false. There is extensive research showing that asset manager votes tend to align with proxy advisor recommendations on routine, non-contentious proposals, overwhelmingly those supported by management. On ESG shareholder proposals, asset manager votes varied widely, demonstrating that they make their own assessments, and ultimately their own voting decisions. Indeed, the supermajority of Glass Lewis institutional investor clients vote according to a custom policy or via a custom process for reaching vote decisions. And, whether they elect to receive vote recommendations according to a custom policy, a hybrid policy, or the Glass Lewis benchmark policy, our clients control how their actual votes are cast.

Similarly, the data flatly contradicts the Journal’s claim that asset managers have become more skeptical of proxy advisors. Over the past three years, the ratio between Glass Lewis benchmark policy recommendations on environmental and social shareholder proposals and the voting support those proposals received has remained consistent. In fact, the largest divide was in 2021, counter to the Journal’s narrative.

Glass Lewis is a business, not an advocacy organization. Our role as proxy advisor is not to persuade clients to adopt a particular voting policy or to vote in any particular way, but to provide corporate governance expertise, objective research and complementary tools to help them vote as they see fit. Our clients have a wide range of views, and we offer a wide range of corporate governance and stewardship solutions tailored to meet their needs. If we were pushing an agenda, encouraging clients to vote against their interests, or otherwise failing to assist them, we would not still be in business. That’s how business works.