AGM round-up: Record tallies but did investors pull their punches on climate?

The number one standout this US proxy season is the sheer number of environmental and social (E&S) shareholder proposals being put to companies, according to Heidi Welsh, founding executive director of Sustainable Investments Institute (Si2).

The non-profit, which tracks filings in the US, put the total for this year at a record-breaking 598, a 20 percent increase on 2021. 

The opening of the floodgates was in large part due to the dramatic shift at the US Securities and Exchange Commission under President Joe Biden.  

Guidance put out by the financial regulator in November, setting out how it would interpret rules governing the shareholder proposal process reversed instructions put in place during the Trump administration – a period in which shareholders found it increasingly difficult to get ESG-orientated proposals, particularly ones calling for climate targets, on the ballot at company annual meetings.     

This year, corporate appeals to rules frequently used during the Trump era to dodge resolutions lost much of their force – so much so that, just days after the Staff Legal Bulletin from the SEC, retail giant Costco withdrew its bid to exclude one asking for science-based emissions targets.   

Companies that pressed ahead with bids to omit fared much worse this year. Just 34 requests to exclude E&S proposals – 6 percent of the total – were supported by the SEC. By contrast, last year, 16 percent of E&S proposals were omitted following intervention by firms, according to Si2. Welsh tells RI that the number of proposals blocked via the SEC’s “no action” process fell “precipitously” this year.

This has paved the way for investors to vote on some of the most progressive climate proposals yet to be filed in the US. In January, 70 percent of investors supported the resolution at Costco, which called on the company to adopt short-, medium-, and long-term 2050 net-zero science-based greenhouse gas emissions reduction targets, covering its full value chain (Scopes 1, 2 and 3). 

Are we seeing the limit of investors’ appetite on climate? 

Yet as the season went on, similar proposals at financial giants and oil and gas companies, essentially asking them to bring their activities in line with global climate frameworks, attracted significantly lower support.  

None of the proposals calling on US banking and insurance heavyweights to end or limit their fossil fuel financing in line with the International Energy Agency’s 2050 net-zero scenario achieved anywhere near majority support. Most came in around the 10 percent mark.  

Similarly, proposals at US oil majors – including Exxon – calling for Paris-aligned emissions reduction targets saw substantially lower support than the one at Costco, despite the similarity of the ask. None achieved majority support. Last year, proposals asking for general emission reduction targets – without reference to Paris – secured majority support at Chevron, ConocoPhillips and Phillips 66. 

To illustrate the shift, 80 percent of shareholders supported general emission reduction targets at Phillips 66 last year but just 36 percent supported Paris-aligned ones this year.  

Was it just the inclusion of the word “Paris” that put off investors? John Geissinger, CIO at US faith investor Christian Brothers Investment Service (CBIS), thinks it may be more the case that some shareholders felt they had gone too far last year.  

“[This year] there was much more focus on disclosure, transparency and facts, and less movement around – which I think is appropriate – resolutions on trying to influence or tell companies what to do,” he says. 

CBIS’s own proposal at Exxon, which called for an audited report on how the IEA 2050 net-zero scenario would affect business, was supported by 49 percent of investors, 22 percentage points more than the one relating to Paris targets.  

“I think the reason we got more support on the disclosure side is because of that pull back,” says Geissinger. “If the shareholders aren’t going to tell the companies what reduction targets they need to make, we better be sure we have transparency on what the implications of that are going to be.” 

As to what is driving that “pull back” from investors, Geissinger tells RI that, while he cannot speak for others: “I can’t ignore some of the political pressure that was put on companies.” He points to pushback against ESG by officials in Texas as an example. “Their public pension funds, etc, [stating that they] would not do business with firms that are that are kind of anti-oil and gas… that’s pretty strong political pressure.” 

In May, investment behemoth BlackRock warned in a memo that it would oppose more climate proposals this year, arguing that they have become “more prescriptive or constraining on companies and may not promote long-term shareholder value”.   

Speaking about the proposals at the US banks, John Hoeppner, head of US stewardship and sustainable investments at Legal & General Investment Management’s US arm, tells RI that a “new battleground” has emerged around how to interpret resolutions: “Is it the letter of the shareholder proposal? Is it the spirit?” 

Legal & General IM supported the IEA alignment proposals at the big US banks, which Hoeppner says are “absolutely in line with the same pledges that the banks have signed on to”.

As to whether a non-binding proposal can be too prescriptive, he argues that if you interpret any proposal “incredibly literally” you will always find a reason to throw it out – “so there’s always some degree of [interpretation as to] what the intent is, what the spirit behind it is”. Legal & General IM is “probably more flexible on that than some of our US peers”, he adds. 

Mark van Baal, founder of Follow This, the Dutch climate activist behind the proposals at the oil majors, tells RI that this year investors “took a softer stance on climate targets in return for capital returns”.

“If one thing has become clear in 2022, it is that the boards of Big Oil will continue to fight tooth and nail to hang on to their lucrative, age-old business model, and will therefore continue to forge new excuses to increase oil and gas production – and that their shareholders are the only ones who can make them change course by voting for Paris alignment,” he says.

Average support for ESG proposals falls but still historically high 

Lower tallies for proposals asking for climate actions contributed to average support for E&S proposals falling this year. In 2021, average support was 32 percent. This year it currently stands at 26.5 percent.  

Si2’s Welsh notes, however, that factoring in the impact of the low level of support for anti-ESG proposals filed by right-wing groups reduces the gap. She also notes that 2021 was a “real outlier” and that this year by any standards is “still historically high”.  

The number of majority-supported proposals also fell to around 32 this year from 40 in 2021, with a few dozen proposals still to go to the vote.  

Welsh also points out that, of the 140 majority votes on E&S issues in the last decade, 91 have occurred in the past three years. 

ESG records fall with big tallies on race, plastics and worker treatment 

Despite the dip in average support, ESG shareholder proposal records tumbled this year, including an incredible 95 percent vote in favour of one on plastic packaging at fast food firm Jack in the Box, which was filed by US investment manager Green Century. Not only was it the highest support for a proposal on the issue of plastics, but is also believed to be the largest support ever for a sustainability-related resolution opposed by the company itself.    

Another proposal at Phillips 66 asking the oil firm to disclose how it could shift its production away from virgin plastics to recycled ones was supported by 50.4 percent of shareholders, according to filer US non-profit As You Sow – an impressive haul for a first-time outing and a sign that the issue is rising up the agenda of investors.  

This year also saw racial justice audit proposals, which only debuted last year, achieve majority support for the first time at Apple, Johnson & Johnson, McDonald’s and Home Depot. 

A growing focus on racial justice resulted in a 40 percent rise in the number of proposals on the issue filed this season compared with last.  

Meanwhile two-thirds of Home Depot shareholders backed a proposal on deforestation in the retailer’s supply chain, in only the second majority vote on the topic, according to filer Green Century. 

The 2022 proxy season also saw record-breaking support for proposals on human capital management. A resolution on corporate use of non-disclosure agreements on employees secured 65 percent support at IBM, believed to be the highest level to date, eclipsing the 50.4 percent support at Apple earlier in the year. Both were filed by US investor Nia Capital.  

Two resolutions on disclosure of race and gender-based pay gaps, filed by US activist Arjuna Capital, also secured majority support this year at Disney (60 percent) and Lowe’s (58 percent).   

Those results come as the SEC has indicated its intention to begin work on its human capital management disclosure rule for corporates.

Welsh tells RI that the proxy season can function as a sort of “market-signalling mechanism” for the SEC. Currently, the only workforce data companies are required to disclose is the number of employees and the proportion of them that are unionised. “You can’t really do very much with those two data points,” Welsh points out.   

Divisive issues emerge, particularly reproductive rights 

Legal & General IM’s Hoeppner also flags that this year has seen more proposals on divisive social issues, with reproductive health “being kind of the biggest one”. Proposals filed at TJX, Lowe’s and Walmart asked the retailers to report publicly on known and potential risks and costs to their business “caused by enacted or proposed state policies severely restricting access to reproductive health care”.  

Hoeppner says that there is a “huge debate” among asset managers as to whether such a report is addressing potential impacts to the businesses or is “just a sacrificial lamb”.  

Legal & General IM ultimately supported the proposals, but Hoeppner says the process of grappling with the issue was a “good learning experience” and prompted the manager to “reflect on our own policies”. He adds that, when it came to writing a rationale for the decision, they tried to “de-politicise it as much as possible”. “It’s about understanding your employee base better, ultimately,” he says. “That’s probably a good thing, but it’s hard.”  

Given the substantial support the proposals achieved this year and the recent decision on Roe vs Wade by the US Supreme Court, the issue is likely to remain at the top of the agenda in the coming year.

As to why investors are being called to opine on so many E&S shareholder proposals across such a wide spectrum, including multiple filings at individual firms, Welsh says: “I’ve been thinking about this in terms of political dysfunction. The proposals are in some sense an acknowledgement by investors that critical market risk and corporate risk issues are not being addressed adequately by government regulation.”  

Looking ahead to 2023

Looking ahead to next year’s proxy season, Hoeppner expects worker pay to become more prominent, particularly as inflationary pressures bite. He also agrees that more proposals on divisive issues such as guns and reproductive health are likely.  

CBIS’s Geissinger tells RI that it is too early to identify specific trends for 2023. But he stresses that the “headline trend” is towards transparency. “Whether that’s an audit under a climate risk, audit over the racial and ethnic distribution of the work force, the inclusion policy – it is just all transparency,” he says. 

Another emerging trend identified by Hoeppner is large asset managers developing escalation pathways when it comes to voting against directors. Legal & General IM used a director vote tied to climate at about 80 companies this year.  

He notes that the biggest asset managers with extensive stewardship teams are also increasingly “creating their own escalation policies” when it comes to director votes. 

These policies might not, however, result in a huge vote against one director, says Hoeppner. Discontent on climate, for example, might be expressed “slightly differently” at a company by different investors. “I might vote against the chair and someone else might vote against another [director]. The main thing that matters is that the rationale for voting makes it back to the director.”