The cliché that the truth lies in the middle is a well worn one, but it may have some applicability to the most recent US proxy season, if two off-the-record conversation are anything to go by on the prescriptiveness, or not, of shareholder proposals.
The debate around the merit of shareholder proposals and the support – or lack of – by large asset managers has been a long running one in the responsible investment world. But the collapse in support by some of the largest US managers in the 2023 proxy season for environmental and social (E&S) resolutions has brought renewed attention, not to mention questions over their motives for doing so.
Just a couple of years ago things were more harmonious. Average support for environmental and social resolutions were riding high with record numbers gaining majority support at US companies, driven in large part by the backing of the bigger investors, many of which had become increasingly comfortable speaking the language of ESG.
This proved to be short-lived. The 2022 proxy season saw average support fall several percentage points to around 30 percent and then drop by close to a third in 2023, according to data from Sustainable Investments Institute (Si2).
In one telling of this story, asset managers spooked by the growing ferocity of the anti-ESG backlash and seduced by record profits in the energy sector simply abandoned their superficial commitment to the cause.
In another rendition, a more permissive environment at the SEC has seen the powerful financial regulator allow more and lower quality proposals – which any investor worth their salt would reject – through to the vote at company meetings.
“Shareholders submitted a record number of proposals in the 2022-23 proxy year and the quality of proposals continued to decline,” BlackRock’s global head of investment stewardship, Joud Abdel Majeid wrote last month.
“Because so many proposals were over-reaching, lacking economic merit, or simply redundant, they were unlikely to help promote long-term shareholder value and received less support from shareholders, including BlackRock, than in years past,” she added.
Where then does the truth lie?
A person closely involved in the shareholder proposal process told Responsible Investor that the level of success filers have had under the current SEC in getting their proposals onto the ballot at companies was “unheard of”.
Such is the regulatory environment at the financial watchdog under the Biden presidency that corporate attempts to exclude resolutions fell by around 30 percent in the 2023 proxy year compared with the previous one.
The person raised concerns about the long-term implications the current volume of ESG proposals poses, and the potential for a swing in the pendulum the other way should the SEC come under the control of a Republican president.
They also conceded that “many proposals that would have gotten thrown out in earlier years” were making through to the vote. Furthermore, the extent to which some of these proposals delved into companies’ operations was also raised, getting “really into the weeds” in way that “would not have been allowed five years ago”.
More nuance than some managers admit
Perhaps then those big asset managers were pointing to a genuine shift rather than making excuses?
Well, according to one stewardship professional at a mainstream asset manager, there is more nuance than perhaps they are letting on.
They told RI was that while it was “objectively” true that proposals have gotten more prescriptive over the last two or three years, the extent to which that is the case has been overstated. They suggested that around 5 percent of proposals have become more prescriptive each year from 2021, and “not 30 percent” this year.
BlackRock, which has been one of the primary targets of the anti-ESG backlash in the US, revealed in August that it supported just 26 proposals on E&S issues out of a possible 399 between July 2022 and June 2023.
That was barely a third of the number supported by the investor in the previous proxy year.
Similarly, the Financial Times reported that BlackRock’s rival Vanguard supported even less, supporting just two percent of E&S shareholder proposals, down nine percentage points compared with 2022, with prescriptiveness cited as the reason.
The stewardship professional RI spoke with conceded that in some instances where there has been the big swing in support away from ESG proposals there could have been an “element of [unintentional] greenwashing” in previous years. “I think what’s happened, especially in the US, is that asset managers have looked themselves in the mirror and said, where do we actually stand on these issues?”
Echoing the other conversation, they described the SEC as opening the “floodgates” for shareholder proposals since 2021, giving rise to resolutions “that maybe aren’t as well targeted or well-crafted or that overextend by trying to go into operational change”.
That neither person was willing to put their names to these comments is interesting in of itself. But what emerges from this extremely limited sample of background conversations is that there is at least some shared concern about the sheer number of proposals being filed and, perhaps, some agreement that there has been a change in how deeply resolutions are now permitted to delve into how companies are run.
Here perhaps lies the true fault line – the appropriateness of shareholders telling a company what to do versus asking for disclosure.
The asset manager representative told RI that they thought that the “prescriptiveness” of the shareholder proposals was being driven in part by frustration by the perceived lack of progress achieved by former ones on disclosure.
If that is the case and given the growing imperative of many of the sustainability challenges facing the world and the companies themselves, prescriptive proposals are likely to remain. That is, unless there is a changing of the guard at the SEC.