Going into 2022, filers of shareholder proposals had much to be optimistic about. Momentum was on their side following a record-breaking 2021 proxy season.
The US Securities and Exchange Commission, under a Democratic president and the leadership of chair Gary Gensler, empowered investors through guidance and proposed rule changes to file shareholder proposals on ESG issues with confidence.
Corporate appeals to rules around micromanagement, ordinary business and substantial implementation lost much of their weight at the financial regulator as a result.
The upshot, unsurprisingly, was two-fold: a record number of environmentally and socially focused proposals, and a substantial drop-off in the proportion of resolutions being excluded via the SEC’s “no-action” process.
Early signs were also good when it came to investor support for climate proposals, with an early proposal at Costco garnering 70 percent support.
It was a symbolic one too, asking the retail giant 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). Similar proposals had in the recent past been deemed excludable by the SEC under the Trump administration, to the frustration of filers.
But as the season got into full swing, support for similarly ambitious proposals calling on firms – particularly energy and financial giants – to bring their activities in line with global climate frameworks attracted significantly lower support.
There were even signs of a tailing off from the previous year. For example, 80 percent of shareholders supported general emission reduction targets at oil major Phillips 66 in 2021, whereas just 36 percent supported Paris-aligned ones this year.
Average support for ESG proposals fell slightly this year, to 27 percent from 32 percent in 2021. Both years’ tallies are, however, still historically high and some of the decline can be attributed to the low level of support for anti-ESG proposals filed by right-wing groups.
But the number of majority-supported proposals also dipped to around 32 this year from 40 in 2021.
What is behind this? One thing that cannot be ignored is the anti-ESG movement currently sweeping the US. The biggest asset managers, which were increasingly thawing when it came to support for climate proposals, have come under sustained pressure from Republican politicians.
In May, BlackRock – perhaps the most targeted manager in the backlash – 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”.
There are also questions over some investors’ commitment to pushing for more ambitious Scope 3 corporate emissions reductions targets.
An SEC filing by ConocoPhillips this year stated that investors had informed the US upstream oil and gas giant that they “overwhelmingly” did not expect it to set Scope 3 emission reduction targets, despite 59 percent of shareholders supporting a proposal in 2021 calling for just that.
The issue is not going away either. Dutch activist Follow This has already filed proposals at Exxon and Chevron calling on the duo to set medium-term Scope 3 emission reduction target that align with the goals of the Paris Climate Agreement.
Disclosure vs action
Earlier this year, John Geissinger, CIO at US faith investor Christian Brothers Investment Service (CBIS), told Responsible Investor that the drop-off for support for more prescriptive proposals could be due more to a greater focus on disclosure rather than a retreat of ambition.
This appeared to be borne out at US insurer Chubb, where two climate proposals went to the vote in May.
One, filed by Green Century Capital Management, asked the company to adopt policies to ensure that its underwriting did not support any new fossil fuel supplies, aligning itself with the IEA’s net-zero emissions by 2050 scenario. The other, filed by As You Sow, asked Chubb to disclose “whether and how” it intends to reduce emissions associated with its business activities in line with the Paris Agreement.
As You Sow’s proposal was backed by an impressive 72 percent of shareholders, yet Green Century’s attracted support of 19 percent.
Focus on directors
Influential proxy adviser ISS published its annual benchmark survey in October, revealing that investors could take a tougher stance on directors at climate laggards in the months ahead.
Close to 80 percent said they supported opposing directors at high-emitting firms that do not adequately disclose in line with corporate climate disclosure framework TCFD.
Even more (84 percent) disagreed that directors at the biggest emitters should be spared if their climate change risk management disclosure and performance were not up to scratch.
Speaking to RI in the summer, John Hoeppner, head of US stewardship and sustainable investments at Legal & General Investment Management’s US arm, said that more and more large asset managers are developing escalation pathways when it comes to voting against directors.
Could 2023 be the year that climate change becomes a director vote issue rather than one to be settled via a precatory shareholder proposal?
ESG proposals: spirit or letter?
Another emerging battleground is around how investors are interpreting resolutions – specifically, whether the letter of the proposal or the spirit are more important, and whether a non-binding proposal can be too prescriptive.
One thing is clear, the job of stewardship departments is not getting any easier given the rising number of proposals across a widening array of issues – some of which, such as those filed in the wake of the repeal of Roe vs Wade on reproductive rights, are politically charged.
An area that is likely to continue to be a focus in 2023 is workers’ rights and treatment. This year saw record-breaking support for proposals on human capital management, including 65 percent support for a resolution on corporate use of non-disclosure agreements on employees at IBM.
Two resolutions on disclosure of race and gender-based pay gaps also secured majority support this year at Disney (60 percent) and Lowe’s (58 percent).
Last week, a group of institutional investors, led by Canadian responsible investment body SHARE and US-based SOC Investment Group, filed a proposal to Amazon calling on the online giant to commission an independent assessment into how faithful it is to its commitment to the rights of workers to unionise – another topic that looks set to figure prominently in 2023.
SOC Investments was one of the pioneers of the successful racial justice audit proposals that emerged in the 2021 proxy season following the killings of George Floyd and Breonna Taylor, and growing awareness of the Black Lives Matter campaign.
Those proposals prompted a flurry of audit commitments, including from Amazon, and this year racial justice audit proposals achieved majority support at eight companies – a trend that also looks set to continue.
Another ongoing area of focus will likely be tax transparency. Five proposals were filed on the topic this year, including three last month at oil majors Chevron, Exxon and ConocoPhillips.
The nuances of the 2022 US proxy season make predictions for 2023 difficult. The only certainty is that investors will be called upon to opine on a host of issues across the ESG spectrum and will be scrutinised on all sides for the answers they give.