Two years of record levels of support for ESG shareholder proposals came to a shuddering halt this year.
Average support for sustainability resolutions plunged by close to a third from the 2022 proxy season to just 22 percent, according to data from Sustainable Investments Institute (Si2). The number of majority-supported resolutions went the same way, dropping to just eight from close to 40 in the two previous years.
One thing that did go up again, however, was the sheer number of proposals. A record 630 resolutions were filed on issues related to the environment, society and sustainable governance.
What precipitated such a dramatic fall in support? That depends on who you speak to.
For one of the largest US asset managers, the blame is likely to sit with the filers and a more permissive environment at the SEC, which oversees the process. Many proposals, they argued, were too tangential, overly prescriptive and generally of diminishing quality.
Sceptics, however, point to the anti-ESG backlash that has continued to rage in the US as the real cause of the chill in support, as investors were showered with legal threats, boycotts and vitriol.
One stewardship professional at a larger manager broke rank and told Responsible Investor 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.
The proposal quality argument fails to account for the reversal on some proposals that did not change between proxy seasons, such as BlackRock‘s apparent abandonment of racial justice audit proposals this year.
It also struggles to explain counterintuitive results, such as the same emissions reduction targets proposal achieving three times the level of support at France’s TotalEnergies as at US counterparts Exxon and Chevron.
More trouble ahead for filers?
Could the low support this year have knock-on effects in 2024? More than 200 proposals were withdrawn in 2023, the majority because agreements had been reached between companies and filers.
But will firms be motivated to make concessions if the leverage of an embarrassing vote dissipates?
It was noteworthy that this year just one company – New York Community Bank – supported a shareholder proposal filed against it. In 2022, around half a dozen companies either supported or did not actively oppose resolutions.
There were also signs that some firms have become more antagonistic in proxy battles.
But even if a proposal achieves majority support, that is no guarantee of action, according to Hannah Shoesmith, head of engagement at Schroders. She says the UK fund manager has been noticing and hearing more about such incidents.
“It’s particularly a concern in the US. Of course resolutions are not necessarily binding there, so maybe companies feel they have more flexibility, but we see it as a basic principle of respecting shareholder rights.
“We’re already concerned about the burden of these shareholder resolutions on everybody. And then if we’ve spent the time to really carefully consider the shareholder resolution, and given our support to ones we think would be beneficial for long-term value creation and then they’re not implemented, that whole effort is wasted.”
Shoesmith expects this will be raised in Schroders’ annual corporate governance letter to US companies in 2024, and questions whether there is a need for proposals asking about the implementation of other proposals.
Frustration with companies might also prompt greater scrutiny of directors, particularly on climate change, according to Troels Børrild, head of responsible investments at Danish pension fund AkademikerPensions.
“I think it will become mainstream as investors are getting a bit weary of all the work that goes into a resolution and companies are not listening or doing enough, even when the resolutions get at least 30-40 percent support,” he says.
Workers’ rights in focus
Despite the gloom, there were bright spots in 2023. Workers’ rights appeared to have been insulated from the general decline in support. For example, freedom of association proposals were among the best-supported this year.
According to a Harvard blog, nine such proposals won 35.5 percent support on average. This includes majority support for one at Starbucks.
“There were some historic wins this year,” says Heidi Welsh, executive director of Si2. “This proxy season definitely showed that, when investors are faced with company-specific cases of malfeasance as at Dollar General and Starbucks, proposals seeking to address these issues get a lot of support.”
She adds that, more broadly, there has been a resurgence of US labour sentiment. “It’s a really interesting space which is likely to continue into 2024.”
Already for the 2024 season, the Nathan Cummings Foundation put forward a proposal on fair pay at Disney.
Welsh notes that similar proposals this year struggled for support, including one at Denny’s asking for increasing tipped wages, which was backed by just 4 percent of shareholders. For her, it is too early to judge how the Disney resolution will fare.
Another social issue that has been prominent in filings over the past two years is racial equity audits. But given the success of those requests in terms of both support and corporate adoption, next year could see follow-up proposals shifting to the quality of audits undertaken by firms.
Climate not going away
Despite the setbacks of this year, market participants agree that climate will remain the dominant issue at AGMs in 2024.
In particular, Welsh notes that proposals on climate lobbying had “significant support” this year – even from the big three – and she expects this to continue into next year.
AkademikerPension’s Børrild, which co-filed a climate lobbying proposal at Japanese car maker Toyota this year, tells RI: “The political system is not wielding decisive enough action. In our view, responsible investors need to prioritise companies’ relationships with associations and policymakers more.
“We’re definitely going to continue our focus on corporate public policy engagement and lobbying in 2024 in different markets, because there’s still a lot of work to be done.”
Welsh also thinks the focus on climate financing by major US financial heavyweights will remain, despite low support, but potentially from a different angle to 2023.
“This year’s season essentially had two types of resolutions – one asking ‘tell us how you are financing fossil fuels’ and the other asking for no more financing of new fossil fuel exploration,” she says.
“The latter did poorly and cannot come back. I think there will be shift and proposals may have a more positive spin like ‘disclose what you are doing on green energy’.”
Unsurprisingly, other areas of continued focus flagged by filers included companies being called on to set Scope 3 targets, as well as setting and disclosing robust transition plans.
Just Transition proposals
Several people also suggested that 2024 may see the rise of Just Transition proposals, given the increased focus on the issue in engagements.
This year saw a handful of these proposals. For example, a resolution at Exxon Mobil asked the board to report on the social impact on workers and communities from closure or energy transition of the company’s facilities, and alternatives that can be developed to help mitigate the social impact of such closures or energy transitions.
The proposal received 16.6 percent support.
Artificial intelligence was mentioned as an area of increasing focus by nearly everyone RI spoke to.
Indeed, this month a proposal on AI misinformation and disinformation was backed by more than a fifth of shareholders at Microsoft’s AGM.
Another issue RI will be keeping a close eye on is the rise of nature-specific and nature-related shareholder resolutions.
To date, the topic has been relatively underrepresented at AGMs. In July, we published a Deep Dive feature exploring why this has been the case and why it may be about to change.
For more details on how this is developing, and a look at some of the first proposals on the topic for next year, see our 2024 biodiversity outlook.
On a less positive note, anti-ESG proposals look set to remain a feature of the AGM season, despite averaging support of just 2 percent this year. Welsh predicts that they will continue to double on DE&I issues, with a particular focus on transgender health.
More alarming, perhaps, is that the shareholder proposal process itself is increasingly in the crosshairs of anti-ESG advocates and their sympathisers, including among US Securities and Exchange Commission commissioners. With an election year on the horizon this decades-old shareholder accountability mechanism could become another battleground.