ESG support falters this proxy season

While ESG is not going away as a priority for institutional investors, the 2023 proxy season shows that shareholder tactics might be headed in different directions.

May and June are considered the peak months of proxy season, particularly at S&P 500 companies that account for 90% of shareholder proposals. Votes from recently concluded annual meetings are still being tabulated, but according to proxy advisory firm Institutional Shareholder Services, environmental proposals dominated by climate change fell from a 2022 peak, while proposals on social issues, such as diversity, equity, and inclusion and human rights, have grown to 35% of proposals advanced by shareholders.

According to ISS, median support levels for shareholder proposals for S&P 500 companies also dropped in 2023. Median support for environmental proposals that rose to 49.4% in 2021 fell sharply to 25.5% in 2022 and continued falling, reaching 16% in 2023.

Social proposals saw median support rise to 32.5% in 2021, then fall to 24.1% in 2022 and 18.2% in 2023.

A blended category of proposals with environmental and/or social implications, such as climate lobbying activity or health and safety issues, all but disappeared in 2023, with just 2.3% median support, after modest support of 13.3% in 2021.

Resolutions with 20% or more support from shareholders are considered significant enough for management to take seriously and respond to at some point.

Overall, support for shareholder ESG resolutions "was significantly down this year," said Marc Goldstein, head of U.S. research at Institutional Shareholder Services in Rockville, Md.

The reasons for the reduced support vary.

In some cases, robust engagement by some investors led companies to address ESG concerns well before annual meetings, reducing the level of support at vote time.

On the issue of climate risk, for example, investors like Legal & General Investment Management increasingly wield the prospect of negative votes if companies are not doing enough.

This year, LGIM, with $1.4 trillion under management, is assessing more than 5,000 companies, up from 1,000 in 2022, in climate-critical sectors on their climate progress. LGIM warned 342 companies that negative votes against management proposals or directors over climate change standards were a possibility, according to proxy policy documents.

Some companies are doing a better job addressing shareholder priorities like board diversity, and they are disclosing more — or at least getting used to the requests, Mr. Goldstein said. "Ultimately, at the end of the day, most proposals are asking for disclosure," he said.

In the U.S., there was also a quantity vs. quality factor in 2023 shareholder proposals that could partly account for lower overall support rates. After Securities and Exchange Commission changes made it harder for companies to exclude proposals, more — but not necessarily more compelling — shareholder resolutions were filed in 2023. That included a growing number of anti-ESG shareholder proposals, with sometimes vague objectives.

On the flip side, some shareholder proposals were considered too prescriptive, leading otherwise outspoken investors to not support them if they appeared to hamstring management. Prescriptive shareholder resolutions, particularly at U.S. companies, are one of the top reasons for not supporting them, said Kimberley Lewis, London-based head of active ownership for Schroders PLC, with $939.2 billion under management.

That was the case with the influential Norges Bank Investment Management, the in-house manager of the Oslo-based Government Pension Fund Global, with 14.44 trillion Norwegian kroner ($1.34 trillion) in assets. Despite its own robust climate action plan, NBIM voted against a Shell PLC shareholder proposal from climate advocacy group Follow This that called for Shell to align an existing 2030 emissions-reduction target to cover its Scope 3 emissions and to align with the Paris Agreement. NBIM voting policy deferred to Shell management on how to address the concern.

The Follow This proposal received 20% shareholder support, including from Dutch pension manager PGGM, with €227 billion ($244 billion) under management, and £3.2 billion ($4 billion) Church of England Pensions Board, among other asset owners, according to Follow This.

While shareholders in Europe increased or maintained emissions reductions pressure on fossil fuel companies this year, according to Follow This, support from their U.S. counterparts at 2023 annual meetings reversed an upward trend that started in 2021, in part because of the war in Ukraine and surging oil prices that had shareholders hesitant to question returns and energy security concerns. A Follow This climate resolution at French energy company TotalEnergies SE co-filed by 17 institutional investors with a collective €1.1 trillion in assets under management garnered 30% support in 2023.

By contrast, shareholder support for a similar resolution dropped to 11% from 28% in 2022 at Exxon Mobil Corp. and to 10% from 33% in 2022 at Chevron Corp., Follow This calculated.

After those votes, Follow This founder Mark van Baal said that "most investors have yet to decouple short-term profits from long-term risks for the company and their portfolios," even though a record 20 institutional investors managing $2 trillion in assets co-filed the resolutions.

It also makes a difference if shareholder resolutions come from asset owners and managers. While in 2022 Schroders supported 80% of all environmental and social shareholder resolutions, "when we dig into the data we tend to have higher levels of support for resolutions filed by asset owners and managers. The ones not introduced by investors tend to be more campaign-related," Ms. Lewis said.

Some asset owners pushing companies to have forceful climate strategies are also taking their message to the top instead of through resolutions.

Before Shell's annual meeting, the £73.7 billion Universities Superannuation Scheme, London, vowed to oppose re-elections of Shell's chairman and corporate directors over the disparity between climate goals and actions. The company had an acceptable net-zero target, USS said before its negative vote, but its operating plans did not show how it would be achieved, and it continues investing in new oil and gas production. Shell's priority of short-term gains over long-term goals "is misaligned with our view as a responsible, long-term investor looking to pay pensions long into the future," a spokesman for USS said.

Corporate directors also felt investor pressure to improve board diversity. After enhancing its voting policy in 2022 to allow for opposing election of directors in companies moving too slowly on board diversity and climate change, the $311.1 billion California State Teachers' Retirement System, West Sacramento, pledged this year to further strengthen votes against boards.

Lack of gender diversity on boards is one of the top reasons that Fidelity International in London, with $663.1 billion under management, votes against directors, said Aela Cozic, associate director, sustainable investing and portfolio manager.

Another factor in the 2023 proxy season was an SEC pay-for-performance rule adopted in August that tracks actual compensation paid, including stock awards, pension benefits and other compensation, along with performance measures such as total shareholder return and net income.

The new disclosure rule helps investors decide how to vote on say-on-pay packages at annual meetings "and we see a surprising level of consistency" in 2023 corporate proxy statements, said Marc Hodak, a partner at executive compensation and corporate governance consultancy Farient Advisors LLC, based in Dallas.

"What investors should care about is the total shareholder return, and they should be happy with what they are seeing. The relationship (between pay and shareholder return) is pretty good," Mr. Hodak said.

When it comes to executive compensation, the ESG backlash isn't translating into less ESG criteria in pay decisions, Farient found. Today, 82% of European companies use emissions reduction and other environmental measures in compensation calculations, and nearly one-third of U.S. companies do, up from 8% in 2020, according to Farient.

"Companies are moving toward achievement metrics. It makes sense from the shareholders' perspectives. The vast majority of shareholders are seeing ESG as functional for the overriding goal of what they care about — the company's resiliency and performance," Mr. Hodak said.

ESG themes will continue to matter to institutional investors, regardless of yearly vote outcomes. "It's not necessarily the end of the conversation," said Katie Frame, London-based active ownership manager with Schroders.