Focus expected to shift in 2021 proxy season

Considering the unusual year preceding it, the 2021 proxy season could see more surprises for and from institutional investors on ESG issues, and for the directors of companies in which they invest.

The 2020 proxy season saw some ESG-related shareholder proposals gaining traction compared with previous years, but the COVID-19 pandemic is expected to spur more gains and more focus on emerging issues like employee health and safety, and human capital management.

The racial and social justice issues that made headlines in 2020 are also expected to crop up in shareholder proposals for companies to do more to promote diversity and inclusion, and to be more transparent about it. Directors of companies that ignore those calls also risk their own seats, said New York City Comptroller Scott M. Stringer, who last year called on S&P 100 companies to publicly disclose the composition of their workforces by race, ethnicity and gender, in their 2021 Equal Employment Opportunity Commission reports. For unresponsive companies, Mr. Stringer said his office may consider submitting shareholder proposals or factoring it in evaluations of directors standing for re-election this proxy season. Mr. Stringer serves as investment adviser, custodian and trustee of the $211 billion New York City Retirement Systems.

Last year's proxy season saw resolutions related to human rights and worker rights for the first time ranking as the most active issue, ahead of resolutions directly addressing climate change, according to the Interfaith Center on Corporate Responsibility, whose 300 members represent faith communities, asset managers, unions, pension funds and other socially responsible investors with combined assets of more than $500 billion.

That momentum is expected to build in 2021. Along with several racial justice resolutions filed, the non-profit organization As You Sow created a racial justice scorecard to help shareholders "look at what companies are actually doing," said As You Sow CEO Andrew Behar in Berkeley, Calif. "What we are really working on is getting the companies on the path toward driving out systemic racism. This year we think there is enough data out there that we can establish best practices," he said.

Matthew Sweeney, spokesman for Thomas P. DiNapoli, the state comptroller and sole trustee of the $226.4 billion New York State Common Retirement Fund, Albany, said officials there plan to scrutinize portfolio companies' responses to the COVID-19 pandemic and racial justice when voting its proxies, including holding directors accountable and voting against executive compensation.

"These issues have had a massive impact on our society and our economy, illustrating the enormous effect ESG issues can have on portfolio companies and investment managers. As a result, the fund believes that now is the time for companies and investment managers to make meaningful changes, not just to react to recent events, but to fundamentally improve their ESG policies and performance," Mr. Sweeney said.

Despite the pressing issues highlighted by the events of 2020, climate change will remain a top ESG concern for shareholders, some of whom are trying new approaches this year. Investor members of the Interfaith Center on Corporate Responsibility have launched a campaign to have companies align their lobbying activities with the goals of the Paris climate agreement, and to proactively lobby for climate action. With growing momentum toward a transition to a low-carbon economy, it was time to take corporate lobbying engagements to a new level, said Jake Barnett, manager of sustainable investment services for ICCR member Wespath Benefits and Investments, an agency of the United Methodist Church, Glenview, Ill., with more than $24 billion in assets.

Taking a page from say-on-pay campaigns, As You Sow recently launched a say-on-climate campaign, asking companies to amend their bylaws to have a climate transition plan compliant with net-zero emission goals of the Paris Agreement. The kicker, Mr. Behar said, is that in addition to the companies' reports, shareholders will be asked to vote each year on that progress. "Like say-on-pay, shareholders get to grade the company," he said. Along with resolutions for specific companies, the campaign is sending letters to many more with the goal of more standardized reporting. While his organization focuses on the U.S., "this is a global movement," Mr. Behar said.

Proxy-voting advisory firms like Institutional Shareholder Services Inc. and Glass, Lewis & Co. have also recalibrated their priorities due to the pandemic, with more focus on board diversity and board responsibilities related to ESG issues. This year, Glass Lewis said in updated proxy voting guidelines that boards of S&P 500 companies not clearly disclosing board-level oversight of ESG issues will warrant notes of concern. Next year, governance directors of companies not providing that disclosure will face recommendations opposing their election.

Glass Lewis, ISS and many investors say they will also be scrutinizing executive pay through a COVID-19 lens. To prepare for the 2021 proxy season, JUST Capital, an independent non-profit that tracks company performance on multiple stakeholder issues, has been tracking how companies address both executive and worker wages, and the gap between the two.

As more asset owners and major asset managers like BlackRock Inc. connect sustainability-related factors to a company's ability to generate long-term financial returns, the pressure on corporate boards is expected to increase.

Investors are encouraged by BlackRock's recent shift to consider more direct proxy voting rather than its traditional engagement. When it comes to sustainability, "we see voting on shareholder proposals playing an increasingly important role in our stewardship efforts," BlackRock said in its latest stewardship report.

"Given the size of BlackRock's stake at most U.S. public companies, BlackRock's support for shareholder proposals by itself can materially change outcomes and responses. In addition, other investors may join the arms race, making it even more likely that proposals will lead to change," said Richard Fields, partner and director of stakeholder engagement at law firm King & Spalding LLP in Boston.

Shareholder activism in the upcoming proxy season is also expected to increase. A CoreData Research survey of 150 institutional investors at the end of 2020 found 91% expect more activism in the next few years, and more pressure on asset managers to join the fight.

"Actively managed funds, passive strategy funds and other institutional investors are increasingly willing to make demands themselves, privately and publicly, that evoke tactics from the traditional activist toolkit," said corporate governance legal experts at Freshfields Bruckhaus Deringer LLP, in a posting on the Harvard Law School Forum on Corporate Governance.

"This is especially true of ESG issues, where activists continue to be acutely aware of ESG weaknesses at their targets and to build bridges with institutional shareholders focused on elements of ESG or even to make ESG a focus of their campaigns," the experts said.