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The ESG bar is high this proxy season: Is your board prepared?

Many ESG and climate-related shareholder proposals won support in 2021.

Many ESG and climate-related shareholder proposals won support in 2021.

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Last year saw a record number of ESG and climate-focused shareholder proposals winning majority support in 2021. Therefore, we can only expect the same for 2022 as shareholders’ and stakeholders’ expectations continue to rise. The success of hedge fund Engine No. 1 in securing board seats at Exxon Mobil in 2021 was a major warning sign for what will come. So, what can companies and their boards expect this year and are they prepared?

If you just scan the headlines for this year’s proxy season, asset managers and proxy advisers are setting the bar high. There has never been as much focus and pressure on boards of directors and their ESG and climate oversight competencies.

Here’s how some notable players see it:

  • The proxy advisory company Glass Lewis will recommend voting against any governance committee chair of a company that fails to adequately disclose the board’s role in ESG oversight.
  • ISS (Institutional Shareholder Services) will generally recommend "against" or "withhold" votes for the responsible committee chair when ISS determines a company is not taking the minimum steps needed to understand, assess and mitigate climate risks to the company and wider economy. 
  • BlackRock, Vanguard and State Street Global Advisors recently issued their voting policy updates for 2022, which reflected several common themes. These included an emphasis on climate, the transition to a net-zero economy, diversity at the board level and throughout the workforce, as well as effective human capital management.
  • BMO Global Asset Management (EMEA)’s engagement priorities include climate change and biodiversity.
  • Aviva Investors’ CEO Mark Versey wrote that bonuses awarded to company executives should reflect how well sustainability targets have been met, warning that laggard boards would be held accountable.

However, it is not only these big names that want climate action; it’s all of us. Larry Fink’s 2022 Letter to CEOs explained how BlackRock wants to bring more democracy and more voices to capitalism.

In this climate (if you’ll pardon the term) of increasing regulations, boards will face even more pressure.

"We are committed to a future where every investor — even individual investors — can have the option to participate in the proxy voting process if they choose," Fink wrote in January. "Every investor deserves the right to be heard. We will continue to pursue innovation and work with other market participants and regulators to help advance this vision toward reality. I encourage you to ask that your asset manager gives you the opportunity to participate in the proxy voting process more directly."

Engine No. 1 will be there to help the individual investor again this year at multiple companies. It recently released an online dashboard that will reveal how it will vote on every proposal at each company in its Transform 500 ETF (ticker VOTE).

The onus is on boards to be better prepared and view the proxy season as an opportunity to engage with their shareholders. Instead of fending off activist investors, companies should view their voices as an opportunity to better understand their stakeholders’ needs.

Pushing these shareholders away will only become harder. The SEC recently announced it would clamp down hard on companies that use traditional ballot-battle tactics to squash shareholder proposals on ESG issues. Relying on prior arguments, past ESG decisions or arguing that climate issues are inappropriately intrusive and interfere with a company’s "ordinary business" operations will be harder.

In this climate (if you’ll pardon the term) of increasing regulations, the growing popularity of ESG and impact investing and rising stakeholders’ expectations, boards will face even more pressure. Their release valve will be to have board members who have the insight needed to provide oversight, who can ask hard questions and are brave enough to push their organization and hold themselves accountable.

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