By the end of May, shareholders had filed 626 ESG-related resolutions at public U.S. companies. That’s just one less for all of 2022, so a new high-water mark is a given for 2023.
The number of proposals addressing climate change were up about 12 percent compared to 2022 and accounted for about a quarter (23 percent) of all ESG proposals, with most focused on emissions disclosures or net-zero goals. The next biggest category was proposals focused on political activity (16 percent), followed by human rights (13 percent).
In contrast, anti-ESG proposals made up about 13 percent of all proposals submitted through May. Support for those sorts of resolutions has tracked in the low single digits (about 4 percent) for years. That compares to average support for pro-ESG proposals of 21.5 percent support in 2023, down from 29.3 percent last year.
Support for ESG proposals is down
There are several factors behind decreased support for ESG resolutions. For one thing, the performance of ESG or sustainability-related funds has disappointed recently after years of steady outperformance. The war in Ukraine saw oil and gas assets increase in price after years of underperformance, largely due to fears of a scarcity of access to Russian oil and gas. This coincided with increased scrutiny of the use of ESG or sustainability as an investment framework, with concerns about greenwashing top of mind for both investors and policymakers. The anti-ESG movement has also chilled support for some ESG proposals, with "woke ESG" now part of the culture wars in America.
Lisa Hayles, director of international shareholder advocacy at Trillium Asset Management, said the ESG-backlash is a definite contributor to the drop in support of ESG proposals. "Last year, Trillium submitted a proposal asking Bank of America to develop a policy to phase out the financing of fossil fuel projects," Hayles said. "It got 11 percent of the vote a year ago, and this year when we re-filed, we re-worked the proposal to be much less prescriptive, but it got less support. Some large asset managers are fearful of being singled out as too ‘woke,’ meaning too sympathetic to diversity and inclusion initiatives or climate action. I’ve talked to a friend at one large asset manager who was told they had to review all their past ESG votes and provide additional justification for them."
Andrew Howell, head of research and sustainable finance at the Environmental Defense fund, offered a similar outlook. "The anti-ESG push has made some asset managers more conservative," Howell said. "Asset managers are afraid of losing business from some state pension funds that feel they need to be more aggressive against ESG."
Indeed, as of the end of May, more than 20 states have introduced bills amending fiduciary duty laws pertaining to investing and proxy voting, in an attempt to dissuade the use of ESG factors in the investing and voting processes.
Numbers don’t tell the whole story
Institutional investors have a powerful lever to influence the behavior and disclosure of the companies in which they invest, but a simple vote for or against a resolution doesn’t tell the whole story.
Large institutional investors such as BlackRock, Vanguard or State Street Global Advisors are often the largest shareholders at publicly traded companies. Each institutional investor spends a lot of time and resources getting its ESG policies right, because they know companies and investors will heavily scrutinize their proxy voting decisions.
Many also have large engagement teams that spend much of their time meeting with companies and voicing concerns. Voting isn’t the only arrow in their quiver, but these institutions often reserve a vote "against" a company for times when a company refuses to take action after years of engagement and discussion.
That backdrop is instructive when dissecting a recent report from Planet Tracker with the title "Voting Against Nature." The report tracks nature-based proposals back to 2010. It examines votes of 7,700 funds on 38 biodiversity proposals from 2010 to 2022. Most proposals (74 percent) asked companies to start reporting on biodiversity issues, while some asked for adoption of biodiversity policies.
Some key takeaways:
- Of the 26,500 votes cast on biodiversity proposals, 38 percent were in favor. The remaining 62 percent votes were cast against, the voter abstained or simply did not vote.
- An analysis of how sustainability and ESG funds voted on biodiversity issues indicates that 76 percent of the time they vote in favor, but 20 percent still voted against measures to limit deforestation.
- Asset managers have argued that engagement — voting being an important method — rather than divestment is a superior approach. Fundholders of sustainability and ESG funds have reason to question whether they are being misled.
Investors being misled sounds pretty bad, right? Well, maybe that’s not what is happening.
Thirty-eight percent support for biodiversity proposals over the last 12 years sounds — high. Most firms voting on these issues were building their "sustainability teams" over this time, and biodiversity issues are just starting to gain mindshare of investors. The Taskforce on Nature-related Financial Disclosures’ framework focused on natural capital is yet to be finalized.
Seventy-six percent support from sustainability funds sounds pretty good, considering for much of this time there was no regulation on what could and could not be called a sustainable or biodiversity fund. In most places, there still is no such regulation. Also consider that in the early days of writing shareholder resolutions, support is low and slowly builds over time.
Investors aren’t necessarily being misled (although I’m sure in some cases they are) but this report doesn’t prove that. I appreciate that Planet Tracker is trying to bring attention to biodiversity-related investments issues — I wrote a long, boring report on natural capital and biodiversity a year ago — but you have to give me more evidence than a splashy headline if you are yelling, "Something is wrong!"
Progress is still being made
Shareholder resolutions aren’t the only way to gauge progress on issues shareowners care about. Progress often takes time. Issues such as "say on pay" (related to executive compensation) and majority voting for directors took years to become an accepted norm — with support starting in the single digits in early years, before becoming routine parts of the corporate voting process.
"There were zero shareholder resolutions on bank financing of fossil fuels two years ago," Howell said. "Last year, there were six at large U.S. banks. This year there are 13. A signal is being sent by investors. Banks need to pay attention to this issue."
Howell said investors need to understand the nuances of these issues. "Investors need to understand that legacy ‘dirty industries’ need to evolve businesses — but that takes money and investment. Banks may be increasing credit to these companies to facilitate an energy transition. This calls for more transparency around these loans and why they are given."
Shareholder resolutions around ESG issues will continue to attract a great deal of investor attention and effort. As the issues of climate change, biodiversity loss and other sustainability issues become more linked to risk and financial performance, expect support for these issues to increase. This progress may not be at the pace that some investors would like, but it is progress nonetheless.