Expect more ESG shareholder proposals.
The surge of investment assets into environmental, social and governance (ESG) funds is empowering investors and activists to demand action from companies around the world. Increasingly, those demands are materializing as shareholder proposals designed to push companies to change business and disclosure practices related to a range of issues, from emissions and climate change to workforce diversity and inclusion.
ESG funds are experiencing record inflows. Broadridge research estimates that retail and institutional ESG assets under management could grow from approximately $8 trillion today to roughly $30 trillion by the end of the decade. By 2025, it is expected that around 33% of all global assets under management will have ESG mandates.
Increased Activity
Nowhere is the upsurge in ESG more evident than on the proxy ballots of publicly traded companies in the United States. During this year’s proxy season, the number of shareholder proposals on the ballot at corporate annual meetings increased by 25% from 2021. That growth was driven in large part by an increase in environmental and social proposals — including a 133% jump in the number of climate-related initiatives. Some of the highest-profile climate proposals were approved. For example, Chevron
The increase in the number of resolutions introduced by shareholder groups has also been fueled by a sharp pickup in the number of initiatives seeking racial equity audits. Last year, these proposals were approved by shareholders of Home Depot, Johnson and Johnson and Apple
Overall, research from Broadridge reveals a slight decline in average levels of support for shareholder proposals last year. But rather than reflecting any waning enthusiasm for ESG goals, that dip more likely reflects the fact that shareholder groups are feeling more empowered and proposing resolutions that are much bolder, broader and potentially transformative in scope. Going forward, proposal sponsors can probably expect even more support — especially for environmental resolutions. Major proxy advisory firms have toughened their policies on climate change. Institutional Shareholder Services (ISS) says it will recommend that shareholders vote against incumbent directors at the companies it finds to have inadequate climate change disclosures or that lack emissions reduction targets. Global asset managers are also taking a harder line. State Street Global Advisors said it might vote against directors at companies that don’t disclose emissions reduction targets or strategies for managing climate change-related risk.
As more individual investors and asset managers start using ESG criteria to guide their investments, regulators are getting involved to ensure that they have access to the reliable and consistent ESG data they need to make informed decisions. In March of this year, the U.S. Securities and Exchange Commission announced a proposal to advance and standardize disclosures related to climate change. If adopted, the proposal would require publicly traded companies to disclose certain climate-related information in their registration statements and periodic reports. That would include information about governance and strategy around climate-related risk, impact from climate events, greenhouse gas (GHG) emissions and progress toward public climate-related goals or targets.
Communicating Commitment
Many companies and boards are moving proactively on these issues. For example, my company, Broadridge, recently issued its annual Sustainability Report, which explains its ESG strategy and highlights accomplishments like helping clients reduce emissions by switching from paper to digital for proxy communications and moving shareholder meetings from an in-person to a virtual format.
Investor choice should always win the day, and, given the interest in ESG, it is likely that almost all public companies will have to make even broader changes to meet the demand of shareholders and regulators for information related to ESG and to prepare for future shareholder proposals. Those changes will include creating enhanced reporting and disclosure practices that enable them to quickly respond to requests from retail investors, asset managers and governments for data on ESG metrics. They will also include efforts to step up and enrich their engagement with shareholders. More than 70% of investors say they now consider environmental, social and governance factors when making investment decisions. To maintain shareholder support through the 2023 proxy season and beyond, companies and boards of directors will have to find ways to effectively communicate both their commitment to ESG and their strategies for achieving their ESG goals.
