Thanks to mounting pressure from investors to take action on ESG, proxy season is becoming an important time of year for public companies. Proxy season, which typically occurs between mid-April and June, allows shareholders and investors to vote on proposals put forward on a company’s ballot.
ESG-related proposals have gotten a lot of attention in recent years – 2022 saw another record-breaking proxy season, with over 800 ESG-related proposals submitted by shareholders at Russell 3000 companies. The reality is that whether we’ve thought of it this way or not, ESG has always been a factor in proxy season.
Shareholder resolutions around ESG, especially the ‘G’, have been around for decades. Historically, proxy season has focused on issues like executive pay, compensation plans, independence and conflicts of interest among directors, and shareholder voting rights, all of which we now consider “governance” issues.
The difference now is ESG proposals are becoming increasingly influential, with more ‘E’ and ‘S’ resolutions than ever before. In fact, ‘E’ and ‘S’ proposals saw a 15% increase from 2021 to 2022 and now represent nearly 60% of all ESG resolutions.
What does this mean for your business? Read on to learn which proxy season patterns you should keep an eye out for and how to prepare.
Overall Proxy Season Drivers and Trends
Before we dive into issue-specific focus areas, there are four high-level trends you should be aware of:
1) Lower barriers of entry for activist shareholders.
In the US, the SEC’s proposed amendments to the Shareholder Proposal Rule lowers the barrier for activist shareholders to qualify resolutions. As resolutions become easier to file, it’ll be harder for your company to exclude them from consideration (which requires SEC approval). It may also create additional costs for your business - a single shareholder proposal can cost a company more than $100,000.
2) ESG urgency amidst increasing polarization.
ESG is experiencing recognition as the future of business as well as politicization fueled by a handful of state and federal officials. While this driver goes far beyond proxy season, it should be considered as part of your company’s integrated ESG strategy. The bottom line is that stakeholders are far more engaged. Expect higher scrutiny over your business and a larger number of resolutions filed, which could include both pro and anti-ESG resolutions.
3)Strategic coordination amongst activist investors.
With better access to data, small activist investors are coordinating efforts and calling attention to ESG or regulatory vulnerabilities. For instance, As You Sow recently asked several major Wall Street banks to disclose their climate transition plans. At the same time, Harrington Investments, Trillium AM, and The Sierra Club Foundation filed a resolution at a similar set of banks to phase out new fossil-fuel exploration. This kind of activity is creating ripple effects, in some cases convincing large asset managers like BlackRock to back proposals from small activist organizations.
4) More robust expectations from major asset managers and proxy advisory firms.
Glass Lewis and ISS (Institutional Shareholder Services), two of the most renowned proxy advisory firms, play an outsized role in recommending votes on shareholder resolutions. Both firms have strengthened their expectations around corporate ESG performance this year, from climate-related risks to board diversity.
Similarly, major asset managers like BlackRock maintain strong expectations on corporate ESG risk disclosure. This includes fully aligned TCFD reporting, long-term scenario planning, and disclosing ESG metrics defined by emerging ISSB standards.
ISS and Glass Lewis: A Closer Look
- ISS now expects TCFD-aligned disclosure of climate risks, net zero by 2050 GHG targets, at least one female director, and the elimination of unequal voting rights or problematic board structures.
- Glass Lewis is tightening its board expectations, including disclosure of diversity demographics and the board’s role in overseeing ESG issues.
This year’s proxy season drivers are more complex than ever. To stay on top of these changes, you’ll need to respond with effective, proactive stakeholder engagement efforts and a forward-looking ESG strategy.
Proxy Season Focus Areas
Climate change continues to be the major focus of shareholder proposals, accounting for 73% of all environmental proposals submitted in 2022. Submissions largely called for companies to formalize Scopes 1-3 GHG reduction targets, disclose climate risks, and create climate transition plans. You should expect a similar trend in the coming proxy season.
However, other ‘E’ issues are starting to get their share of the spotlight. Three focus areas to watch out for this year are circularity, plastic pollution, and especially natural capital.
Natural capital, including biodiversity, deforestation, water stewardship, and land-based emissions, is emerging as the next big ‘E’ issue for investors. Here are just a few recent examples of how this trend is picking up steam:
- Following COP15, a group of investors announced the formation of Nature Action 100 – an initiative focused on driving greater corporate ambition to reduce biodiversity loss.
- Last year, State Street, BlackRock, and T. Rowe Price all identified biodiversity and land use as material and necessary for boards to tackle.
- In 2021, Ceres launched Food Emissions 50, an investor-led initiative engaging the 50 highest emitting food companies in the US. More recently, Ceres launched the Valuing Water Finance Initiative, an effort led by 64 investors with $9.8T in AUM to encourage companies to act on water as a financial risk.
- GRI released its draft Biodiversity Standard, with final standards expected in Q3 of 2023.
- The Science Based Targets Network (SBTN) is currently finalizing guidance for setting science-based targets for nature.
If climate has taught us anything, it’s that once investor awareness is there, pressure to disclose and act isn’t far behind. With so much momentum building behind nature-related issues, it’s a safe bet that they’ll make their way into 2023 shareholder proposals.
Social issues are typically addressed by requiring audits. During the 2023 proxy season, you can expect this to play out across these four issues:
- Racial justice: Racial equity is a hot-button topic for activist investors and major asset managers alike. As a result, proposals asking for racial equity and civil rights audits are becoming more common. Prepare to be asked for data about your number of non-white employees, non-white employee turnover, and more.
- Human rights in the supply chain: Human rights encompasses a broad range of issues, such as modern slavery, human trafficking, child labor, treatment of women, equal pay, worker safety, and impact on indigenous communities. As policy tightens around these issues – like the US Uyghur Forced Labor Prevention Act (UFLPA) and the EU’s proposal to ban products made with forced labor – resolutions demanding human rights audits will continue to rise.
- Board composition and diversity: As mentioned above, both ISS and Glass Lewis have clear thresholds they expect for racial and gender diversity on boards. Large asset managers like BlackRock also articulate this in their proxy voting guidelines (how they will vote on significant shareholder resolutions). Take time to review these expectations so there are no surprises.
- Human capital management (HCM): HCM is an emerging umbrella for workforce issues, such as DEI+J efforts, worker demographics (including disclosure on the EEOC’s EEO-1 survey), recruiting, and retention. After all, as Larry Fink said in his 2022 CEO letter, “no relationship has been changed more by the pandemic than the one between employers and employees.” Keep an eye out for HCM-related shareholder proposals this proxy season and beyond.
The biggest trend to track in governance is a sharper focus on ESG-related corporate lobbying. These days, media groups are quick to expose companies for hypocritical political activities, for example, when companies claim to support climate action but participate in trade associations that lobby against policies that would drive meaningful progress.
2022 saw a record-breaking 86 resolutions seeking information about corporate lobbying practices, and this number is expected to be even bigger this year. To mitigate risk of reputational backlash, 2023 resolutions might call for full transparency about your political spending, as well as trade association and industry group memberships. For now, the primary focus is on climate change, but other hot-button issues like LGBTQ+ rights and abortion access may be included.
Remember, the best way to address vulnerabilities in proxy season is to identify and build relationships with key stakeholders before proxy season starts.
Depending on when your fiscal year ends, you may also need to abide by the SEC’s new Pay Versus Performance disclosure rules. This means you’ll have to compare executive compensation to corporate financial performance in your 2023 proxy statements.
How to Prepare
Investors and non-profits are more powerful than they’ve ever been. To keep up, your company needs a holistic, strategic approach to engaging these stakeholders. It’s critical to review the expectations of both your investors (including large asset managers like BlackRock) and proxy advisory firms (ISS and Glass Lewis) to get ahead of any issues that could result in a “no” vote.
You also need:
- An up-to-date materiality assessment based on a broad range of stakeholder perspectives, not just your internal view.
- A reporting and disclosure strategy that focuses on ESG risks and business model resilience.
- A consistent public narrative that runs through your reporting, disclosure, and other communications efforts and speaks to everyone, not just highly specialized investors.
Our team can partner with you to update your materiality analysis and create a plan for engaging your stakeholders. We’ll help you get in front of these changing patterns, ensuring that shareholder actions strengthen your ESG strategy rather than threaten it.