Notwithstanding legislative and executive action by several states in opposition to the supposed "woke" stances of some businesses on ESG and ESG investing—or perhaps because of it—this proxy season will see a significant number of shareholder proposals related to ESG. (See this PubCo post and this PubCo post.) As described in the 100+-page Proxy Preview 2023 from the Sustainable Investments Institute, As You Sow and Proxy Impact, there have been 542 ESG-related proposals as of mid-February and the number is "on track to match or exceed last year's unprecedented final total of 627." Of course, proponents of shareholder proposals don't often expect to gain a majority vote—even if they did, the proposals are rarely binding. Rather, the goal is frequently to raise the issue for management and shareholders and hope to secure a substantial enough vote in favor to convince management to take action or, as the WSJ reports, to "create pressure for companies to change [or] to take a position on hot-button issues." The Preview identified as the two biggest changes for the 2023 proxy season a continued increase in climate change-related proposals and, post-Dobbs, a significant number of proposals related to reproductive health. There has also been an increase in proposals identified as "anti-ESG," and the Preview expects these proposals to increase, despite "the cool reception they receive." According to a co-author of the report, "[c]omplex environmental and social challenges are not going away just because they prompt controversy....Proxy season will give companies feedback on reform ideas, but there's no indication attacks on ESG investing are going to dampen investor appetite for facts and disclosure, which make the capital markets work better."
This year, the Preview reports, more proposals are likely to come to a vote as companies have been more hesitant to request no-action positions from Corp Fin in connection with omission of shareholder proposals. That hesitation may well be attributable to Corp Fin's 2021 Staff Legal Bulletin 14L, the effect of which was to make exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies, smoothing the glide path for inclusion of proposals submitted by climate and other activists. (See this PubCo post.) As a result, the Preview saw a dramatic cut last year in the number of proposals omitted and a reduction this year in the number of companies requesting no-action positions: there were about 30% fewer no-action requests as of the end of January 2023 and, as of mid-February, "12 have been omitted...and the SEC staff has yet to respond to 76 more challenges (compared with 103 in mid-February 2022). Withdrawals appear to be down—just 76 so far compared with 106 last year, but negotiations in engagements are ongoing and many are likely to produce agreements. While 454 were slated for votes as of mid-February, this number will drop."
The Preview observes that "[r]ecord high votes on many issues in 2021 appear to have prompted both more filings in 2022 and—to some extent—more expansive proposals. After the average vote then fell, though, proponents now have reframed some requests. The 2022 overall average also was pulled down by 34 votes on anti-ESG proposals that attracted average support of only 3.5 percent support." With regard to climate proposals, "[a]verage support that jumped in 2021, plus more visible climate impacts and limited progress on emissions reductions, drove some more aggressive requests that seemed to push the envelope too much for some last year, pushing down the average vote by about 10 points, even as companies and shareholders reached more agreements than ever."
SideBar
In the 2022 proxy season, companies saw more shareholder proposals than in past proxy seasons. However, as discussed in this article in the WSJ, the prescriptive nature of many of the proposals, especially climate-related proposals, had prompted many shareholders, including major asset managers, to vote against these proposals. According to the WSJ, the proposals were more prescriptive, "resulting in a lower percentage of proposals gaining majority support. It dropped to 10.6% this year [in 2022] from 16.2% last year [in 2021], according to Esgauge."
In this paper, BlackRock Investment Stewardship—BlackRock is reportedly the largest asset manager worldwide—provided its perspective on climate-related shareholder proposals during the 2022 proxy season. In 2021, BIS "supported 47% of environmental and social shareholder proposals," but 2022? Not so much. Why is that? According to BIS, climate-related shareholder proposals submitted in 2021 focused on "material business risks" or requested reports providing information that would be useful to investors to help them assess a company's "ability to generate durable long-term value." BIS considered these proposals "to be consistent with long-term value creation" and not undue constraints on management's strategic efforts to create shareholder value. But many of the proposals in 2022 were "unduly constraining on management or were overly prescriptive as to information sought or timeframes. Others failed to recognize the progress made such that companies had largely met the ask of the proposal." In voting on behalf of its clients, BIS said that it "supported 24% of E&S shareholder proposals in the U.S. [in 2022], down from 43% [in 2021], reflecting how these factors made these proposals less supportable in the 2021-22 proxy year."
In this article, Sustainable Governance Partners, an ESG consulting firm, largely agreed with the assessment of BlackRock above. The authors counted a "flood of E&S-related proposals"; however, "average support and passage rates for environmental and social (E&S) shareholder proposals declined significantly." The authors then did some substantial unpacking of those conclusions:
- Companies negotiated "dozens of withdrawals" of proposals, especially proposals of the type that voters strongly supported in 2021, "rather than risk adverse votes."
- Just as BlackRock was disinclined to support prescriptive proposals, so the authors here found that the proliferation of prescriptive proposals—those seeking "specific strategic action, rather than just additional disclosure"—especially those related to climate, dissuaded many voters from voting in favor.
- However, the authors found that "proposals seeking additional disclosure and oversight of social justice matters—most notably racial equity audits—received higher support," a trend the authors "expect to continue in the future."
(See this PubCo post.)
According to data from the Preview, as of mid-February, climate change-related (23%) and other environmental proposals (7%) accounted for about 30% of proposals, and the number was expected to increase for this year. The number of proposals specifically on climate change was up from last year at mid-February—122 compared with 109 in mid-February 2022. Most of the climate-related proposals, the Preview reports, ask companies to set and report on net-zero GHG emissions goals or "Paris-compliant" goals. Some proposals request companies to "consider climate risk in their business strategy and disclose how they can adjust to a much lower carbon economy in the future." There were also a number of proposals submitted to banks and insurers that finance and underwrite fossil fuel projects, asking, in some cases, for transition plans explaining how they would align their financing activities with their GHG emissions reduction target.
But the prevalence of social proposals—including political influence (17%), human rights (15%), decent work (85), health (8%) and diversity (7%)—is even higher than climate at over 50%. The Preview counted about 50 proposals related to fair pay, working conditions and benefits, and a number of proposals addressing gender and racial pay disparities, seeking data regarding unadjusted median and adjusted pay gaps. In addition, the Preview characterized as relatively new to the social proposal agenda proposals designed to protect the right to organize unions. The number of proposals seeking more disclosure on workplace diversity program metrics declined from 50 to only 38 this year as of mid-February; because many companies are now providing more transparency on this issue, the Preview views the decline in numbers to be an indication of "success rather than waning interest from proponents." In addition, the Preview counted 79 proposals seeking racial justice audits. This year, there were 22 reproductive health proposals, an increase from four last year. Many of the proposals regarding reproductive health request information about the impact of the new restrictions, how companies will handle the risks and "how they will handle law enforcement queries about private health information." The Preview found that proposals related to corporate political spending were "split in three roughly equal buckets: lobbying, election spending and values congruency" (between company public statements and policies and political contributions and spending). And an unsurprising proposal to McDonald's on sexual harassment "calls for an independent assessment by the end of the year about the company's 'efforts to eradicate sexual harassment and gender discrimination in its corporate owned and franchised restaurants.'" (See this PubCo post, this PubCo post and this PubCo post.)
The Preview suggests that, while some anti-ESG proposals "question the benefits of corporate efforts to combat climate change," describing it as "a futile waste of money," most of the anti-ESG proposals "concentrate on social policy." For example, these proposals might charge liberal bias in business or discriminatory impact of DEI efforts. However, according to the Preview, these proposals garner a favorable vote of less than 4% on average. As of mid-February, the Preview had identified at least 40 anti-ESG proposals, compared to 27 last year. This article in Law 360 reports that "filings of anti-ESG proposals are up about 60% year over year, with as many as 70 such proposals this year."
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