The ABCs of Proxy Voting and Its Role in ESG

by: Erica Lasdon | April 26, 2022

What is Proxy Voting?

Proxy voting is the primary means for shareholders to communicate their views about a company’s management. At most public U.S. companies, shareholders can vote annually to elect board members and approve executive compensation packages and other strategic proposals put forward by the company. This voting peaks from April through June, when most annual corporate meetings occur.

For decades, U.S.-based public corporations have also faced shareholder proposals at a company’s annual meeting. They are proposed by shareholders who meet minimum holding requirements set by the U.S. Securities and Exchange Commission (SEC). Resolutions tend to focus on a single, concrete call to action, such as issuing a report or establishing explicit board oversight for Environmental, Social, and Governance (ESG) issues relevant to the company.  Rules require that the proposals be high-level and do not overstep management territory.

While non-binding, these proposals have been an important mechanism for interested investors to drive attention to ESG issues. Over the years, vote totals have risen out of the single digits for ESG resolutions. Still, many filed resolutions are withdrawn before being sent out for a broader shareholder vote. This entire process has formed the backbone for more active engagement between shareholders and company management. It has built a body of voluntary disclosure from companies that forms the basis for much of what we currently understand about material ESG business issues.

Long-term ESG Proxy Trends

Examining the trends in proxy voting is a powerful way to understand the general market views on corporate ESG practices. The overall trends are unmistakable and steady. The following charts¹ give a clear sense of how this process has driven the adoption of ESG in recent decades.

What to Expect in 2022

The 2021 proxy season featured record support for proposals on environmental and social (E&S) issues and continued strong support for governance proposals, especially at midsized and smaller companies. It also saw growing opposition to director elections. Part of this trend is explained by the increasing support by institutional investors such as BlackRock and State Street for ESG resolutions and against directors presiding over perceived inadequate climate or diversity oversight. These investors are also increasingly open to supporting dissident board nominees, potentially signaling a new phase in shareholder activism connected to longer-range strategic concerns about climate and/or diversity.

This shift in voting practices is likely to continue in the upcoming 2022 proxy season. What is creating this shift?

In general, institutional investors are moving more quickly to vote against companies, many shedding their more cautious approaches in past years, which showed deference to corporate management recommendations on resolutions. Large investors like BlackRock and State Street demonstrate this approach by signaling intent in annual public letters to vote against companies that lag on issues like climate and diversity. 

Similarly, the proxy advisory services that provide influential analysis and recommendations to investors also signal ESG policy changes annually. Both ISS and Glass Lewis have signaled a more active ESG voting approach, especially on efforts to increase board oversight of crucial ESG issues like climate and diversity.²

We can perhaps get the clearest view of ESG during the 2022 season by looking at the leading edge of shareholder action, the investors filing the resolutions. The annual Proxy Preview published by three active groups (As You Sow, Sustainable Investments Institute, and Proxy Impact) highlights leading trends and gives specific details about pending resolutions. In March 2022, there were 529 filed resolutions, up 20% from 2021. The pie chart³ below shows the ESG topics at play this year:

In his introductory letter to this year’s Proxy Preview, As You Sow CEO, Andy Behar, draws these three main messages from 2022 resolution proponents:

1) Climate change affects each company and its supply chain, employees, and customers. Every company must cut emissions in half by 2030, and leading companies are already on the way.

2) Racial justice, gender equality, diversity, and equity are critical for talent retention and recruitment. Companies are starting to act by using clear metrics to quantify the problem and inform action.

3) Political Spending has become riskier in the era of polarized politics. Some companies restrict spending while others are challenged to explain incongruent corporate policies and political spending.

What Should Companies do to Prepare?

Public companies now have a clear obligation to provide disclosure on key ESG topics, driven by this market expectation. Corporate boards should ensure they are prepared to provide proper oversight of ESG topics and may be asked to participate in shareholder engagement more actively than in the past. Management teams should ensure that they get forward-looking information on significant ESG developments to efficiently allocate corporate resources towards necessary improvements.

What About Private Companies?

Private companies and investors in the private markets do not face the direct challenge of a shareholder resolution or proxy vote concern about director elections or other corporate-backed proposals. However, proxy season trends offer a useful window into expectations private market participants face on other fronts. Increasingly, requests for similar ESG information are expected as a part of other types of corporate financing. Private equity investors, banks, and other capital providers also seek to understand how large and small firms manage their most relevant ESG issues.

There are no public records of proposals or votes and less pressure to report on ESG issues publicly. Still, surveys of investors and other participants in private markets show a similar rising tide of interest in understanding relevant ESG issues. Private companies and investors can use many of the same tools as public market peers and can sometimes find customized guidance for their asset class.

Conclusion

As companies and investors face questions from stakeholders about their strategy on climate change and other ESG issues, ClimeCo is here to develop solutions that fit your needs. For more information or to discuss how ClimeCo can drive value for your organization, contact us at info@climeco.com.

Here are some recent resources offering guidance on many of the topics discussed above:

[1] “The Long View: US Proxy Voting Trends on E&S Issues from 2000 to 2018,” Kosmas Papadopoulos, Managing Editor, ISS Analytics, published on 1/31/2019 at the Harvard Law School Forum on Corporate Governance.

About the Author

Erica Lasdon is Sr. Director, Capital Markets on ClimeCo’s Sustainability, Policy, and Advisory team based in Washington DC.  Erica specializes in applying ESG to financial company operations, with deep expertise in engagement, proxy voting, and investment functions across a wide range of asset classes. Erica holds a B.S. in Biology and a B.A. in History from the University of California, San Diego and served on the development team for the Sustainability Accounting Standards Board’s Level II exam for the inaugural FSA credential.