ESG shareholder proposal

December 5, 2018

ESG Shareholder Proposal Findings That Will Surprise You

Environmental, Social and Governance (ESG) proposals continue to make the rounds. Some of the world’s most influential investors, including State Street, Vanguard and BlackRock, are raising the bar on corporate responsibility. BlackRock CEO Larry Fink’s 2018 letter to CEOs, entitled “A Sense of Purpose,” reinforces BlackRock’s position that without a sense of purpose companies cannot achieve their full potential. State Street, in keeping ESG shareholder proposals at the forefront of investor concerns, added an ESG measure for issuers to enable the evaluation of a firm’s focus on long-term profitability. Vanguard just recently launched two new ETFs that invest in ESG responsible companies. And, in an important gain for shareholders around climate change, the Church of England, Nordea Group and Robeco have pushed Royal Dutch Shell to set carbon emissions limits for 2019 and link performance to executive pay. In this Farient Brief, we explore the trends in ESG proposals and voting results.

“Successful investor relations depend on issuers understanding the long-term concerns of investors.  Several of the shareholder proposals that have gained momentum this year are addressing climate change, gun control and the opioid crisis. Proposals that historically were easy to dismiss are now becoming mainstream and garnering more than 50% support at companies like Rite Aid, Kinder Morgan and Exxon Mobile. The result of investors’ focus may result in less support for board members going forward.” – Dayna Harris, Partner, Farient Advisors

Findings that surprised us

  • Environmental and social shareholder proposals declined from 2017 – 2018 by 40%
  • Environmental and social shareholder proposals, though a small percentage of all proposals, passed a multi-year high with median support remaining relatively consistent
  • Success of governance proposals dropped to a multi-year low (17% were passed)
  • Investors are making more demands on fuel companies to take greater responsibility for their role in global warming
  • Proxy Advisors provide different recommendations

ESG shareholder proposal trends: Some go up. Others go down.

Not surprisingly, nearly all ESG proposals continue to be submitted by shareholders with just a small fraction sponsored by management. However, the “mix” of these proposals has changed. Looking at companies in the Russell 3000 index, Environmental and social proposals declined in 2018, as compared to 2017, from 215 to 155 – a decrease of 40%. Conversely, Governance proposals increased from 147 to 190, driven by two specific proposals: “Amend Right to Call Special Meeting” (+50 proposals YOY) and “Right to Act by Written Consent” (+30 proposals YOY).

Similar to the overall number of proposals, the voting results were also divergent between the two groups. While the number of governance proposals increased, their success rate dropped to a multi-year low with only 17% getting the nod, down from 43% in 2016. E&S proposals, on the other hand, passed at a multi-year high of 7% as compared to .5% in 2015. What did surprise was that median support level for E&S proposals has stayed consistent, increasing only slightly over the past three years to 27% in 2018.

Although investor focus has evolved, these trends (increased shareholder proposals, moderately rising “for” votes and lower success rates) are confounding. It appears that investors may be more targeted in their E&S proposals while casting a wider net with governance issues that often include:

  • Right to Call Special Meetings
  • Right to Act by Written Consent
  • Proxy Access

Overall Voting by Year

ESG Shareholder Proposal

Where the proxy advisors place bets

One of the surprising findings from our research was the difference in recommendations of ISS and Glass Lewis (GL). Looking at E&S proposals specifically, ISS and GL only agree on their recommendation (FOR and AGAINST) 65.4% of the time (43.8% + 21.6% from chart below). ISS recommends voting FOR on E&S proxy items at a much higher rate than does GL, 76.5% to 45.8% respectively.

Proxy Advisor recommendations vary by proposal type as well. Further exploration highlighted that in 2018 ISS recommended FOR on 93% of Political Activities proposals and 85% on Environmental proposals. GL recommended FOR on 58% and 48% on each, respectively.

From a historical perspective, ISS’s support of E&S proposals has remained fairly consistent, in the 70% range since 2014. However, GL’s support has nearly doubled from 26% in 2014 to 2018’s 46%.

ESG shareholder proposal

Will shareholders have the last word?

Throughout this Brief, we identified broader trends of what ESG shareholder proposals looks like. Clearly, large institutional investors continue to evaluate companies on their ESG positions as they contribute to the long-term sustainability of the company.

Looking more closely at what drives shareholder support for ESG shareholder proposals, we found that environmental proposals received the highest median support at 31% of all types presented by shareholders. A close second were proxy items on Political Activities (Political/Lobbying reports and Approving Political Contributions) with 30% median shareholder support and energy proposals with 28% support. As a group, Social proposals saw a big increase in year-over-year support from 9% in 2017 to 25% in 2018.

As to proposals that receive a supporting majority, the biggest change occurred in the Environmental group. Only one environmental proposal passed in 2015. While eight passed in 2018, six of the eight proposals that passed were from energy and mining companies and highlighted safety, climate and other ESG factors, including the recent victory for Royal Dutch Shell shareholders that officially links executive pay to measurable ESG goals. The three Social proposals that have passed over the last three years addressed gender diversity. In 2018, two of the proposals that passed followed the most visible issues of the year, including gun violence and the opioid crisis.

Farient’s conclusion

Despite reduced regulatory and spotty enforcement by government agencies, investors are holding companies responsible for ESG issues. Boards of directors should be aware of the increased focus of stakeholders on current and future challenges. Shareholder proposals are gaining momentum, which means that boards and management need to be prepared in how they will respond to future proposals. Clearly, the board’s long-term commitment to this process is critical.

Farient’s point of view on ESG shareholder proposals is that boards of directors should continue to address areas that are important to shareholders and preempt any potential surprises with additional disclosures and discussions as necessary. We recognize that the demands on boards of directors has increased exponentially over the past several years. To that end, we encourage our clients to plan for the unexpected. Consider familiarizing your board with industry standards set out by the Sustainability Accounting Standards Board (SASB) as it develops KPIs for tracking performance on key ESG issues.  Failure to focus on future trends around ESG may result in lackluster support for board members during the annual voting process.

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