EU, Financials, Policy and Regulation, Sector Focus, US

ESG shareholder proposals have a future but are not the only route to change

The US Securities and Exchange Commission, Washington DC. The number of ESG proposals appearing on proxy statements has increased, after the SEC changed its rules in 2021 (Photo: Saul Loeb/AFP via Getty Images)

Research shows US asset managers are withdrawing their backing for ESG shareholder resolutions, while support from their European counterparts is rising

Shareholder proposals aimed at changing the way companies behave on environmental, social or governance issues appear to be losing popularity. In 2021, around a fifth of all shareholder proposals received majority support, but this figure fell to just 3 per cent in 2023, according to data from non-profit ShareAction.

However, there is a clear difference between the voting records of US and European asset managers. 

Increased EU legislation around ESG is thought to be driving support for ESG proposals by European asset managers; on average, they voted in favour of 88 per cent of resolutions in 2023, says ShareAction.

Kate Hewitt, an ESG specialist at Montanaro Asset Management, says: “There is this culture within Europe that is full steam ahead behind ESG, and that tone is being picked up by asset managers.”

In the US, however, regulatory changes designed to make proxy statements more accessible and make it harder for companies to omit proposals from shareholder votes have made asset managers less keen to support ESG resolutions during the AGM season. 

US giants BlackRock, State Street Global Advisors, Fidelity International and Vanguard own a huge proportion of global assets and have opposed many ESG resolutions. ShareAction accuses them of “outsized” influence.

The so-called Big Four’s criticism of, and support for, ESG proposals is waning. BlackRock slammed the “poor quality of many shareholder resolutions” submitted for last year’s AGM season.

“Given the increased proportion of prescriptive proposals or those lacking economic merit – as well as companies’ continued progress on disclosures and practices – we supported approximately 9 per cent of the shareholder proposals [BlackRock] voted on,” it said in its 2023 voting report.

A transient slump?

Only 3 per cent of 2023 environmental and social shareholder resolutions assessed by ShareAction received majority backing, compared to 14 per cent in 2022 and 21 per cent in 2021. Of the 257 resolutions reviewed by the non-profit, only eight were passed.

Meanwhile, the number of proposals appearing on proxy statements is on the rise, after the US Securities and Exchange Commission changed its rules in 2021 to make it harder for companies to omit proxy resolutions. 

In a 2023 stewardship report, Vanguard said the SEC changes had contributed “to an increase in the number of proposals that may be immaterial at the company in question, direct company strategy or operations, do not provide sufficient discretion to company leadership to act on the proposal’s request, or are otherwise overly prescriptive”.

But ShareAction deputy chief executive officer Simon Rawson dismisses asset managers’ frustrations with ESG proposals, pointing out that three-quarters of 2023 resolutions the non-profit assessed merely asked for greater corporate disclosures. “They can no longer hide behind the excuses of proposals being too prescriptive or proposals being badly drafted, because that doesn’t stack up,” says Rawson.

Furthermore, a survey by intelligence provider Cerulli Associates in 2023 suggests the rhetoric of anti-ESG politicians in the US may have been overstated when it comes to asset manager behaviour. None of the managers Cerulli surveyed said they planned to stop incorporating ESG into their investment decisions – though 30 per cent said that they would be more cautious about their ESG messaging in investment documents, prospectuses and marketing materials.

“US asset managers have not completely backed out and the slump is only transient,” according to Achin Bhati, head of ESG, investor research at intelligence provider Acuity Knowledge Partners. He predicts upcoming ESG regulations in the US – such as SEC proposals to increase climate-related disclosures – “will cause an uptick in ESG shareholder proposals by the US asset managers”.

Useful indicator

Despite this, investor proposals can still be useful in analysing attitudes towards ESG.

“They’re a useful way of objectively and quantitatively assessing which topics asset managers are prepared to take a stand on,” says Lindsey Stewart, director of investment stewardship research at Morningstar. He predicts biodiversity and nature-based proposals are likely to feature in this year’s proxy season, along with artificial intelligence.

Climate resolutions are already being submitted for the coming proxy season. On January 16, it was announced that 27 investors with €4tn in assets under management had co-filed a resolution with non-profit Follow This, calling on Shell to align its medium-term emissions reduction objectives with the Paris Agreement.

The group is dominated by European asset managers, such as Amundi, Candriam and Groupama, although it also includes some small investors from the US that are expected to announce their participation at a later date.

Since 2021, European managers have, on average, boosted their support for environmental and social shareholder proposals from just under 70 per cent to 88 per cent – apart from UK managers, whose support has stayed steady at around 64 per cent, says ShareAction.

The non-profit acknowledges the likely influence of the EU Shareholder Rights Directive, which came into effect in September 2020, and requires asset managers to report on their shareholder engagement policies and explain how these have been enacted.

Yet even with European support increasing, the US giants have a major influence on voting outcomes. ShareAction calculates that 69 ESG shareholder proposals would have passed last year had the Big Four backed them. Managers must therefore consider other means to engage with companies. 

“Shareholder resolutions do have an important role to play in the way in which asset managers conduct their stewardship, but it isn’t the only way,” says Montanaro’s Hewitt. Investors can also speak with company management to effect change, she says.

“There are other interesting levers – primarily how you vote on director appointments and their pay,” says Iancu Daramus, Fulcrum Asset Management’s head of sustainability.

“If you want a company to change, you should be targeting the directors who might be preventing that change from happening, or the pay that might inadvertently be rewarding them for behaviours you don’t want, rather than filing the shareholder proposal and then expecting the same directors to act on it,” he adds.

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