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August 16, 2022

Is lower support for shareholders’ ESG proposals really a trend?

BlackRock’s support for shareholder proposals on ESG matters has fallen over this past year, as have other asset managers’ decisions, but while the energy crisis and politics have driven this change, it may only be temporary.

BlackRock’s support for shareholder proposals on environmental and social issues fell by nearly half in this year’s annual meeting season, as the asset manager voted for 24 per cent of these compared to 43 per cent last year.

The asset manager’s investment stewardship and voting summary for 2022 stated that its work on climate-related issues remains focused on the material risks and opportunities that the energy transition poses.

However, BlackRock said its long-held view is “the pathway to decarbonisation is difficult to predict and will not occur in a straight line. Consistent with that view, we have not supported certain climate shareholder proposals that are overly prescriptive or micromanage how companies should decarbonise”.

The report said many proposals on environmental and social issues were “unduly constraining on management” or were “overly prescriptive as to information sought or timeframes”, while others “failed to recognise the progress made such that companies had largely met the task of the proposal”.

BlackRock is not the only investor to be supporting fewer environmental and social shareholder proposals, as the Financial Times reported that environmental and social proposals from State Street Global Advisors fell from above 25 per cent last year to roughly 20 per cent this year, according to preliminary calculations.

Law firm Orrick reviewed the shareholder proposals received by Fortune 250 companies in the first half of 2022 and identified 221 environmental social and governance-related shareholder proposals received by 98 companies. It found that of the 221 ESG-related shareholder proposals, only 21 received a passing vote; additionally, 17 of those 21 were recommended against by the board. 

So what are the potential factors behind such low and seemingly reducing support for shareholder ESG proposals?

Geopolitical landscape

Ioannis Ioannou, associate professor for strategy and entrepreneurship at the London Business School, says that asset managers are currently having to navigate a very complex landscape. 

He says geopolitics – and more specifically the energy crisis that resulted from the war in Ukraine – is forcing asset managers to take a closer look at the rate and scale of the energy transition and the role of fossil fuels compared to renewables. This is reinforced by government actions, such as US president Joe Biden’s visit to Saudi Arabia in July, which seemed to signal that, in the short term, it may be acceptable to some degree “to bring fossil fuels back into the energy equation for the sake of energy security,” says Ioannou.

However, this signal is “actually mixed”, he adds, given that governments often claim that the solution to the energy security issue is to “double down on renewables yet, in the short run, we see them turning towards more fossil fuels”. 

Ioannou says this mixed signalling, in combination with a very short-term understanding of the energy crisis, “may well have pushed asset managers to re-evaluate their expectations of companies, the perceived risks, and consequently, their ESG-related voting behaviour”.

Mark van Baal, founder of shareholder activist group Follow This, has also seen a fallback in support for climate resolutions this year. Van Baal says Follow This seeks to “wake up shareholder power to push big oil companies to go green”. For example, he says, Shell’s votes for the group’s resolution to set targets for Scope 1, 2 and 3 emissions dropped to 20 per cent from 30 per cent last year, and big oil has “convinced investors that the current energy crisis should override the climate crisis”. 

Effect of Republican action

Ioannou adds that asset managers are not only observing but are experiencing at first hand how “ESG is placed at the centre of a culture war that has been initiated by the Republicans”. 

In July, West Virginia’s state treasurer Riley Moore announced that five big financial institutions – BlackRock, JPMorgan, Goldman Sachs, Morgan Stanley and Wells Fargo – would be barred from government contracts in his state due to their “boycott of energy companies” through their policies on coal mining.

This is not the only case of Republican-led states calling out financial firms on their ‘woke’ agendas. Earlier this month, Texas attorney general Ken Paxton joined 18 other states in a letter to BlackRock CEO Larry Fink that challenged the asset manager’s reliance on ESG investment criteria rather than shareholder profits in managing state pension funds.

The letter said: “Our states will not idly stand for our pensioners’ retirements to be sacrificed for BlackRock’s climate agenda. The time has come for BlackRock to come clean on whether it actually values our states’ most valuable stakeholders, our current and future retirees, or risk losses even more significant than those caused by BlackRock’s quixotic climate agenda.” 

Ioannou says that this “coordinated attack by the political right might have been less effective had the Republicans not had a decent chance of actually winning congressional majorities in November”. Because they do, these currently state-level anti-ESG efforts could become federal-level policies and legislative frameworks, or even Supreme Court decisions. 

Therefore, he says, it may be the case that asset managers are “hedging against a future adverse political and policy environment towards ESG”. This may also be why a number of asset managers are at the same time appear to be “defending” their fossil fuel investments in order to maintain economic relationships with the Republican-dominated states, says Ioannou.

Regarding the Republicans’ actions, van Baal says: “The incumbents, or the conservative forces, have managed to push climate action in the ‘woke’ corner, which is nonsense – it’s a financial imperative.”

Prescriptive proposals?

Last year, the US Securities and Exchange Commission revised guidance on shareholder proposals and broadened the scope of permissible proposals that address significant social policy issues. According to BlackRock’s voting spotlight summary, this has resulted in a marked increase in environmental and social shareholder proposals of varying quality coming to a vote.

In the US, BlackRock saw a 133 per cent increase (from 105 to 245) in shareholder proposals. Globally, BlackRock voted for 22 per cent environmental and social shareholder proposals. This equates to 71 proposals, which is only 10 less from the 81 it supported last year. 

Of the 250 environmental and social shareholder proposals it did not support, 149 were because the company had substantially implemented or were progressing on the issue being addressed.

However, van Baal is unconvinced by BlackRock’s claims that many of the rejected shareholder proposals were “overly prescriptive”. He says that companies have the option to send a no-action letter to the SEC if they believe a resolution should not be on the ballot for reasons such as it has already been implemented, it involves too much micromanagement or includes false information, and adds that the SEC is “very strict about micromanagement”.

According to BlackRock, the SEC only granted no-action relief for 6 per cent of environmental and social shareholder proposals, compared to 21 per cent last year.

Van Baal also points to data from Follow This, which indicate that the top nine asset managers in the Netherlands, including Aegon Asset Management, NN Investment Partners and Robeco, voted in favour of the activist shareholder group’s climate resolution about Shell in 2022. He says this shows “it is possible to convince all investors if we have time to explain the consequences of climate change”. 

Elsewhere, Orrick’s data identified three major types of climate-related proposals: requests for increased climate-related reporting, requests for greenhouse gas emissions reduction targets, and requests for companies in the financial sector to set policies ending or restricting their investment in fossil fuels.

Proposals calling for increased climate-related reporting had the most success, with a passing rate of 28.6 per cent in the first half of 2022. Meanwhile, proposals for greenhouse gas reduction targets had a passing rate of 12.5 per cent, and proposals for improved investment policies received no support. 

Orrick says the higher passage rate for climate-related reporting proposals may indicate that investors value receiving additional climate-related information and are less interested in holding companies to specific targets or climate-related goals. 

Better analysis needed 

Separately, Stephanie Niven, portfolio manager at Ninety One, says ESG is a challenging topic to reduce to metrics and data. She says it is possible that some asset managers may “have a lack of resources in the face of a significant increase in the number and complexity of shareholder proposals”. 

Orrick’s research shows there was a significantly larger number of ESG-related shareholder proposals submitted in the first half of 2022 relative to all of 2021 across the Fortune 250. A total of 221 resolutions were proposed in the first half of 2022, compared to 128 for all of 2021.

Additionally, many managers separate the proxy voting process from the investment process, potentially creating information inefficiencies, she says. 

Ioannou says one should not read too much into the numbers from a single year, as it might be the case that in this particular year a relatively higher number of low-quality or absurd proposals were submitted. He says for an accurate comparison, an evaluation of the quality of proposals is needed, along with more years of data “to make more robust inferences about whether this particular year’s reduction is significant or meaningful”.

There has been a change – but the recent lower support for ESG resolutions may not yet indicate a trend. 


A service from the Financial Times