ESG on the Ballot: U.S. Proxy Season Preview
Emily Brock
Senior Research & Networks Manager
Each year, the U.S. proxy season reflects and amplifies current sentiment about corporate behavior, including on sustainability. When shareholders make their voices heard, the results distill overall investor sentiment and allow for the introduction of new themes and priorities. Shareholder participation in American corporations is unfettered by many of the restrictions of other markets, and, in the current contentious atmosphere, sustainability and ESG are expected to be prominent themes in the 2023 proxy season.
2023 trends in shareholder proposals
Climate will be at the top of the agenda at 2023 annual meetings, just as it was last year. Already, at least 41 climate-related shareholder proposals have been filed. Companies’ eagerness to improve climate-related disclosure may prompt compromises in some cases, leading to withdrawals before meetings occur, but shareholders at many prominent American corporations are still likely to find climate on their ballots. Recent changes in the SEC’s rules allow shareholder proposals with more detailed, prescriptive language about climate, including emissions, risk, and target setting. Look for prominent corporations across multiple sectors, ranging from Amazon and Goldman Sachs to Raytheon and CarMax, to be addressing climate-related shareholder proposals in the run-ups to annual meetings.
Shareholder proposals focused on social issues will continue to be important as well. At least 27 shareholder proposals related to diversity, equity, and inclusion (DEI) or gender equality issues will appear on ballots. Most seek increased disclosure regarding workforce diversity and equity; as in past years, we may see many withdrawn as companies voluntarily disclose the requested information. Workers’ rights issues, including the right to collective bargaining, also continue to be important topics.
Two other shareholder proposal themes will influence discussion at some high-profile annual meetings. The first of these is sexual and reproductive health, a topic previously seen very rarely on ballots. In the wake of the 2022 Supreme Court decision overturning Roe v. Wade, abortion access has become a central and hotly-debated issue. Many corporations voluntarily took public stances on this issue in the weeks following the ruling, but many others have declined to do so. Related shareholder proposals filed with six consumer-facing companies including Coca-Cola, McDonalds, and Pepsico aim to make companies publicly delineate the risks and costs resulting from effects that federal and state reproductive rights policies have on their employees. The impact of virgin plastic manufacture is another new theme for shareholder proposals this year. Referencing recent research into global plastics manufacturing, shareholders have filed six similar proposals at U.S.-based petrochemical and oil & gas companies asking them to report on how reductions of virgin plastic would impact their financial position.
Director elections: climate accountability gets personal
While the climate-focused contested director election during ExxonMobil’s 2021 shareholder meeting may have been the most headline-grabbing in years, 2023 may bring more climate-inspired votes against directors overall. Proxy advisory giants ISS and Glass Lewis, together estimated to control over 90% of the proxy advisory field, both now recommend that investors oppose reelection of selected directors at companies that are flagged by Climate Action 100+. To avoid triggering an adverse vote recommendation at ISS, the largest proxy advisor, a company needs to have disclosed that it is taking “minimum steps needed to understand, assess and mitigate risks related to climate change,” including disclosing relevant emissions data and TCFD-defined climate risks.
Although these proxy advisory changes are unlikely to lead to any directors stepping down from boards, they signal a change in tone for corporate accountability on climate change issues. With the encouragement of ESG investors and raters, the past two years have seen many companies amend committee charters to include board-level responsibility on climate and other ESG issues like DEI.
For years, shareholders have targeted director elections as a means to send messages regarding board diversity, executive compensation, labor rights, and governance failures. Climate action looks poised to be next on the list, both in the United States and in Europe. This year shareholder activists are suing individual members of the board of directors of Shell on climate-related grounds; although unlikely to lead to anything more than headlines, this does portend a new era of heightened expectations for board-level climate responsibility.
Diversity of opinions on ESG and shareholder power
A measure of anti-ESG sentiment heated up in 2022. While some politicians and financial sector pundits criticized ESG investing policies, this was countered by sustainable investing proponents, and ESG assets under management continued to grow. Legal challenges and regulatory changes on the horizon in the United States and the European Union portend another year of intense debate over the role of social and environmental data in investment decision making.
So-called ’antisocial’ shareholder proposals that push companies to abandon social and environmental initiatives have been a factor at annual meetings for years. However, these have taken on a sharper tone with the evolution of ‘trojan horse’ proposals, permitted under SEC rules, which advocate for detrimental practices in language similar to standard ESG-related proposals. As regulatory leniency on shareholder proposals continues, proxy advisors and shareholders alike will need to carefully examine the language of proposals to ensure vote recommendations are well aligned with sustainable investing approaches. Corporate investor relations teams will need to be on their toes to ensure that the implications of all shareholder proposals are properly understood.
At the same time, recent changes in proxy voting processes at large asset managers such as Vanguard and BlackRock may make it easier for individual investors to vote their own shares. These changes have been made in response to criticism that large asset managers may sometimes vote in contradiction to their clients’ desires on ESG issues. The new universal proxy rule will make it easier for shareholders to support dissident nominees in contested elections, but that change’s impact on ESG-related issues overall is hard to predict. Whether individual retail investors will take the time to vote their shares at all also remains to be seen—most experts doubt that there will be enough uptake for these changes to have much impact.
ESG and executive compensation
In the United States, SEC requirements for “say-on-pay” ballot items mean that shareholders are able to scrutinize the pay packages for the CEO and named executives and to cast advisory votes against excessive pay. Opposition to CEO pay is becoming increasingly common as performance metrics rebound following two years of Covid-related inconsistency. The material submitted in relation to these say-on-pay votes allows for extremely detailed examination of executive pay packages. At a time when layoffs are rampant and many industry sectors are facing financial headwinds and stakeholder criticism, closer scrutiny of executive pay is likely. In an early signal that companies are worried about potential backlash, Apple announced that CEO Tim Cook would voluntarily forgo approximately $35M of the $70M performance-based equity award that was due to be paid out as part of his 2023 compensation package. Some other major banking and tech firms have followed Apple’s lead, anticipating that proxy filings that could reveal their CEOs pocketing outsized payouts might spark strong negative reactions.
The inclusion of ESG metrics in performance-based incentive pay in executive compensation has grown more common in the past three years, and is likely to grow more in the future. Because sustainability programs are often multi-year initiatives, best practice is to include ESG metrics as extending two-five years. Such metrics have been in place long enough that 2023 will bring a significant number of ESG metrics in executive compensation forward in proxy statements. For cases where an executive failed to achieve the ESG goal, the company faces the dual challenge of having to publicly admit that it did not reach its sustainability commitments and then determine whether to withhold the bonus entirely or pay out a part of it.
Communication and responsiveness will be key for companies this proxy season
At times, the short-term time horizons of some investors may lead them to voice questions on whether a company’s ESG performance may appear to run at cross purposes to its financial performance. Other stakeholders may simultaneously urge that same company to commit more strongly to its sustainability goals. As the 2023 proxy season gets underway, it’s important for companies to communicate clearly to investors, ESG ratings providers, and other stakeholders exactly how their sustainability programs are integral to business success. This year has the potential to spark new levels of investor scrutiny about how best to implement ESG approaches in public companies, and responsiveness and engagement will be key for companies during this time.
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