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Boards face growing pressure from ESG petitions

After an unprecedented year of investor support for environmental, social and governance (ESG) petitions at companies worldwide, board members are bracing themselves for more pressure in the months ahead.

A record 12 proposals on environmental issues filed at US companies in 2021 were passed with a majority of shareholder support, according to law firm Sullivan & Cromwell, which has analysed voting patterns in annual general meetings.

And data provider Morningstar has calculated that the average level of shareholder support for all environmental and social petitions increased to a record 34 per cent in the 12 months to July 2021. Diversity, equity and inclusion resolutions won an average of 43 per cent backing and nine petitions passed.

But perhaps the most notable example of shareholder activism this year was at ExxonMobil, where a small hedge fund investor succeeded in having three new members voted on to the oil major’s board. The support given to such a small stakeholder in Exxon underscored the vulnerability of boards that are not seen as taking ESG concerns seriously enough.

For the environmentalists and religious organisations that traditionally file shareholder proposals, these successes mark a dramatic shift in fortunes from even just a couple of years ago. For decades, activists struggled to win any significant support for their causes. The largest asset managers — BlackRock, State Street and Vanguard — rarely sided with them, allowing companies to shrug off ESG concerns.

But the big asset managers are no longer asleep.

Vanguard’s support for environmental and social proposals put before boards by shareholders jumped to 20 per cent in January-June this year, from 6 per cent for the same period in 2020, the firm said in September. Its support for workforce diversity proposals — asking companies to disclose more information about their gender and racial composition — shot up to 50 per cent from 17 per cent the year before.

Meanwhile, rival BlackRock says that it doubled its support for shareholder proposals in 2020-21 compared with the previous year. It also recently announced that it will allow big institutional clients to vote directly at AGMs, potentially increasing the constituency that boards must answer to.

Investors also revolted against big bonuses for executives. A record number of “say-on-pay” votes — non-binding votes on executive pay mandated by the 2010 Dodd-Frank financial regulations — went against the companies in 2021, according to ISS Corporate Solutions.

The last few months of the year are typically a time when companies and investors talk through shareholder concerns before petitions are filed. Now, following record support for ESG proposals, companies seem more accommodating towards activist investors, worried that a proposal could lead to an adverse vote and a reputational hit. Companies that take a flippant approach to investors’ ESG concerns are “a dying breed”, says one lawyer familiar with such boardroom discussions, who requested anonymity to speak freely.

These days, boards are meeting to talk about their climate strategy and how to roll out a net zero emissions plan that does not come across as greenwashing, the lawyer adds. Companies are also hiring specialists to check asset manager’s voting records to see where pre-emptive shareholder reassurance may be needed.

“Forward-thinking companies have been preparing for these continued discussions by putting together better and more disclosure,” says Marc Treviño, co-head of Sullivan & Cromwell’s corporate governance practice. “As they did in 2021, I expect that companies will continue to prefer to negotiate the withdrawal of climate-related shareholder proposals as opposed to risk being seen as anti-climate by investors and other stakeholders.” Engaging with investors before a potentially damaging vote “will be the number-one issue of the 2022 season,” he suggests.

As You Sow, a California-based non-profit that is one of the largest filers of shareholder proposals on behalf of endowments and other investors, says a record five of its petitions won majority support in 2021. But it prefers to engage with companies before any petition is filed. The aim is to get managers to make changes without having to go to a shareholder vote.

“Ultimately, we help these companies reduce risk and improve their brand,” says Andrew Behar, As You Sow’s chief executive. “Looking ahead, the question now is how companies will implement changes to their policies and practices in response to these high votes, and how investors respond if they don’t.”

The big asset managers have historically been reluctant to defy company managers on ESG proposals. But these investors have felt pressure themselves from the world’s largest pension funds to prioritise ESG concerns.

Neuberger Berman, an asset manager overseeing about $429bn, has taken a novel approach by disclosing how it will vote on some shareholder proposals before the vote takes place. Most asset managers do not disclose their votes until afterwards. But Neuberger’s pre-vote disclosure, which started in 2020, aims to drive progress on environmental and social matters, the firm has said.

“We are increasingly hearing from our clients that they want more transparency around proxy voting overall,” says Caitlin McSherry, director of investment stewardship at Neuberger Berman. She adds that companies are now getting in touch with the firm proactively to ward off potential investor discontent. “I see it escalating this fall,” she says.

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Boards face growing pressure from ESG petitions

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