Our key takeaway: Voting in favour of ESG shareholder proposals isn’t always enough to see companies address issues like human rights, equity, climate change and nature loss. In recent research, the UN Principles for Responsible Investment (PRI) found that even majority-supported shareholder ESG proposals are not translating into company action—less than two out of five majority-supported ESG proposals in the 2022 proxy voting season have seen meaningful action and implementation on the part of companies. Investors have a crucial role to play in ensuring that their investees are fulfilling expectations and responsibilities with regard to people and planet, not least as a matter of fiduciary duty. Investors often have considerable leverage to push company action: they can start by defining a framework for what constitutes meaningful action on the part of companies, including time-bound expectations; engaging with companies regularly to follow up on progress and implementation; and ultimately holding boards to account for inaction by voting against board leadership and individual directors.
The UN Principles for Responsible Investment (PRI) published its research, 'Are corporate boards responding to successful shareholder ESG proposals?' (March 2023):
- More majority-supported ESG proposals…but not enough company action: PRI cites research by PwC indicating that the 2022 proxy season reached record-high majority-supported shareholder proposals on ESG. While majority-supported ESG-related proposals are still uncommon (they represent “less than 10% of the 900-plus ESG proposals filed last year”), the uptick in shareholder attention to ESG issues is an important development. PRI’s research exploring the outcomes of proxy voting shows however that companies are not always implementing even majority-supported proposals. PRI looked at 78 majority-supported shareholder proposals from the 2022 proxy season and issued surveys to the shareholder proponents and target companies; these proposals focused on topics ranging from human rights impact assessments, racial and gender equity and civil rights audits, disclosure and action on GHG emissions and science-based climate targets, transparency on plastic pollution, governance structures and beyond. The research revealed a lack of progress and accountability on even majority-supported ESG proposals. For example, “[f]or 20 proposals (more than one-quarter of those analysed), we found that neither the company nor the proponent indicated that the company has, or would be, implementing them, with no publicly available information showing otherwise at the time of publication.” In addition, surveyed investors “believe that companies are only fully implementing 23% of proposals, and that 14% will only be partly implemented. In approximately a quarter of cases the investor proponent believes the proposal will not be addressed at all.” And when it comes to companies, only half of the surveyed companies “said they have implemented or will be implementing the proposals their shareholders passed, in part or in full.” While these proposals are not legally binding in the U.S. investment context, PRI nevertheless notes that “if companies frequently ignore the will of their shareholders, it can weaken the voice of investors overall and dilute the efficacy of proxy voting and shareholder proposals as important investor engagement tools. This is particularly the case for investors seeking to mitigate systemic sustainability issues. Without corporate boards that are responsive to shareholder concerns, achieving meaningful progress on these issues via shareholder engagement is unlikely." PRI also warns this trend may indicate that some companies have “captured boards [that] are more likely to govern in a way that favours management interests to the possible detriment of shareholders.” Captured boards may hinder a company’s ability to manage and mitigate its impacts on people and the environment, especially where boards lack “adequate ESG expertise among their independent directors.”
- Defining more clearly what constitutes issuer inaction: As a first step to confront this challenges, PRI recommends that investors increase investee accountability by aligning on a set of expectations for companies to take action on majority-supported proposals. For example, this could include asking themselves questions like, “are they satisfied with companies simply committing to take action or do they expect evidence of steps taken towards implementation?” PRI suggests that investors should be asking to see meaningful progress in the first year and that they should be careful to ensure that action has actually been taken: “For example, ISS’s latest US voting guidelines indicate that some companies may disclose in their subsequent proxy materials that they have discussed a majority-supported resolution with their shareholders, while not making any commitment to act. Investors should think critically about whether such efforts, when used to delay action or commitment, are justified when over half of the company’s voting shares have already weighed in favour of a proposal."
- Taking action by exercising leverage: After defining a set of expectations for investee companies to act, investors should use their leverage to push companies to adhere to those expectations by “systematically apply[ing] policies, engag[ing] with other market participants, communicat[ing] expectations to companies and hold[ing] company boards to account.” Investors should continue to engage directly with companies to clarify their expectations for time-bound action on majority-supported resolutions. “In all cases, best practice is to communicate the rationale with investee companies ahead of voting, as this increases transparency and accountability, and provides an opportunity to initiate a dialogue and receive additional information.” Investors can also influence the behaviour of boards by holding directors directly accountable; PRI notes that such efforts “can be a powerful escalation strategy.” For example, investors may wield their voting power to vote against all directors, withhold support for board and committee leadership and even propose alternative directors where allowed.