ESG proxy voting takes center stage

ESG (Environmental, Social, Governance) has emerged as a major concern for today's investors against a backdrop of a global pandemic and climate-related worries, and boards are being held accountable.

For many stakeholders, the past two years have served as a catalyst to hyper-focus on ESG-related topics since COVID-related health concerns, a rise in social injustices and economic inequalities, and extreme weather events have all amplified the importance of integrated ESG strategies within a company.

Large institutional investors endorsed environmental and social shareholder proposals in unprecedented numbers during the 2021 proxy season, as well as voting against the reelection of directors at portfolio companies when ESG management was deemed insufficient. As a result, businesses are beginning to recognize the importance of implementing sound ESG programs that satisfy shareholders' changing expectations.

Due to regulatory changes and increased market demand, experts say proxy voting is about to get even more important.

Proxy voting in a nutshell

Shareholders in publicly traded firms have a say on issues brought forward for a vote at the company's annual general meeting, whether by management or other shareholders. A proxy vote is a type of voting in which members of a decision-making group can delegate their voting authority to another person.

In the United States, a "proxy statement," which provides an overview of the meeting agenda, is mailed to shareholders prior to the annual meeting. This package may also include a range of other documents that reflect financial data and operational outcomes, as well as key announcements, such as plans to change the company's share structure or mergers and acquisitions. Shareholders can then vote on the matters on the agenda in person at the company's annual general meeting, by mail, or online.

Unless they possess shares with additional voting options, investors with common shares normally receive one vote per share at shareholder meetings. Absent shareholders who have not utilized a proxy card with their signature are considered to have abstained; their votes do not count for or against any proposal put up at the meeting.

Why are proxy votes important?

Shareholder voting is the most common way for shareholders to influence a company's or mutual fund's operations, corporate governance, and even social responsibility initiatives that fall outside of financial considerations.

The importance of stakeholder voting rights was the highlight of BlackRock CEO Larry Fink’s 2022 letter to CEOs. Fink, who is also a huge proponent of ESG, argued heavily for stakeholder capitalism, stating that corporations should serve the interests of the entire community, including employees, suppliers, and customers, rather than just shareholders. “Every investor deserves the right to be heard,” he wrote.

Fink believes that paying attention to all stakeholders, not just shareholders, is critical to a company's success. According to Fink, keeping employees, customers, and suppliers motivated and inspired is critical to ensuring that those participants continue to deliver returns to shareholders, and ultimately ensure long-term corporate prosperity.

As a result, BlackRock is attempting to give its clients a voice in how proxy votes are cast at the companies in which their money is invested. This option is now available to a select group of institutional clients, including pension funds that support 60 million people.

"We are committed to a future where every investor – even individual investors – can have the option to participate in the proxy voting process if they choose," said Fink.

Regulatory changes give ESG new life

In recent years, US government policy on incorporating ESG criteria into fiduciary investment management processes has swung back and forth. With President Joe Biden's new administration, however, came a new direction.

The Department of Labor (DOL) released a proposed rule titled "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights" in 2021. The proposal would change the DOL's investment regulatory duties surrounding ESG considerations for retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). The Proposal would also change the requirements for exercising shareholder rights and proxy voting under ERISA.

The DOL specifically emphasizes that a responsible fiduciary should incorporate ESG elements in the risk and return analysis when making plan investments, which is a huge win for ESG. The proposal includes the following non-exclusive ESG factors as specific examples of the facts and circumstances that can be considered material to the fiduciary’s risk-return analysis:

• Environmental issues, such as a company's exposure to the real and potential economic repercussions of climate change, including physical and transitional risks, as well as the positive or negative impact of government regulations and policies aimed at mitigating climate change.
• Social issues such as workforce practices like the company's progress on employees' diversity, inclusion, and other drivers of employee recruiting, promotion, and retention; investment in training to improve the skills of its workforce; equal employment opportunity; and labor relations.
• Governance factors such as a corporation's avoidance of criminal culpability and compliance with labor, employment, environmental, tax, and other applicable laws and regulations, as well as board composition, executive compensation, and transparency and accountability in corporate decision-making.

According to the DOL, climate change-related issues, governance considerations, and worker practices are no different from "conventional" material risk-return factors, should be examined equally in the investment process, and are consistent with ERISA's duty of prudence.

New DOL proxy voting changes

The proposal also makes the following changes to the proxy voting and exercise of shareholder rights provisions in the 2020 ESG Rules:

• Duty to vote – "No vote" statement removed: Previously, fiduciary obligation regulations did not require every proxy to vote or every shareholder's right to be exercised. The elimination of this restriction does not mean that every proxy must be voted; rather, proxies should be voted in general unless a responsible fiduciary believes that the costs or efforts will outweigh the benefits.
• Voting policies - Removal of "safe harbors": The two "safe harbor" proxy voting policies that plan fiduciaries can adopt are no longer available. The DOL does not believe those two safe harbor regulations are necessary or useful and is worried that they may inadvertently encourage plans to withhold from proxy voting more broadly without adequately addressing shareholders' interests.
• Records maintenance: This change removes the need for plan fiduciaries to keep track of proxy voting and other shareholder rights exercises.
• Elimination of monitoring obligation: This removes the specific requirement that a plan fiduciary must monitor any third-party proxy voting service to which voting has been delegated.

The bottom line

The proxy market is changing beyond the regulatory environment. Separate from the DOL's action, the Securities and Exchange Commission (SEC) decided to propose changes to its proxy voting advisory regulations last November. The proposed revisions are intended to address investor and other concerns that the current requirements may obstruct and damage the timeliness and independence of proxy voting advice, as well as expose proxy voting advisory firms to undue litigation risks and compliance costs.

These changes are meaningful as proxy voting is often the sole means by which investors can have a say in the business operations and societal activities of their company or mutual fund. These changes also clarify the value and importance of ESG considerations for stakeholders, investors, and companies, while ensuring ESG becomes material to the fiduciary’s risk and return analysis.

ESG materiality assessments

With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.

An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.

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Michelle Winters

Michelle Winters is our VP of Sales. Previous to this role she oversaw the account management & consulting teams. Michelle's roles have allowed her to successfully ensure that our clients see increased value, optimization of their strategies, and the right solutions to position them for growth and success.

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