Have we reached an inflection point on environmental and social shareholder proposals?

In this thoughtful article from the Managing Editor at ISS Analytics, The Long View: US Proxy Voting Trends on E&S Issues from 2000 to 2018, the author contends that, notwithstanding high-level data showing relatively static median vote support for shareholder proposals over the last 19 years, that data is deceptive: “the reality is that investor voting behavior among owners of U.S. companies has changed significantly—perhaps almost revolutionarily—over the past two decades.” What’s more, “the most significant change in investors’ voting behavior pertains to environmental and social issues, as these proposals are earning record levels of support in recent years.”

The author contends that support for E&S proposals began to increase after the 2008 financial crisis, which created a new focus on governance and sustainable business practices, including environmental and social issues. Over the last 10 years, the median level of support for E&S shareholder proposals increased as a percentage of votes cast from 6% in 2008 to 24% in 2018, reflecting a “dramatic change in investors’ attitudes towards environmental and social issues.” Similarly, in 2018, 36% of E&S shareholder proposals received support of over 30% of votes cast, up from 7% in 2008. This change in voting results reflected increased pressure from the public and regulators, global policy initiatives, major disaster events (such as the 2010 Deepwater Horizon oil spill and the 2011 Fukushima nuclear disaster) and “the evolution of the debate by proponents from a values-based framework to a value-oriented discussion of managing potential business risks.” As investors became more actively engaged, policy issues, such as climate change and diversity, rose to the forefront.

Another trend identified by the author is the shift in the way proponents framed their proposals from requests that companies adopt specific E&S policies or take specific actions to proposals “seeking disclosure, risk assessment, and oversight of particular issues.” As a result, the proposals seemed “less dogmatic about business practices, and allow[ed] for dialogue and engagement in a relatively cost-effective way.” In addition, the emphasis of the basic E&S proposal was converted from a pure “values” focus to an “economic discussion about how environmental and social risks can impact the company’s long-term value.” This change served to encourage more engagement about long-term economic value, allowing proponents to position themselves as “long-term investors and to dispel previous perceptions of them as solely social or environmental advocates.” This shift, along with the rise in ESG investing, also eventually led to a change in the voting strategies of many large investors from abstentions—which averaged 16% in 2010 and dropped to 3% in 2018—to votes in favor, reaching an average of 25% in 2018. Even more significant, the Paris Climate Accord “made climate change risk management a top policy priority.”

In addition, the author points out that there has also been an increase in support for shareholder proposals on social issues, such as board and employment diversity, as well as significant health and safety issues, such as the opioid epidemic and gun safety.

Another trend the author identifies is the increase in the proportion of E&S proposals withdrawn, as proponents instead engage with companies and reach agreement on disclosures or adoption of policies. According to the article, 48% of E&S proposals were withdrawn in 2018, while only 37% went to a vote, reversing the historical proportions.

Notwithstanding all of these positive indicia, the author cautions that we shouldn’t expect E&S proposals to achieve the ready level of acceptance of the most successful governance proposals, such as declassifying the board. That’s because issues like board declassification require only a binary decision—declassify or don’t declassify. E&S proposals, however, tend to require a more qualitative assessment of existing company practices, current levels of disclosure and company performance. As a result, the author does not expect E&S proposals to regularly “average above-majority support levels given the nature of the requests.”

Nevertheless, the author concludes that the record withdrawal rate in 2018, together with record level of support for those proposals that went to a vote “indicate an inflection point for environmental and social issues, as these considerations move to the mainstream of investment management.” As a result, the author contends that “we can expect a high percentage of proposals achieving significant support levels for the years to come, as investors encourage more companies to improve disclosures and practices on these issues.”