End of Week Notes
A “sea change” in ESG proxy voting?
Record levels of support for ESG proposals in first half of proxy season
One of the most resonant aspects of sustainable investing for me is its emphasis on engagement with companies on ESG issues. Shareholders may try direct engagement or they may put an issue to the vote of fellow shareholders at a company’s annual general meeting. The threat of a shareholder proposal sometimes brings company management to the table. If discussions are fruitful, the issue is resolved, at least for the time being, and the proposal is withdrawn. But that leaves plenty of proposals on proxy ballots every year, almost always opposed by management.
For most of recorded history, the overwhelming majority of shareholders have followed management’s recommendation and voted against such proposals, which are, in any case, only advisory even when a majority of shares are voted in favor.
Not so much anymore. Last year, the 186 ESG-related shareholder proposals averaged 36% support among shares voted and 20 garnered majority votes. This year, with many company meetings still to come in May and June, 21 ESG-related proposals have already earned majority votes, and average shareholder support is up to 44%, according to a new report by my Morningstar colleagues.
What’s driving this? For one thing, more investors have significant concerns about climate risk, racial equity, and political expenditures — the three broad topics that are drawing increased shareholder support so far in this year’s proxy season. Political expenditures are related to the other two, because traditional business support for Republican politicians based on their perceived business-friendly philosophy has resulted in support for those who also are climate-change deniers or “inactivists” and who support restrictions to voting designed to discourage people of color from voting.
For another thing, big mutual fund companies have started to understand that their fundholders also have significant sustainability concerns. Funds face growing expectations to vote independently and not just rubber-stamp management positions. BlackRock and, to a lesser extent, Vanguard signaled last year that they were prepared to support more ESG-related shareholder proposals than they had in the past. Neuberger Berman has preannounced its votes on 35 shareholder proposals so far this year.
Funds aren’t required to disclose their votes until August 31st of each year, but in all likelihood, large fund companies are driving the greater support for many ESG-related proposals this year. The following table shows significant increases in support for 10 proposals that were voted on over the past two years:
The impact of increased shareholder support for ESG proposals on companies has the potential to be profound. Investors are saying in greater numbers than ever before that they want public companies to do more on climate and do way more to help dismantle systemic racism.
In effect, they’re saying to companies: We want you to care not only about profits, but about people, planet AND profits. It’s the same thing other stakeholders are saying — customers, employees, communities, and policymakers. It’s helping put capitalism on a more sustainable path.
Fund and Asset Manager “ESG Commitment Level” evaluations now available on Morningstar.com
Premium members of Morningstar.com can now view our manager-research analysts’ assessments of how committed a fund or asset manager is to ESG. This is important information because virtually every fund and asset manager is telling us that they now use ESG in some way. For most, it’s about incorporation of ESG data into their systems so that analysts can consider it, but the frequency and degree to which that happens varies widely. Even for what we call sustainable funds — those that put sustainability concerns at the center of their investment process — we observe many different approaches.
Here are two screen shots showing where to access ESG Commitment Level information on Morningstar.com. Only funds and asset managers under analyst coverage receive an ESG Commitment Level assessment, and our analysts haven’t worked through the entire coverage list yet.
When I said above that virtually all funds now consider ESG in some way, even if limited, I didn’t mention the one type of fund that doesn’t — the standard market-cap weighted index fund. In those funds alone sit around $5 trillion.
All the more reason for index funds to step it up on the engagement and proxy voting side of things.
Beyond the First 100 days: Leadership & policy opportunities for a more sustainable and inclusive economy
Honored to be participating in this event coming up on Monday.
Monday, May 17, 2021 at 2:30pm — 4pm ET
In partnership with JUST Capital and US SIF: The Forum for Sustainable and Responsible Investment (US SIF), The Aspen Institute’s Partnership for an Inclusive Economy is hosting a 90 minute conversation that will examine 1) whether Americans increasingly expect market leadership on environmental and social issues 2) what that means for the actions the administration should take in order to advance a more sustainable private sector.
Please join us to hear from:
Mark Warner, United States Senator, Virginia
Alison Omens, JUST Capital
Lisa Woll, US SIF
Rhett Buttle, The Aspen Institute
Holly Ensign-Barstow, B-Lab
Joe Keefe, Impax Asset Management
Xavier de Souza Briggs, Brookings Metropolitan Policy Program
Jon Hale, Morningstar
Dana Hyde, The Aspen Institute
Mike Froman, Mastercard
Heather Higginbottom, JP Morgan Chase PolicyCenter
Randall Strickland, Pathstone
Bharat Ramamurti, National Economic Council, The White House
And then, coming up on May 26…
…our next Morningstar Sustainable Investing webinar. Really looking forward to this one. Be ready with questions! Register here.
