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Myriad shareholder proposals advanced sustainability and inclusion across corporate America this past proxy season as strategic engagement between investors and investees on sustainability continues to grow. According to US SIF Foundation, $9.8 trillion of sustainably invested assets use corporate engagement and shareholder action to influence corporate sustainability, including via strategic engagement, filing shareholder proposals, and proxy voting. The 2021 proxy season set new records with at least 467 shareholder resolutions on environmental, social and governance (ESG) issues.
Trends from the 2021 Proxy Season
The 2021 proxy season reflected the increasing importance of sustainability and inclusion to investors. According to Harvard Law School research, relative to 2020, environmental and social hot topics remain unchanged—climate change, diversity, political activity—but shareholder support has greatly increased, most notably at large institutions. Despite new regulatory impediments, smaller investors continue to use their voices, including through the Interfaith Center on Corporate Responsibility (ICCR), which since pioneering the use of shareholder advocacy to press companies on ESG issues 50 years ago, Interfaith Center on Corporate Responsibility (ICCR) has provided its members—now 300 strong with over $4 trillion in AUM—with a collaborative venue to use their collective investments to catalyze social and environmental change in executive suites and boardrooms.
While the support of large institutional investors for ESG proposals was broadly expected to rise given their public statements about the importance of sustainability and inclusion, the quantum leap in degree of support is surprising. From July 1, 2020 to March 31, 2021, BlackRock, the world’s largest asset manager, has supported 62.5% of environmental and social proposals. The result for the full year (July 1 2020 to June 30 2021) is likely to be different given there are many more proposals voted during peak proxy season. Nevertheless, by contrast, for the 1,000+ ESG proposals for the one-year period ending June 2020 (7/1/2019 to 6/30/2020), BlackRock backed 6% of “E” proposals, 7% of “S” proposals and 17% of “G” proposals. Accordingly, supporting 62.5% of environmental and social proposals represents a sea change in investment stewardship at BlackRock.
Smaller Faith-Based Investors
The number of filings of ICCR members remained steady year-over-year. Meanwhile, the number of shareholder proposals filed by ICCR members that the SEC omitted at the request of the company increased by nearly 60% since 2020. This increase in omissions is one example of the shadow cast by the Trump administration.
Inclusion and climate change were most commonly the primary issue in ICCR member filings. Inclusion filings in particular increased by 32% year-over-year. Faith-based investors like ICCR continue to operate on the cutting edge of sustainability and inclusion. In 2021, the internet and direct marketing retail industries came under focus for ICCR members, with shareholder proposals at Amazon, Booking Holdings, and Expedia.
The Tailwinds Behind Corporate Engagement
Corporate engagement has multiple tailwinds.
First, the pandemic and racial violence and unrest in 2020 triggered numerous new shareholder proposals. Many expected the increase in resolutions linked to racial justice and equal opportunity. There was also an increase in innovative proposals tied to worker safety, climate transition planning, and lobbying.
Second, strategic engagement is a key tenet for leading investment industry associations and impact frameworks. Globally, investors with $103 trillion in assets under management signed the UN-supported Principles for Responsible Investment (PRI), committing to be active owners and incorporate ESG issues into ownership policies and practices. Strategic engagement is also a key tenet for other sustainable investing organizations, like the 300 Club and the Impact Management Project.
Third, shareholder activism regained its strength after pausing for Covid. Shareholder activism is when an individual or group purchases large numbers of a public company's shares and/or tries to obtain seats on the company's board to effect a significant change within the company. According to Lazard, the number of activist campaigns in the US during 4Q 2020 was up 200% quarter-over-quarter, and Q1 2021 activist activity increased 48% year-over-year and already accounts for nearly half of 2020’s total activity.
Fourth, investment stewardship has momentum: 24 different stewardship codes have been developed, mostly since 2016. Investment stewardship is monitoring of and engagement with investees to promote long-term value creation. Stewardship codes outline the relationship between investors and investees.
Why Corporate Engagement Matters
Corporate engagement is the most reliable type of sustainable investing for investors seeking impact, in the sense that it has been clearly demonstrated empirically. Five academic studies indicate that there is a reasonable probability—ranging from 18% to 60%—that shareholder engagement requests succeed. In particular, Barko, Cremers, and Renneboog and Dyck, Lins, Roth, & Wagner show that shareholder proposals are associated with subsequent increases in corporate ESG ratings.
Shareholder proposals in particular are an important mechanism for shareholders to broach significant issues, monitor corporate management, and influence corporate policies. Shareholder proposals are a cost-effective mechanism way for motivated shareholders to communicate with one another and for shareholders as a group to communicate with management via votes on proposals. Although most shareholder proposals are not binding on management, a majority vote nearly always leads to adoption, and even a minority vote often prompts meaningful change. BlackRock recently reported that companies adopted 94% of proposals with majority support and 67% of proposals with 30% to 50% support. During the 2021 proxy season, 65 ICCR members filed shareholder proposals that achieved over 30% support.
The Road Ahead
The revisions to Rule 14a-8, announced in September 2020 go into effect before the 2022 proxy season. The changes raised the thresholds of ownership both in terms of the number of shares and length of time they must be held. Before the new rule, a shareholder who has held shares in a company for at least a year needed to hold at least $2,000 in shares. Under the new rule, new purchasers of stock must hold $25,000 in shares for at least a year or hold $2000 in shares for at least three years. The SEC’s new rule will require some of the smaller faith-based and sustainable shareholders that ICCR represents to wait two additional years before submitting a proposal. This could limit their ability to carry out sustainable investing through investment stewardship, tie up funds, and prevent investments in other companies where they could also engage on important issues.
In addition, the revisions to Rule 14a-8 limit resubmissions. The prior rule required 3% support on a first-year vote, 6% on a second vote, and 10% on a third vote to keep a proposal before a company’s shareholders. Now resubmission will require 5% on a first vote, 15% on a second vote and 25% on a third vote. The new rule’s higher threshold for proxy proposal resubmission will also limit collective deliberation by shareholders on emerging ESG issues and therefore limits the dynamism of ESG materiality. For example, a Tyson human rights due diligence shareholder proposal achieved 18% of the total vote, which translates to 79% of the independent vote excluding Tyson family shares, but below the threshold of the new rules to be refiled in 2022. As Bob Eccles explains, growth in evidence of why an issue should be material leads to escalating stakeholder activism which puts pressure on companies to address this issue lest they lose customers and truly engaged employees. Investors who understand the profitability implications also become more active in their engagement with the company on this issue. And then, voila, it is material!
Due in part to the potential harms of the revisions to Rule 14a-8, ICCR has taken the next step in defending the rights of small shareholders by filing a lawsuit along with As You Sow and James McRitchie to overturn the SEC’s revisions to rule 14a-8. This lawsuit follows a letter from a coalition of investors—including the New York State and New York City Comptrollers Scott Stringer and Thomas DiNapoli—to Congress urging support for a resolution under the Congressional Review Act (CRA) that would repeal the restrictive changes to rule 14a-8 that were passed by the SEC during the Trump administration and public and private letters and briefings to the new administration.
As ICCR CEO Josh Zinner explained: “For decades, the shareholder proposal process has served as a cost- effective way for corporate management and boards to better under long-term shareholder priorities and concerns regarding long-term value creation. The revisions to rule 14a-8 will significantly limit this process. The Trump era SEC leadership pushed these revisions through despite a limited economic analysis that disregarded the substantial body of evidence about the benefits of shareholder engagement to investors and companies. We felt we had no choice to file suit before the revisions go into effect.”
There is precedence in the Biden administration for overturning last-minute Trump administration rules that limit sustainable investing. This past March, the Department of Labor announced that it would not enforce two midnight Trump administration rules under Employee Retirement Income Security Act (ERISA), which would have limited the ability of retirement funds to invest on the basis of environmental, social, and governance (ESG) considerations or to prioritize ESG issues in proxy voting and strategic engagement.
Strategic engagement remains a dynamic part of the investment value chain, with greater emphasis on sustainability and inclusion and an evolution toward an increasingly conducive regulatory environment expected in the months ahead.
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