- The number of shareholder resolutions submitted is up 20% this corporate reporting season in the US.
- Asset managers have begun to engage publicly as shareholders, particularly around ESG issues.
- Shareholder resolutions are typically a last resort in company engagement and can effect change.
Investor engagement is on the rise, with ESG-related issues increasingly taking centre stage in shareholders’ discussions with their portfolio companies and asset owners being given more opportunities to express their voting wishes.
Across the world, from April to July, large listed companies host annual general meetings (AGMs) where their executives present on financial performance and shareholders get to ask questions and vote on issues facing said businesses. Their enquiries are becoming notably more focused on corporates’ approach to and strategy around sustainability.
The ‘Proxy Preview 2022’ report, released in late March by three US shareholder advocacy groups, reveals how scrutiny of ESG issues is growing. It shows that 567 shareholder resolutions had been published this year by the end of March, up 20% from last year, and have steadily risen since 2019 (see chart). The most common types of proposals – 21% of the total – relate to climate change.
Trusteam Finance, for example, has a resolution against the auditors of Air Liquide’s annual meeting today (4 May). The Paris-based management company argues that PwC and EY have not considered the impact of climate-related matters in their audit.
Also in France, a group of asset managers has filed a resolution ahead of the shareholder meeting of TotalEnergies later this month, on 25 May, demanding that the French oil major meets the targets of the Paris Climate Agreement.
But what is the process involved behind getting shareholder resolutions voted on at an AGM and, more importantly, do they work?
At the end of March, an investor coalition led by non-profit campaign group ShareAction, filed a resolution at Sainsbury’s calling for Britain’s second-largest supermarket chain by revenues to commit to paying the ‘living wage’ – £11.05 ($14.05) an hour in London and £9.90 for the rest of the UK – to all of its 189,000 workers, rather than merely the statutory minimum wage.
While the group raised the pay of employees in its stores outside London to the living wage rate in early April, it did not make the same commitment for the workers on its sites who are employed via third-party contractors, such as security guards and cleaners.
Angeli Benham, senior global ESG manager at UK's largest fund house Legal & General Investment Management ($1.8trn in assets under management), said the change falls short of what the investor coalition had asked for, and the resolution remains on the agenda for Sainsbury’s AGM on 9 July.
A long process
This ESG engagement initiative with Sainsbury’s started in 2013, says Simon Rawson, director of corporate engagement at London-based ShareAction. Although few take as long as that, engagement is not remotely easy.
Investors or their proxies make initial contact with a company by sending letters (now usually emails) to the board, he tells Capital Monitor. “Most times that gets picked up by the investor relations team, possibly someone in [the] sustainability [department] and maybe someone in human resources.”
Another opening tactic is to pose questions at a company’s AGM, Rawson says. The advantage of doing so is that it puts the topic “on the radar of the whole board”.
In addition to the formal business of the AGM, informal conversations take place with directors and non-executive directors after the meeting. Engagement starts after “we corner them at the coffee stand and start a conversation”.
Putting together a coalition of investors – typically a mixture of asset owners and asset managers – is more art than science, Rawson says.
For the resolution with Sainsbury’s, ShareAction mobilised a group including Legal & General Investment Management, National Employment Savings Trust (Nest), the country’s largest workplace pension scheme with £17.6bn under management as of end-2021.
Asset manager ESG engagement
What has helped is the growing, albeit slow, engagement with companies by asset managers. A report from ShareAction at the end of last year found the sector sluggish to raise environmental concerns and unwilling to support the vast majority of resolutions focused on social issues.
Some hesitation comes from what Rawson calls reputational “risk aversion”, while others think it is better to have these conversations privately.
But, as Michael Hugman, director of climate finance at the Children’s Investment Fund Foundation, which launched the Say on Climate initiative, notes: “The key thing [around voting and ESG engagement] is transparency. One challenge we see is that a lot of traditional stewardship has taken place privately, and it's often extremely difficult to see what the results of that stewardship have been."
Still, some asset managers are bucking the trend and engaging publicly as shareholders.
Edinburgh-based Abrdn takes an “active stance from a voting perspective” as part of its increasingly active engagement with the firms it invests in, Fionna Ross, senior ESG analyst, tells Capital Monitor. “We don’t just want to invest in a company that is strong from a financial perspective. We have to be comfortable and have enough evidence that ESG issues are being addressed.”
Ross cites oil and gas companies as “really obvious examples” of firms that are being “more transparent in their strategy”.
Abrdn is part of Climate Action 100+, an investor-led initiative to encourage the world's largest corporate greenhouse gas emitters take necessary action on climate change. As such, in last year’s proxy season it voted for the overwhelming majority (94%) of shareholder votes on climate-related proposals that had been flagged by Climate Action 100+ and almost three-quarters (74%) of all climate-related proposals.
In 2020, the $589bn manager published a position statement outlining that it expects investee companies to consider diversity and inclusion in their working practices and, since March this year, has insisted that companies listed in the US have at least one racially or ethnically diverse member on the board or it will divest its stake.
It has not so far come to that. As Ross says: “I don't luckily have any examples of where we've had to do that in the past because we do generally see engagement as being quite constructive”.
Similarly, in early April, London-based Schroders, with $990.9bn in assets under management, published an Engagement Blueprint – a mandatory roadmap for active ownership with engagement objectives for its fund managers and analysts.
Resolutions: a last resort
The company uses voting at AGMs as part of an engagement tool, says Kimberley Lewis, Schroders’ head of active ownership. It sets “specific, measurable [and] actionable” objectives with a three to five-year horizon for its investee companies and engages extensively with them.
In extreme cases, “you go to the board chair and have a conversation, then you vote against management, and if that doesn't change, then you might file a shareholder resolution”, Lewis adds. But Schroders would only resort to the latter “once engagement is exhausted”.
Schroders, for example, worked with ShareAction to encourage HSBC to up its climate commitments earlier this year. This was a successful engagement that resulted in a shareholder resolution being withdrawn after the bank agreed to phase down financing of fossil fuels in line with 1.5C, as well as to update its oil, gas, and thermal coal policies by the end of this year.
Shareholder resolutions typically lead to a step-change in how seriously companies take engagement, says Rawson. And if they succeed, they are typically withdrawn.
Following a shareholder proposal submitted in January by ShareAction and a shareholder coalition which included European asset manager Candriam and Dutch asset manager Actiam that Unilever to sell more healthy food, at the start of March the British consumer goods giant announced its commitment to a new benchmark for public reporting about the healthiness of the food it sells. Unilever said it would from that point measure the sales of its products against government-endorsed ‘nutrient profile models’ and its own internal metrics.
Unilever’s shareholders and ShareAction felt the company had committed publicly to most, if not all, of what they were asking for and consequently agreed to withdraw the resolution, says Rawson.
Failure to engage
But proposals often do not even make it to the resolution stage.
In early April, for instance, Volkswagen rejected a shareholder proposal from seven European investors that wanted details of how the German car manufacturer’s lobbying activities help to address climate risks. The group included Schroders, Swedish state pension funds AP2, AP3, AP4 and AP7 and the Church of England Pensions Board.
While VW does report its trade association memberships, it does not make comprehensive disclosures of how those associations’ lobbying goals and activities align with its own climate goals. The company ultimately rejected the proposal, deeming it beyond the competence of the general meeting.
This response “spoke volumes” about VW’s level of engagement and approach to sustainability (or indeed lack of it), says Charlotta Dawidowski Sydstrand, sustainability strategist at AP7.
Schroders tells Capital Monitor it is not planning to divest its VW shares but that it is “disappointed that a company leading on so many areas of the low-carbon transition has fallen behind on climate lobbying disclosures”.
None of the other members of the investor coalition have said whether they would now sell their VW holdings.
The same can be said of the often-dismissive treatment of shareholders by family-run groups and technology giants Alphabet (Google’s parent), Meta (Facebook’s owner) and Twitter.
It is perhaps no wonder that many companies would prefer stewardship discussions to happen behind closed doors – and that is all the more reason for investors to be pushing for them to be as public as possible.