Shareholder proposals that focus on environmental, social, and governance issues are regularly passing with greater than 50 percent of investor votes — a milestone for ESG integration.
In a research paper published in the University of California-Davis Business Law Journal, Kasey Wang, a law clerk at the Southern District of New York Bankruptcy Court and a graduate of Harvard Law School, wrote that a large portion of the increasing support for ESG issues comes from institutional investors. According to Wang, investors have raised ESG-focused shareholder proposals for decades at annual company meetings in the U.S., but until recently, these proposals rarely made their way to implementation.
At an annual meeting, a company’s investors typically have one vote per share of stock in the company. For a shareholder proposal to pass, 50 percent of investors must vote in favor of the proposal. According to Wang, from 2006 to 2015, only four ESG shareholder proposals at companies in the Fortune 250 passed with majority votes. But in recent years, institutional interest in ESG proposals has undergone a dramatic transformation: From 2016 to 2021, 41 ESG shareholder proposals passed.
Wang attributes the spike in successful ESG shareholder proposals to support from institutional investors, specifically smaller institutional investors. While some commentators credit a change in the voting patterns of the world’s largest asset managers — for example, BlackRock and Vanguard — Wang argues that this doesn’t paint the whole picture.
“It is inaccurate to state that the shift in the largest asset managers’ voting patterns solely caused the recent success of ESG shareholder proposals,” Wang wrote. “In fact, [for years], smaller institutional investors have been supporting ESG shareholder proposals in increasing numbers, [long] before the largest asset managers lent their support in order to remain competitive and cash in on the trend.”
For institutional investors, the motivation to vote in favor of ESG shareholder proposals started with the smallest institutions — according to the paper, institutional investors with small audiences are more in touch with the opinions of that audience. Public pension funds, for example, care about the opinions of their beneficiaries and the views of their political constituents.
As their stakeholders became more passionate about ESG issues, institutional investors were forced to engage with related proposals. And as support for ESG proposals moved up the institutional totem pole — from nonprofits and religious funds to pension plans and then to the largest institutional investors in the world — institutional adoption of ESG became an industry standard.
“As awareness, concern, and energy about an issue spread among people, institutional investors that catered to the narrowest audiences began to actively support ESG issues, such as by raising ESG shareholder proposals and voting against directors who did not take ESG seriously,” Wang wrote. “The market has shifted to embrace ESG investing.”