There Were More ESG Proposals Than Ever This Year. But Fewer Passed.

The enthusiasm for sustainable investing is higher than ever. But in terms of shareholder proposals that were actually passed in the proxy season, the picture looks less rosy.

According to the latest proxy season report by Freshfields, there were a record number of shareholder proposals for companies in the Russell 3000 index, mostly related to environmental, social, and governance issues. But compared with data from last year, the percentage of proposals that received majority support declined in 2022. Only 9 percent of the 208 environmental and social proposals were approved by more than half of the shareholders this year, compared with 27 percent of the 131 measures in 2021. 

Pamela Marcogliese, partner at Freshfields, said that over the past few years, voters have become more discerning, which makes it harder for the proposals to receive majority support. “We are no longer starting from a place where shareholders [are] willing to approve anything,” Marcogliese told II in an interview. “They are becoming much more thoughtful [about] what the companies have been doing.” She added that the rising number of shareholder proposals is due in part to the fact that the regulator has made it harder to exclude them as a result of changing guidance earlier this year. 

The decrease in majority support for environmental and social proposals coincides with the rise of the “anti-woke” movement in the investment management industry. BlackRock, for example, became the target last year of an attack-ad campaign that focused on its ESG policies and investments in China. Strive Asset Management, an anti-ESG firm backed by Peter Thiel and Bill Ackman, poached a longtime CalPERS investment manager to lead the products and investments team in May. The lack of ESG standards and concerns over greenwashing have also contributed to doubts on the part of some investors.

“The emergence of an ESG counterpoint has begun, including an increase in more conservative proponents pushing toward an anti-ESG focus,” the Freshfields report said. 

According to Marcogliese, shareholder proposals that only focused on asking for “incrementally more” had a lower pass rate than proposals that could substantively move the needle. “Just because the proposal asks for incrementally more information or a slightly more robust target doesn’t necessarily mean that the company isn’t already doing a good enough job,” she said. Instead, shareholders are more positive toward proposals that can have a material impact on their businesses. “I think they’ve become much more deliberate in terms of what is worth supporting,” Marcogliese said. 

The report noted that some newer social proposals have received significant support in the current proxy season. Almost half of the 222 shareholder proposals in 2022 are focused on the social aspect, with 24 dedicated to human capital issues and 21 to human rights concerns. Other issues, such as diversity in the workforce, gender pay disparity, and employee rights and safety, have also gained attention from shareholders. 

Things look brighter on the governance front. According to Freshfields, the percentage of new S&P 500 board directors with a diverse background rose from 59 percent in 2020 to 72 percent in 2021. Although California has struck down laws that required public companies to include a minimum number of diverse directors, “diversity continues to be a focus” among shareholders, according to the report. Nasdaq, for example, has pushed for board diversity by requiring most firms to disclose board statistics in a standardized format. 

“Even before California enacted those rules, and even in companies that are not headquartered in California, companies have made a significant amount of progress with respect to diversity on the board,” Marcogliese said.