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Edelman Smithfield


ESG Issues Preparation is Key to Next Proxy Season

The annual proxy season has, in recent years, often become associated with ESG. As the number of ESG related investment products has grown, so has the ESG specific stewardship activities of many institutional investors. After a very busy few years, 2022 marked a slight change in tone and level of activity – but with ESG topics still at the forefront of investors’ minds, what could be next in 2023?


In 2022, the proxy season revealed some interesting trends. Firstly, for the first time Social topics were ahead of Environment ones as the dominant form of shareholder proposals filed. Within the Social category, DEI related proposals were the dominant ones. Within the environmental category proposals to enhance the disclosure by issuers on their GHG emissions continued to dominate all other sub-categories, representing a third of all proposals filed.

Secondly, the amount of shareholder proposals that did not go to a vote went up across categories in ESG, suggesting that the stewardship activities of institutional investors is yielding substantial results whereby investors and issuers agree to a compromise solution ahead of a formal vote.

Finally, 2022 saw the arrival of more nuanced engagement on the merits of ESG proposals, which became a very public part of the debate about adequate stewardship amongst fund managers. Blackrock, for example, stated clearly that its analysis of certain climate related shareholder proposals was that they were too prescriptive for issuers’ management teams, interfering with management execution of strategy for items such as the energy transition.

In the same vein in the UK, a high-profile proposal asking Sainsbury’s, the supermarket chain, to ensure certain wage guarantees were extended to all workers and contractors was similarly divisive. Though backed by several high-profile asset owners, the proposal was very publicly rejected by others, who felt the company’s strategic autonomy was being impeded unnecessarily, especially given the strength of its existing commitments to fair pay.

The investors who mainly outsource their proxy voting analysis also now have a more differentiated choice of recommendations. According to a study by Georgeson, ISS and Glass Lewis, the two main proxy voting consultancies, took quite a different approach to their recommendations in the European proxy season this year. As the chart below shows, Glass Lewis was more likely to lean towards recommending investors abstain or vote against proposals if their analysis was that the proposal was de facto interfering with effective management execution.


What next in 2023?

The ESG landscape continues to grow in complexity, with issuers now facing new reporting frameworks in certain jurisdictions, such as TCFD in the UK and CSRD in the EU, as well as likely mandatory climate disclosures in the United States from the SEC. Combined, these new requirements will create more challenges for all capital market participants in terms of disclosure, which opens the door to shareholder proposals if a shortfall is deemed material enough by some investors.

On the controversies front, there have been several well publicised public debates about the merits of ESG, notably in the United States. Broadly speaking, some United States asset owners and their political representatives are trying to ensure that their vision of fiduciary duty – one that does not encompass ESG – be the primary focus of their delegated asset management firms. This backdrop creates the potential for shareholder proposals to come from both ESG-aware shareholders and their opponents, which could be potentially cumbersome to address for issuers caught in the middle.

Given this complex backdrop, what are issuers to do when the look ahead to the 2023 proxy season?
The Edelman Smithfield team has three recommendations:

  1. Make sure your ESG reporting is in line with best practice: As the landscape becomes more challenging, relying on repackaged CSR reports or anecdotal evidence without reference to the mandatory or recognised ESG frameworks will likely set the stage for demands for more – with many investors conditioned to back the proposals filed by the more activist and vocal filers.
  2. Be proactive in understanding your reporting gaps versus mandatory frameworks: Our team is increasingly being asked for benchmarking and gap analysis of issuers’ current and future ESG reporting requirements. Performing readiness assessments for reporting needs will always be easier if done before frameworks become mandatory, plus it can help organise issuers’ data gathering and governance oversight of ESG metrics internally ahead of ‘real time’ reporting deadlines.
  3. Stay on the front foot with your investor base and explain your ESG strategy in detail: as the Sainsbury’s example shows, not all institutional investors with dedicated ESG stewardship teams think alike. Issuers with strong rationales for their business decisions, and evidence of their broad ESG commitments, should be on the front foot with investors, thereby mitigating the risk of being ‘caught in the middle’ between competing ESG agendas.

The ESG landscape has become more complicated and controversial over the last twelve months. This makes preparing for shareholder engagement and potential proxy votes on ESG topics ever more important for issuers around the world. Having a clear set of expected steps can help prepare issuers for what is likely to be another very active ESG proxy season in 2023.

Olivier Lebleu, CFA, Edelman Smithfield

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