Environmental and Social Shareowner Proposals Gain Traction

Key Characteristics of Prominent Shareholder-sponsored Proposals on Environmental and Social Topics, 2005-2011, released by the IRRC Institute (IRRCi) and researched by Ernst & Young LLP finds environmental and social (E+S) shareowner proposals are gaining increased support from investors at US companies. Download the report, presentation, press release and even replay the webinar from IRRCi’s website.

From 2005-2011, average support more than doubled from about 10% to 21%. At the same time, the proportion of shareholder-sponsored resolutions on E+S matters grew by a third, from about 30% to 40% of all proposals going to a vote. Even measures that “failed” tended to get more support, as indicated in the chart below.

According to Jon Lukomnik, IRRCi executive director,

Investor attitudes about extra-financial issues seem to be undergoing a sea change. It wasn’t that long ago that these were regarded by most mainstream investors as abstract issues, viewed as only tenuously linked to bottom line concerns. Today, however, an increasing number of investors seem to regard some E+S proposals as an early warning system for issues that will demand attention from corporate managements and boards because of the implications for corporate sustainability and long-term shareholder value.

Topics that command large numbers of proposals and higher votes include political spending, climate change, board diversity and energy extraction. When momentum grows behind a prominent proposal, it may be a predictor of potential changes to company practices and shifting investor priorities. In some cases, these views may become so widely shared that other stakeholders may turn to policymakers to request changes across an industry. Of course, not every topic commands broad prominence. But those that do tend to have certain shared characteristics.

The study finds three characteristics appear to be connected with highly prominent environmental or social shareholder proposals:

• Targeting. Proposals at companies where investors raise concerns over board performance received higher voting support. This reflects not only investor-perceived concerns over the related E+S issue, but also a perceived need for other governance-related change… the G in ESG that CorpGov.net typically focuses on.
• Timing. Proposals connected to current events gain prominence from their association with headline-making events and/or related media attention. Proposals also gain prominence if related to ongoing trends and developments in the regulatory, legislative and global arenas, as well as among industry-specific peers and “leading companies,” as defined by proponents.
• Sponsor. Prominent proposals tend to be associated with, and supported by, two types of proponents: (1) “Socially Responsible Investors” (SRI), defined as institutions which explicitly seek both investment returns and social impact, and (2) public pension funds. These investors play a leading role in shaping the engagement—landscape. Public pension funds got slightly better results. By contrast, E+S proposals submitted by special interest groups or individuals tend to receive lower levels of support. In my experience, such groups and individuals generally focus more on governance issues.

Proposals calling for disclosure generally received a higher vote than those call for a particular corporate action or change in corporate policy. The data suggests that investors are less likely to support issues where a company credibly demonstrates it has or will sufficiently address the issue, or where the general topic may be better addressed through public policy or other non-corporate remedies.

The report offers various analyses of 24 proposal topics. Those analyses include:

• Total average support: During 2005-2011, average support varied greatly for each of the proposal topics, from 3% for tobacco risks to 31% for energy extraction techniques/waste. Based on a proposal topic breakdown, half of the proposal topics have an average support of 11% or above; a quarter of the proposal topics average more than 20% support.
• Growth trends in average support: A number of the highest supported proposal topics also experienced high compounded annual growth rates (CAGR) in terms of annual average support, suggesting that support builds among investors as they become familiar with the specific issue. These proposal topics include: practices at financial institutions, recycling and energy efficiency, corporate political spending/lobbying, EEO/diversity, energy extraction, renewable/sustainable energy and food and consumer safety. My take: Institutional investors may only set voting policies once a year, so adapting to new measures can be slow. An important leadership function has been taken by US SIF, the Interfaith Center on Corporate Responsibility (ICCR) and the Center for Political Accountability in developing and disseminating model proposals, although the report did not address such cooperation.
• Average number of proposals filed/voted: The proposal topics with the greatest the number of proposals voted appear to represent subject matter that is more “universal,” i.e., applicable to all or multiple industries. More than 60% of the total number of proposals voted are represented by only a handful of proposal topics: political spending/lobbying, human/labor rights, climate change & sustainability, EEO/diversity and animal testing/animal welfare.

The research is based on a review of the roughly 1,300 shareholder-sponsored E+S proposals, which were voted across Russell 3000 companies during 2005-2011. Proposals that didn’t go to vote were not included, nor were proposals never submitted because proponents were able to negotiate changes with the company. To my knowledge, most proponents initiate the proposal process and then negotiate, since companies must respond to actual filings, whereas they often ignored letters.

Over the course of the seven years studied, there was a fundamental shift in thinking. Whereas in 2005, E+S proposals were easily marginalized, by 2011 they were seen as legitimate concerns. I suspect this is largely due to the attention drawn between E+S issues and risk as highlighted by the FreshFields Report, followup reports, as well as groundbreaking work done by GMI Ratings and others. As funds employ ESG measures to select stocks and proxy advisors get tougher on boards that ignore votes, we can expect ESG measures to gain further traction.

Reputational risk has become more immediate and consequential with the rise of social media and funds such as the giant NBIM with $576-billion in assets. In 2011, over a third of the 1,078 companies evaluated by NBIM received a score of zero on issues such as children’s rights, climate change and water scarcity. More recently, the Norwegian Ministry of Finance asked the Strategy Council for the Government Pension Fund Global (GPFG) to write a report on the strategy for responsible investment. The intent is to ensure NBIM represents best practice for responsible investment.

CalPERS’ Sustainable Investment Research Initiative (SIRI) will drive the development of the fund’s first set of investment beliefs. The project aims to help CalPERS understand how sustainability factors affect financial performance. The UN’s Global Reporting Initiative is creating a common language and standardized measures, as are networks of investors and businesses, such as Ceres. The National Association of Corporate Directors (NACD) has been increasingly focused on enterprise risk management.

The Investor Responsibility Research Center Institute is a not‐for‐profit organization established in 2006 to provide thought leadership at the intersection of corporate responsibility and the informational needs of investors. IRRCi ensures its research is available at no charge to investors, corporate officials, academics, policymakers, the media, and all interested stakeholders.