ESG is down, but definitely not out following bruising shareholder votes on environmental, social and corporate governance proposals during the 2023 proxy season. That’s the consensus of a panel of advocates at Proxy Preview Review, a recent webinar analyzing outcomes of the 2023 corporate proxy season.
Among the findings: The number of climate change resolutions on corporate ballots soared, but the percentage of votes in favor of them plummeted. In 2023, 61 climate change resolutions were voted on, up sharply from 20 in 2021. But average support was only 21.8% this year, down sharply from 53.2% in 2021.
An anti-ESG backlash had been expected during this year’s proxy season, but panelists say that was not the main reason for the reversal. In fact, investors largely rejected a flood of 52 anti-ESG proposals, giving them just 2.4% average support, half of what’s needed for resubmission.
Another setback for ESG advocates this year was a sharp decline in the number of resolutions getting more than 50% support.
“There’s no sugarcoating the dramatic fall in the number of proposals that earned majority support in 2023,” said panelist Heidi Welsh, executive director of the Sustainable Investments Institute, Si2, a Washington, D.C., non-profit that researches and reports on efforts to influence corporations on ESG.
In 2021, 39 ESG proposals received majority support, but in 2023, the total plummeted to just 8, said Welsh, co-author of the Proxy Preview report, now in its 9th year.
The real successes of proxy season are not the resolutions that get a majority vote, but the ones that are withdrawn before a vote takes place. Resolutions are usually withdrawn when corporations agree to make the changes sought by advocates. Proponents in 2023 withdrew 223 proposals, compared with 275 last year. In 2019 fewer than 40 resolutions on climate change were withdrawn, but in 2023, that number rose to 71.
Tougher climate resolutions
The panelists said one of the reasons for this year’s lower vote percentages for environmental proposals was a “ratcheting up” of the resolutions from general to specific. In 2021, corporations were asked to voice support for climate measures. In 2023, they were asked to commit to specific actions, such as setting greenhouse gas emission targets.
“(In 2021) ESG got very trendy,” said Michael Passoff, founder and CEO of Proxy Impact, a San Francisco Bay Area proxy voting and shareholder engagement service. “Biden was just coming into office and talking about climate initiatives and big investments in clean energy. Interest in ESG investing was booming, and companies were all marketing themselves as green. And many of the climate resolutions that year asked for commitments but not details. It was pretty easy year to be a climate-friendly voter.”
But larger investors and some proxy advisors deemed this year’s tougher climate resolutions “too prescriptive,” said Passoff, co-author of the Proxy Preview report. “That in my opinion, is a lame excuse and just a complete failure to properly assess investments. They’re non-binding resolutions, so technically, they’re not prescriptive at all. But they are more specific.”
Another factor in the poor showing for climate resolutions was that activists this year reached out to mid-cap and smaller corporations, many of which were unfamiliar with ESG issues and resolutions, said Andrew Behar, CEO of As You Sow, a non-profit shareholder advocacy and engagement organization based in Berkeley, Calif. Another factor is that mid-cap companies tend to have greater insider holdings, he said. “Again, you get lower votes.”
Passoff said ESG advocates have notched up a small, but notable, victory on climate: There were no resolutions on clean energy in 2022 and 2023. That’s because so many companies have started to turn to renewable energy, shareholders no longer need to raise this issue, he said.
Other climate-related issues that received more proposals this year than last year are emissions (91), strategy and risk assessment (43) and deforestation (12).
While anti-ESG resolutions didn’t receive any traction with shareholders this year, panelists say there is a real and growing anti-ESG effort from politicians. Almost all anti-ESG proposals are on social policy issues and align with Republican “culture wars,” Welsh said.
“They argue against proposals supporting diversity, equity and inclusion. There’s a handful about political influence. There’s hardly anything on climate change. And none of this gets support from investors at large. It never has and it still hasn’t today,” she said.
Welsh and Behar said “red state” attorneys general sent proxy advisors and institutional asset managers letters threatening legal action if they supported resolutions on abortion rights.
“One of the things that we’ve seen … is an influx of politicians in our space where we’re used to being left relatively alone with our spreadsheets,” said panelist Meredith Benton, principal and founder of Whistle Stop Capital, an Alameda, Calif., consultancy focused on ESG best practices in investment portfolios. “But here we are in the political debates.”
Benton insisted the work of ESG advocates is non-political.“What I’m optimistic about is that the politicians will find that they are too deep in this water, there is far greater complexity than they realize, and that we will be allowed to continue doing the work which we have historically done,” she said. That is being attentive to which social and environmental issues best benefit the companies that investors hold, and how to help them improve their practices there, added Benton.
Welsh said that while climate questions took a beating during this year’s proxy season, other issues saw less change in support. They include board oversight/composition, sustainable governance, health, diversity at work, decent work, human rights and political influence. Referring to the last topic, she said some corporations express support for certain positions but contribute to politicians opposed to them.
“The facts show that they actually spend a lot more at the state level in statehouses dominated by Republicans. They contribute consistently to politicians who have banned abortion, restricted queer rights, and made it harder to vote. And climate denial is part of that package. These are not values that are shared widely by the capital markets’ main players,” she said.
Is ESG dead?
Despite setbacks, the panelists say they are optimistic for the future of the ESG movement.
“I think one question as some folks may be asking is, is ESG dead?” Welsh said. “I don’t think ESG is dead because votes have dropped a little bit. There’s way too much engagement going on. This is really baked into the pie right now in terms of how the capital markets function.”
Behar says a recent development may strengthen investor engagement in ESG: the decision of some companies to give mutual fund shareholders a voice through “pass-through voting,” which aggregates their ballots for a voting decision.
“Soon, in the future, you will be able to say, ‘You know what, the CEOs are incredibly overpaid, and I want to vote against this,’” Behar said.
“Regardless of what the anti-ESG efforts will be, the market has already decided that ESG and a path to a low-carbon economy will be supported,” Passoff said. “The amount of climate resolutions will also likely remain high as shareholders, unlike large asset managers, recognize the urgency of the issue.”
In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.