The surge in investing in environmental, social and governance (ESG) funds is empowering investors and activists to demand action from companies around the world. These demands are increasingly materializing as shareholder proposals aimed at getting companies to change their business and disclosure practices across a range of issues, from emissions and climate change to workforce diversity and inclusion.
ESG funds see record inflows. Broadridge Research estimates that private and institutional ESG wealth under management could grow from around $8 trillion today to around $30 trillion by the end of the decade. By 2025, around 33% of all assets under management globally are expected to have ESG mandates.
Nowhere is the uptick in ESG more evident than on the ballots of publicly traded companies in the United States. During this year’s proxy season, the number of shareholder proposals on ballots at corporate annual meetings increased by 25% compared to 2021. Much of this growth was due to an increase in environmental and social proposals – including a 133% increase in the number of climate-related initiatives. Some of the most well-known climate proposals have been approved. Chevrons for example
The increase in the number of resolutions introduced by shareholder groups has also been fueled by a sharp increase in the number of initiatives seeking racial justice testing. Last year, those proposals were approved by shareholders in Home Depot, Johnson and Johnson, and Apple
Overall, research from Broadridge shows a slight decline in average support for shareholder proposals over the past year. But rather than reflecting decreasing enthusiasm for ESG goals, this decline reflects the fact that shareholder groups are feeling stronger and are proposing resolutions that are much bolder, broader and potentially transformative in nature. Proposal sponsors can probably expect even more support in the future – especially for environmental decisions. Major proxy consulting firms have tightened their policies on climate change. Institutional Shareholder Services (ISS) says it will recommend that shareholders vote against the incumbent directors of companies they believe have inadequate climate change disclosures or lack emissions reduction targets. Global wealth managers are also cracking down. State Street Global Advisors said it could vote against directors of companies that don’t disclose emissions reduction targets or strategies for managing risks related to climate change.
As more retail investors and wealth managers use ESG criteria to guide their investments, regulators are stepping in to ensure they have access to the reliable and consistent ESG data they need to make informed decisions. In March this year, the US Securities and Exchange Commission announced a proposal to improve and standardize disclosures related to climate change. If approved, the proposal would require listed companies to disclose certain climate-related information in their registration statements and periodic reports. This includes information on governance and strategy related to climate-related risks, impacts of climate events, greenhouse gas (GHG) emissions and progress towards meeting public climate-related goals or targets.
Many companies and boards are proactive in dealing with these issues. For example, my company Broadridge recently released its annual sustainability report, which explains its ESG strategy and highlights achievements such as: B. Helping clients reduce emissions by moving from paper to digital communication with proxies and moving shareholder meetings from an in-person to a virtual format.
Investor choice should always win, and given the interest in ESG, it is likely that almost all publicly traded companies will need to make even more sweeping changes to meet shareholder and regulator demands for information on ESG and prepare for future shareholder proposals. These changes include creating improved reporting and disclosure practices that allow them to respond quickly to requests for data on ESG metrics from individual investors, wealth managers and governments. This includes efforts to intensify and enrich their engagement with shareholders. More than 70% of investors say they now consider environmental, social and governance factors when making investment decisions. To maintain shareholder support during the 2023 proxy season and beyond, companies and boards must find ways to effectively communicate both their commitment to ESG and their strategies for achieving their ESG goals.