Proponents this year are focusing largely on sustainable investment practices and many of the proposals come from long-time corporate governance advocate James McRitchie. A total of 16 proposals address the investment process. Another five are about executive pay links to climate metrics and four more about disclosing various sustainability metrics. As of mid-February, two have gone to votes and one has been withdrawn, leaving 20 pending. Only two are resubmissions that went to votes last year, although proxy voting practices have been considered often before at major asset managers. Companies have lodged a handful of SEC challenges.

Investment Process

Shareholder proponents pressing for corporate change on many different social and environmental policy issues had long courted support from the biggest asset managers who own large positions in almost every publicly traded company. When these dominant managers—including the “Big Three” combination of BlackRock, Vanguard and State Street Global Advisors—started voting in favor of resolutions, the vote averages jumped markedly, reaching an apex three years ago. But with the political winds from the right in the United States blowing hard—or at least noisily—against the idea that ESG considerations are legitimate business matters, the Big Three reversed course and stopped supporting as many resolutions. This is largely the reason vote averages have dropped. Attorneys general in red states also have sent letters to big managers warning about adopting ESG investing strategies, while federal and state lawmakers have issued subpoenas to compel testimony. Republicans in the U.S. House of Representatives spent all of July grilling ESG market participants.

Proxy voting congruency reports: In response to the anti-ESG backlash, shareholder proponents this year have filed proposals at major managers and banks about their proxy voting practices. There are two variants and BlackRock and State Street each received both.

James McRitchie wants BlackRock, Charles Schwab, JPMorgan Chase, Morgan Stanley, Northern Trust and T. Rowe Price Group to report by next October “on the reputational and financial risks to the Company of misalignment between proxy votes it casts on behalf of clients and its client’s values and preferences, as well as strategies for addressing such misalignments on important issues.”
SEC action—Charles Schwab is arguing the proposal can be omitted since it is about products and services and therefore constitutes ordinary business. JPMorgan Chase makes a similar argument, saying it would micromanage but also is too vague.
ICCR members have a more specific request, asking four firms for an assessment of their proxy voting records and policies—with regard to climate change at BlackRock and about both diversity and climate change at Goldman Sachs, JPMorgan Chase and State Street. The proposal notes the companies have diminished their support for climate-related shareholder proposals and contend this is inconsistent with support for action on climate change and consideration of ESG issues in the investment process.
SEC action—United Church Funds withdrew at State Street after it lodged a challenge saying its current reporting makes the proposal moot.

Customized voting options: Some of the large investment managers have started to offer some of their clients the ability to vote their shares according to individualized preferences, instead of the same way the firm votes as a whole in what are known as “pass-through voting” arrangements. James McRitchie would like Bank of America and Citigroup to report by next October “on the feasibility of offering customized proxy voting preferences for [company] clients that seek to maximize portfolio-wide returns by pursuing voting strategies designed to push certain companies to address social and environmental externalities.”

SEC action—Both firms have lodged multi-part challenges at the SEC, arguing they already offer client-select voting options, that it is ordinary business since it is about customer relations or would micromanage or concern specific products and services, and that it is not material. The SEC has yet to respond.

Retirement plans: As You Sow started asking companies in 2022 to align their employee retirement plans’ investments with climate-friendly portfolios but has earned only modest support for this proposition to date, with only two votes out of 10 in the last two years above 10 percent (including 11.2 percent in 2022 at Microsoft). So far, just two proposals have surfaced on this issue in 2024 and one already went to a vote, filed by Myra Young at Intuit; it earned 13.2 percent in January. Another resolution has been filed at Alphabet. It asks for a report on “how the Company is protecting plan beneficiaries—especially those with a longer investment time horizon—from the increased future portfolio risk created by present-day investments in high-carbon companies.”

PROXY VOTING COULD BRIDGE THE RED AND BLUE DIVIDE

JAMES MCRITCHIE
Shareholder Advocate, Corporate Governance

Investors currently get the same voting advice from the leading proxy advisory firms, whether broadly diversified or highly concentrated. A portfolio-wide focus for voting makes more sense for diversified investors and investors concerned with environmental and social issues.
I filed proposals at Bank of America and Citigroup, asking each to prepare a report on the feasibility of offering customized proxy voting preferences for “clients that seek to maximize portfolio-wide returns by pursuing voting strategies designed to push certain companies to address social and environmental externalities.”

Climate-related investment stewardship: In a somewhat similar vein, the Sierra Club Foundation seeks a report “specifying whether and how BlackRock could use stewardship (other than proxy voting policies) to better address clients’ demands to go beyond disclosure to effectuate real-world decarbonization.” A similar proposal at the company last year earned 9.6 percent. One more such proposal has been filed but withdrawn at a different unnamed company.

ESG Pay Links

As companies have begun to take seriously the bottom-line impacts of climate change risk management and diversity considerations in human capital management, they have started to tie executive pay to specific corporate goals on these issues. Shareholder resolutions asking for these links have never received spectacular votes, but companies are taking action anyway. This year there are a few variations from As You Sow and state pension funds, at electric utilities and a couple of industrial companies, but all five are about climate change:

As You Sow wants Cummins and General Electric to disclose a plan “to link executive compensation to 1.5-degree C-aligned greenhouse gas emissions reductions across the Company’s full value chain.” A similar proposal at Cummins last year earned 15.1 percent support, although the 2024 resolved clause is more general; the supporting statement has similar very specific suggestions, though, which As You Sow says are needed because the company claims CEO pay is linked to climate change but does not explain how.

MOTIVATING PROGRESS ON CLIMATE WITH CEO COMPENSATION

ABIGAIL PARIS
Climate & Energy Program Manager/ Decarbonization Lead, As You Sow

Companies increasingly are incorporating climate-related metrics into CEO pay packages. The effectiveness of CEO compensation as an accountability mechanism, however, hinges on at least three key factors.
Too often, where climate-related metrics exist, they

are predominantly qualitative, leaving significant and unwarranted discretion to compensation committees;
are non-transparent and use overly complex quantitative climate metrics that are difficult to understand and act upon; or
include insignificant metrics outside the long-term incentive plan that makes up the most substantial part of CEO pay.

NYSCRF wants FirstEnergy and WEC Energy to “publish an analysis…assessing the implications of using absolute or relative changes in total greenhouse gas emissions (“GHG”) as a component of senior executive compensation.” Neither company has had such a proposal before. The Illinois Treasurer has filed the same proposal at Southern.

SEC action—Southern is arguing at the SEC that the proposal is moot because it reported in its proxy statements in the last three years about executive pay ties to its GHG emissions reduction goals.

Sustainability Metrics Disclosure

Most major companies now provide a sustainability report, but standards are always evolving, particularly in Europe which sets a higher bar for ESG disclosure. U.S. shareholders are also broadening their requests for more transparency and reporting. Four proposals seek sustainability reporting and information about three is public:

Boston Trust Walden has a resolution at Chemed asking for a sustainability report. It notes a $75 million fraud settlement with the U.S. Justice Department about Medicare and Medicaid claims and asks for annual reports “describing the practices, goals, and metrics it utilizes to assess performance managing potentially material environmental, social, and governance (ESG) risks and opportunities.
The Accountability Board received 5.6 percent support on February 13 for its resolution at Ingles Markets, a company controlled by its board chair that operates 200 supermarkets in the American South. It asked for
a report that EITHER explains how and why the company affirmatively concluded it faces no material risks attributable to changing customer expectations on significant environmental and social policy matters OR, if it does not so conclude, discloses an analysis of how the Board is overseeing Ingles’ management of such risks (and any risks from failing to have disclosed the risks).
General Motors has lodged a challenge to a proposal from Green Century that seeks “an annual report providing additional disclosure on sustainability risks within its supply chain and risk mitigation efforts.” The company says the proponent did not prove its stock ownership and a vote seems unlikely.

THE EUROPEAN UNION DRIVING SUSTAINABILITY AND ACTIONABLE ESG DATA FORWARD

MERI PODZIC
CEO, As You Know

The arena of sustainable investment is evolving globally. For the European Union, the impact is clear: to operate in the EU, companies must elevate their sustainability game and material data disclosures.
At the heart of this change is the Corporate Sustainability Reporting Directive that went into effect January 5, 2023. These directives require EU businesses—including qualifying EU subsidiaries of non-EU companies—to report on the environmental and social impact of their business activities. This has set a new precedent, forcing companies to put sustainability reporting on an equal footing with financial reporting.