Investor pulse check: September 2023
While the ESG backlash seems to have settled out over the waning weeks of summer, its impacts on investors and public companies may be enduring. Across the buyside, we’ve witnessed a range of investor reactions – from near capitulation to unwavering focus on corporate sustainability. However, most institutional investors fall between these ends. Below we provide a digest of recent updates from the world’s largest passive investors, BlackRock, Vanguard and State Street.
BlackRock
As BlackRock faces criticism from all sides, the firm’s 2023 global voting spotlight reinforces its “focus on the long-term financial interests of our clients.” The firm continues to emphasize the value of strong corporate governance, focusing on board composition, shareholder rights, and executive compensation programs that align pay and performance. The firm’s support for E&S proposals globally declined from 47% in 2021 (of 172 proposals) to 22% in 2022 (of 321 proposals) to 7% this season (of 399 proposals).
BlackRock notes that, in concert with the decline in E&S proposal quality, shareholder support has dropped substantially across the market, particularly for E&S proposals:
As basis for this trend, BlackRock points to the poor quality, prescriptive nature, and/or lack of economic merit in this year’s shareholder proposals:
Echoing what we have heard from many investors this year, BLK underscores that shareholder proposals calling for additional changes – where measurable progress has been made by the targeted company -- are not currying favor with investors.
In response to the voting patterns reported for 2023, BLK remains in the crosshairs, receiving criticism for the pullback in E&S advocacy. We expect the company to deflect suggestions that this relates to the ‘ESG backlash,’ pointing instead to the prescriptiveness, lack of economic impact, and the progress made by companies to-date as factors in their analysis.
Implications for issuers: In off-season stewardship engagements with portfolio companies, we expect more targeted dialogue on select ‘financially material’ issues, a continued interest in decision-useful disclosure, and more two-way dialogue on evolving issues (e.g., Scope 3 GHG emissions, next-level DE&I disclosure). For continued success with BLK, it will remain important to invest time in a robust two-way dialogue, continue to show progress on relevant E&S issues, and avoid ‘outlier’ status on leading board & governance practices.
Vanguard
Vanguard’s 2023 US Regional Brief reflects a return to brass-tacks for the more conservative of the “Big Two.” The firm has taken a more reactive approach to the ESG political heat over the past year, underscoring their sole focus on financial returns, and withdrawing from such initiatives as the Net Zero Asset Managers coalition.
Vanguard supported 2% of E & S shareholder proposals this year, driven by “the changing nature of these proposals and the evolution of company disclosure.” This compares with support levels of 9% in 2022 and 22% in 2021. The firm also reverted an established pattern singling out only the ~5% worst executive compensation plans, after having elevated the bar in recent years.
Governance remains in focus, and Vanguard’s expectations are little changed here – in fact, the firm supported 17% of governance-related (shareholder rights) shareholder proposals. This compares with support levels of 18% in 2022 and 38% in 2021.
Notably, the firm appears to be open to supporting some overboarded directors, in instances where the board discloses a “formal and periodic board evaluation process, director commitment policy, and assessment of the director’s performance.”
Implications for issuers: In off-season engagements, we expect Vanguard to give significant deference to management and the Board, focusing on enterprise-level risk management and looking to the company to discern whether a specific issue meets the ‘financial materiality’ threshold. Board composition – and the diversity of skills and experiences – will remain a priority, as will board process and alignment of executive pay. Demonstrating an interest in investor perspectives and focusing on long-term delivery for shareholders will enable companies to maintain traction – and breathing room -- with Vanguard.
State Street
State Street has not yet published a recap of their proxy voting activity for 2023 beyond their 1Q23 report; however, the firm has provided the market with an important update to their climate-related expectations: in a new report, State Street weighs in to say firmly that it is currently “not practical to include Scope 3 emissions data in investment strategies” as the available Scope 3 data is rife with challenges and still in a “nascent stage.” SSGA attributes the shortcomings in Scope 3 reporting to unreliable data, a lack of standardization and resources, as well as to the complexities of corporate supply chain information.
Once N-PX filings are tallied and SSGA voting patterns are analyzed, we will look to develop a read on the firm’s application of 2023 voting policy enhancements including their 30% board gender diversity policy for the Russell 3000, their TCFD disclosure expectations across the S&P 500, and their board ethnic and racial diversity expectations for the Russell 1000.
Implications for issuers:SSGA remains hard to pin down for engagement dialogue, particularly for mid-cap and small-cap companies without significant ESG concerns. We advise that companies approach SSGA with a targeted request for engagement, providing a semi-detailed agenda directed at addressing any voting concerns, disclosure expectations, and/or board issues. Gathering feedback, developing a dialogue and building rapport with their team can be helpful longer-term.
