Sustainable investing is finally getting traction in the market place. This is possibly because the market has started to acknowledge that issues such as climate change and inequality can have a detrimental effect on economies and companies. In order to prevent these effects from happening, however, we need to start considering the outcomes of our investment strategies in financial, social and ecological terms. In the next series of columns, I would like to talk about outcomes – this time on voting on shareholder resolutions.
Shareholder resolutions can be used as a tool to aid engagement with companies, specifically if no or too-slow progress is made. They can act as a very powerful signal to companies. Because of the growing interest in sustainability that was displayed by large (passive) asset managers in 2018, we had expected to see large support for such shareholder proposals when the 2019 voting season started.
According to a recent article in the Financial Times, BlackRock, Vanguard and SSGA account for a quarter of votes cast at S&P 500 companies. This proportion is set to grow further, according to academics at Harvard Law School1. So, the voting behavior of these large investors can be extremely powerful in creating change for long-term value creation.
Unfortunately, as shown in a recent report by Majority Action2, these managers vote down shareholder resolutions in 90-100% of cases. The main reasons that are mentioned in the stewardship reports are ongoing engagement on these topics with these companies, and the fact that these shareholder proposals were not addressing material ESG issues.
It is true that not all shareholder proposals are created equal. Even on a financially material ESG topic like climate change, some proposals are too specific in prescribing a certain course of action, or they ask for information that has already substantially been addressed by corporate reporting. That does not contribute to long-term shareholder value. In the first half of this decade, most environmental shareholder resolutions fell into these categories. That explains why we at Robeco also only supported one-sixth of climate-related resolutions between 2012 and 2015.
For example, a proposal at Dominion Energy's 2012 AGM asked for a report on the implications of increasing renewables generation to 15% in a single American state. This resolution's narrow focus did not address the challenge of the energy transition with scalable outcomes in mind. It was rightfully brushed aside by shareholders, with only 5.5% support. But over time, we've seen smarter and more relevant resolutions which support concerted and urgent action on climate change, and retain the necessary flexibility for implementation. Therefore, this year we voted in favor of 88% of the climate-critical resolutions mentioned in Majority Action's report.
Where companies failed to respond appropriately to resolutions, ESG-minded investors rallied around proposals to improve board accountability. This was the case at ExxonMobil, which had succeeded in pulling an important climate resolution from the agenda at its May 2019 AGM. A proposal seeking an independent chairman instead was seen as an opportunity to bring long-term thinking to the boardroom, and to show shareholder discontent at the company's unwillingness to engage.
A support rate of over 40%3 made it clear that more and more shareholders see climate change as a real threat to their investments. If the largest asset managers did the same, many more climate-critical resolutions would have gained a majority vote in favor. What a strong signal that would have been – it could have created positive outcomes by contributing to real progress! However, as mentioned earlier, it turns out that this year was a missed opportunity, especially considering the pressing nature of the climate issue.
We understand that ESG for active managers is a way of distinguishing themselves from passive, and of course this goes for Robeco as well. We will do so by providing the best products, solutions and performance for our clients. However, in trying to create change, we have always worked together with our clients and our competitors since we started engaging with investee companies in 2005.
And we believe that as more and more asset managers start engaging on ESG, coordinated action is the only way forward, not only to bring change, but also to keep it manageable for companies. So, we invite and welcome the large investors (supported by their clients) to join us in supporting well-written, financially material ESG shareholder proposals to create the change that is needed to sustain economic, ecological and social assets.
This column was co-written by Cedric Hille, Active Ownership analyst at Robeco
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