Voting to promote the S in ESG

While environmental issues have a high profile in the fight against global warming, and governance traditionally dominates corporate agendas, the S is frequently the middle child of ESG that often gets sidelined at AGMs, say Michiel van Esch and Antonis Mantsokis.

Yet social issues such as achieving gender equality, paying living wages and maintaining healthy workplaces are increasingly key to corporate success, they say. One way to address this is during the proxy voting season, when investors vote at company annual general meetings (AGMs) that take place between February and May.

“Social topics have traditionally received little attention in proxy voting; the agendas of most AGMs focus on environmental or governance-related topics,” says Van Esch. “Climate change is now so blatantly urgent that investors quickly come forward with decarbonization plans.”

“Governance never had an issue in claiming its financial relevance for investors; indeed, many governance practices are often designed to be in the best interests of shareholders. But for some reason, social topics are still having to prove their relevance from a financial materiality perspective.”

Many studies focus on whether diversity leads to higher corporate profits, or whether paying living wages provides any benefit to shareholders. “But this only shows one side of the story,” says Van Esch. “The relevance of social topics can be better understood through the double materiality lens, where both materiality and saliency come together.”

“We see this for example in the technology sector where salient human rights issues like privacy and freedom of expression are accompanied by material risks such as regulatory risk and public scrutiny. Therefore, asking the supervisory board of a tech company to increase oversight on human rights makes business sense, whilst also being in the best interests of society”.

Investors have been increasingly vocal in pursuing ESG topics at companies that were often reluctant to change until prodded. Shareholders can vote against the reappointment of directors, refuse to endorse salary packages under the ‘Say on Pay’ scheme, and file resolutions to ask for specific changes to company policies. Most of these have focused on environmental or governance issues, but things are changing.

“In the past five years we have seen shareholders raising issues related to human capital management by submitting relevant resolutions at the AGMs of numerous companies,” says Mantsokis. “We voted in favor of 96% of social shareholder proposals in the last AGM round.”

“As Covid-19 has highlighted poor labor protections for workers who became even more vulnerable during the lockdowns, social topics are now also being brought forward by investors in relation to corporate practices.”

“We have seen shareholders filing proposals that ask for reports on sexual harassment mitigation initiatives, companies’ efforts in relation to diversity and inclusion, and their broader workforce policies.”

These kinds of socially based resolutions have received rising shareholder support, with an average of 45% voting in favor of them in 2021, compared to 17% in 2020, according to the proxy advisory service company Glass Lewis. This indicates that investors acknowledge the importance of those issues, and that corporations need to take steps to address them.

The issue of gender equality is now increasingly being tackled by investors. “Since 2015, we have seen over 60 cases where shareholders have submitted resolutions focusing not only on gender, but also on racial pay gaps,” says Mantsokis.

“The proposals requested companies to disclose any pay disparity that they had between men and women who hold equitable jobs and qualifications. We feel that getting full data disclosure, including information on gender pay gaps, and transparency would increase the number of female employees being promoted to more senior positions.”

“At the same time, it would increase productivity and ensure fair treatment across employees, regardless of their gender. Therefore, we will continue to support proposals that ask for better disclosures on the topic.”

The Black Lives Matter movement, which was initially a protest about police brutality in the US, has now filtered into questions about whether company actions also adversely affect black or other minority communities.

“In the 2021 proxy season, we saw many shareholder advocates and investors submitting resolutions with a focus on racial equity,” says Van Esch. “The proponents were asking companies (predominantly financial institutions) to conduct racial equity audits to detect how their business activities might have ‘adverse impacts on non-white stakeholders and communities of color’.”

“There were several other proposals requesting some tech companies to report on whether written policies or unwritten norms in turn lead to reinforcing racism, or how these companies are planning to promote social justice.”

While many of these proposals received strong shareholder support, not all were adopted, with only 11% of investors backing a resolution at a major tech company, and 38% at a health care group. Regulators and stock markets are now taking tougher action to take a broader perspective of what diversity entails, and what is expected of companies.

“In markets like the UK and US we now see best practices evolving to set broader diversity requirements than just gender,” says Mantsokis. “For example, the Nasdaq has pushed their constituent companies to report on board composition beyond gender, and also required boards to nominate members that self-report as a racial minority or as a member of the LGTBQ community.”

Human rights due diligence provides one way for companies to proactively manage potential and actual adverse risks. This remains an area for improvement across many sectors. Almost half of the companies assessed by the Corporate Human Rights Benchmark, which ranks global companies in this arena, fail to score any points on their human rights due diligence efforts.

One approach that can help is invoking the wider fiduciary duty of shareholders to hold companies accountable for failing to mitigate this. Despite being a key ESG topic, the issue of human rights normally only finds its way to the AGM via shareholder proposals.

“This year we have given the issue a more structural place in our voting policy to oppose the nomination of strategic board members if companies are involved in social controversies and do not have a human rights due diligence process in place,” says Van Esch.

“In all, we’ll take a much stronger approach in the upcoming AGM season. It’s time that social issues take their rightful place on the corporate agenda.”