In the era of ESG, or investing according to environmental, social and governance principles, investors have become increasingly active in trying to drive support for ESG-related policies.
Those investors, as shareholders in a large company, are able to participate in a process called proxy voting, where they have the opportunity to submit a shareholder proposal or vote on other proposals on topics that are important to them.
“Even if investors just own a single share, that makes them a partial owner of the company," says Kent McClanahan, vice president of Responsible Investing for RBC Wealth Management–U.S. “With proxy voting, CEOs and boards are out there asking owners: 'What do you want the company to look like?'"
As public awareness and activism around ESG has increased, ESG-related issues have also started showing up in more shareholder proposals and proxy votes. Examples could include environmental issues such as emissions and climate change; social issues like diversity and the treatment of the company's workforce; or governance issues such as board composition or executive pay.
“One thing that has been interesting this proxy season is the sheer number of shareholder proposals," says Sara Mahaffy, an ESG strategist with RBC Capital Markets. “By our latest count, there have been 320 environmental and social proposals that have made it to the ballot, way above prior years."
Particular areas that have seen the greatest increase in proposals: political activities and lobbying, climate governance and workforce diversity, according to RBC Capital Markets research.
Pushing for action
Shareholder services firm Georgeson confirmed the keen interest in ESG votes in its 2022 early proxy season review, stating: “The 2022 proxy season has already broken the record for the number of shareholder proposal submissions … on the heels of a groundbreaking 2021 proxy season, many proponents appeared emboldened to submit ESG proposals seeking more significant demands in 2022."
The fact that shareholders are pushing for action is not surprising, given how ESG investing has exploded in recent years. More than $17 trillion is now invested sustainably, according to the US SIF Foundation's most recent trends report, accounting for one-third of all professionally managed assets.
Of course, not all ESG proposals, nor all shareholder proposals in general, will pass. For the 2022 season, only around 10 percent of all shareholder proposals garnered majority support, says Mahaffy. Environmental and social proposals, specifically, have drawn an average shareholder support of 24 percent—significant, but not a majority.
But even if a particular proposal doesn't gain majority support, that doesn't mean the effort was in vain. Quite often, companies will take action on the matter anyway to demonstrate they are being responsive to shareholders, Mahaffy explains.
“Look at how companies react when they see voting results," she says. “If a shareholder proposal gets meaningful support of at least 20 percent, they may do something. Last year, we saw a number of companies voluntarily come out with new initiatives to address shareholder proposals."
Moreover, for every ESG issue that actually makes it to the stage of a proxy vote, there are multiple issues that have already been addressed behind the scenes. For example, if a shareholder proposal suggests boosting diversity on the board, the company may engage and take action pre-emptively to prevent the need for an official vote—and to avoid any potential public embarrassment.
What investors should know about proxy voting
It's not just individual shareholders who have the ability to participate in proxy voting. Even if you own shares of a company through a broader mutual fund or exchange-traded fund (ETF), you can still get involved. In these cases, the fund's asset manager will vote on such matters—and you, in turn, can register your stance with them.
Because of asset managers' size and stake—BlackRock, for example, surpassed $10 trillion in assets under management early in 2022—they hold significant sway and their votes matter. If your asset manager tends to vote in a way that's contrary to your values, you as an individual investor always have the option of moving your assets to a different firm.
“Asset managers have become much more engaged as ESG has become a bigger part of the investing world," says McClanahan. “They talk directly to companies about environmental, social and governance issues, and how those factors can impact future earnings. They might say, 'Did you know your peers are doing this, and that it is helping their bottom line?'"
For any investor looking to learn more about the proxy process, a key challenge, especially for those with sizeable portfolios, is researching and keeping track of all these complex issues and upcoming votes. McClanahan points to a number of resources that are available to help investors in these situations, including:
- Principles for Responsible Investment (unpri.org), for those who want to become more-engaged investors.
- The Forum for Sustainable and Responsible Investment (ussif.org), for investor education.
- The U.S. Securities and Exchange Commission (sec.gov), which keeps track of proxy voting records.
- Proxy advisories ISS (issgovernance.com) and Glass Lewis (glasslewis.com)—two leaders in the space—which list voting recommendations and publish frequent trend reports.
- Many investment managers provide visibility into their proxy voting records.
Even with all those resources and research available to investors, it can take effort and due diligence to keep abreast of the proxy votes taking place. But it's possible to stay informed and participate in the proxy process for investors and shareholders who choose to do so.
“If you have a 401(k) or an IRA or any stock market investment of any kind, you own at least part of a company," says McClanahan. “So be aware of what you hold and what is going on in your portfolio and whether you approve of the way companies are running their businesses. Investors are starting to pay attention—and that's the most encouraging thing of all."
Due diligence processes do not assure a profit or protect against loss. Like any type of investing, ESG investing involves risk, including possible loss of principal.
Past performance does not guarantee future results.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.