‘We think it is telling that ISS is releasing a new ‘ESG-skeptic’ policy.’ So says an ESG expert from a leading consultancy, talking about a new comprehensive review of all ESG proposals since 2022.
That report, titled What do shareholders propose?, takes stock of shareholder proposals filed at S&P 500 and STOXX Europe 600 companies over the past two years (the full 2022 and 2023 calendar years) and offers 10 key takeaways, including the idea that proxy advisers are ‘too ESG’ for US investors and ‘too little ESG’ for their European investors.
So what does SquareWell Partners, the firm behind the study, mean by this? Essentially, its research shows that European investors appear more inclined than proxy advisers to support ESG proposals, according to the firm – something that Carmen Ng, E&S director at SquareWell, says has implications for relationship-building.
‘Companies might need to put more effort into their engagement with European investors in order to gain their support,’ she explains. ‘As found in our previous study for Harvard, European investors have, proportionally, supported or endorsed more environmental and social initiatives than their US peers. While climate initiatives appear to be more broadly supported, European investors appear to be taking the lead in supporting initiatives relating to biodiversity and social topics.’
ESG skeptic
Ng also points to the recent news that ISS is set to offer an ‘ESG-skeptic’ policy as an indication of a potential shift around support. Already, she says, there are noticeable tendencies around support for – or opposition to – specific trends from proxy advisers.
‘We noticed there are certain S&P 500 shareholder proposal topics that both ISS and Glass Lewis seem to consistently support or oppose,’ says Ng. ‘The data is not sufficient to say this is the rule, but observing the pattern and understanding both proxy advisers’ positions in general can provide insights into their likely stances on future proposals.’
Just how influential these big proxy advisory firms are – or are not – has been a topic of much debate for years and this is another area SquareWell examines in its proxy season review. Ng describes ISS and Glass Lewis as having ‘a lot of influence among investors’ in the study sample.
‘We observed a substantial rise to around 40 percent in average shareholder support when both ISS and Glass Lewis recommend for a proposal and a sharp decline to around 8 percent when both advisers recommend against,’ she explains. ‘This makes it very important for companies to secure support for management from both proxy advisers, whenever possible.’
Beware misinterpreting drop in proposals
As well as looking back over the past two years of proposals, Ng says ‘there seems to be a significant drop in shareholder proposals’ so far this year, describing the early 2024 data on S&P 500 firms as ‘quite telling’, though she cautions companies not to misinterpret the numbers.
‘All items under the ESG term are relevant but not all are material,’ she explains. ‘This is what we think is changing: we think investors will focus on how sustainability efforts generate returns and will hold boards accountable for this rather than micromanage companies.
‘Companies should not misinterpret recent trends and news coverage as investors not caring about ESG. We think it is actually the opposite: investors are becoming more sophisticated in understanding these topics and factoring [them in] as part of their routine investment process, rather than as an isolated exercise. Companies doing poorly on material topics – such as climate or human capital – will be challenged.’