2021 was a pivotal year for proxy voting. Following years of incremental gains, investor votes drove support for environmental and social issues to new heights, advancing stakeholder capitalism into mainstream finance.
ESG considerations pose the most significant risks and opportunities facing investors today. While it was rare for shareholders to vote against company management on corporate ballots only a few years ago, proxy voting is now a mainstream tool in investment practice. As the volume and breadth of ESG risk exposure continue to rise, the stage is set for another momentous proxy season. The trending topics of last year will likely continue to steer the agenda—with the prospect of even more substantial support from shareholders in 2022.
Key Themes Shaping Proxy Voting in 2022
Engagement dialogues are expected to take on a new level of intensity. Sensing stronger voting support, management teams and boards may be more motivated to meet shareholders’ requests to secure withdrawal of the resolutions. On the other hand, where investors are more confident of a strong vote outcome, they will likely be expecting a higher degree of commitment from the companies they engage with.
1. Shareholders Expect Decisive Climate Action on Scope 3 Emissions
In the lead-up to COP26, asset owners and asset managers joined ‘net zero’ investing alliances that place active ownership at the center of investing strategies committed to portfolio and real-world decarbonization. As in 2021, climate concerns will dominate proxy voting in 2022. However, shareholders’ requests will be noticeably more specific, asking companies to adopt and report on emission reduction targets and transition plans that reference the latest forward-looking guidance, such as the IEA’s Net Zero by 2050 Roadmap and the Climate Action 100+ Net Zero Company Benchmark Indicators. There will be a strong focus on scope 3 emissions—the emissions generated across a company’s entire value chain—particularly with the heaviest emitters.
2. Boards will be Held to Higher Standards in Director Elections
Investors recognize that addressing climate change requires a new way of doing business and new approaches to corporate governance. With evidence that many boards lack the ESG expertise to effectively navigate the net zero transition, investors must take action to improve climate governance. The World Economic Forum’s Climate Governance Initiative has set out principles and guidance for companies' boards on incorporating climate considerations into corporate governance and climate reporting frameworks. Asset managers are now incorporating ESG considerations into their voting guidelines on director elections and pay practices.”
Investors will look closely at boards, corporate leadership, and incentive structures as they cast their proxy votes in 2022 and beyond.
3. Linking Net Zero to Nature-Positive: Biodiversity will be a Hot Topic
Investor focus on nature and biodiversity has shot up in the past two years, along with a growing awareness of the intersections with climate risk and human rights. The COP26 Deforestation Pledge recognizes natural solutions as the most effective climate mitigation strategy and signatories affirm support for Indigenous Peoples and local communities. In Spring 2022, Part 2 of the COP15 UN Biodiversity Conference will take place, aiming to finalize and adopt a new global biodiversity framework. The Framework will set out targets and milestones for reversing biodiversity loss, with implications for businesses and their supply chains, as well as for investors. The investor-led Natural Capital Finance Alliance is examining how to align capital flows with the framework, and investor commitment is being mobilized via the Finance for Biodiversity Pledge. Following the CA100+ model for channeling global investor influence, plans are being laid for a Nature Action 100+ investor action framework.
Global agreements and investor initiatives modelled on investor climate stewardship will drive up support for ballot measures on themes such as packaging and plastic waste, pesticide use, water stewardship, and deforestation in 2022, attracting more attention to sectors such as chemicals and food, beverage, and agriculture.
4. Supply Chain Resilience Will Drive Votes Across Sustainability Themes
Supply chain resilience is a growing investor concern. In the past, investors have frequently filed shareholder resolutions to ask companies to assess and disclose how they are managing human rights, labor practices, environmental impacts, and other supply chain risks, and to request stronger supply chain due diligence.
Building supply chain resilience entails prioritizing sustainability and transparency. Investors can amplify their stewardship efforts by influencing supply chain sustainability. For instance, tackling large manufacturers’ supply chain greenhouse gas emissions, or scope 3 emissions, extends influence over parts of the economy that investors may not otherwise influence directly via traditional stewardship strategies. Investor support for proxy ballot items addressing supply chain deforestation and forced labor gained strong support in 2021 and supply chains will feature on proxy ballots in 2022.
5. Investors Want a Workplace Culture Reset
The COVID-19 pandemic has changed the balance of power between companies and workers and increased investor awareness of the societal importance of employee protections, such as paid sick leave, and of the economic value of workplace cultures that advance diversity, equity, and inclusion. Measures to empower employees and create more supportive workplaces help companies retain valuable talent.
In 2022, with many companies now committed to providing workforce diversity data, traditional requests for gender and racial diversity breakdowns will to some extent be replaced with calls for companies to report on diversity and inclusion efforts within the workplace and for boards to oversee third-party assessments of companies’ civil rights and racial equity impacts.
A shareholder’s right to file and vote on shareholder resolutions is a central feature of shareholder democracy in the United States. With the growing influence of global investor-led initiatives and the rising urgency for transformational climate action, we’re seeing a degree of convergence across several markets in the use of the proxy process. At the same time, local investors and investor advocacy groups are taking market-specific actions to address universal ESG concerns. There has never been a more exciting time to be working in the field of proxy voting.
Our ESG Voting Policy Overlay service builds on Sustainalytics’ long-standing engagement business, offering targeted voting recommendations to support a holistic approach to ESG stewardship. Adding this policy to our stewardship services is intended to help investors become better stewards of capital; strengthening their commitment as responsible owners to achieve long-term value for their beneficiaries, investee companies and societies in which they operate.
If you are interested in knowing more about Sustainalytics’ ESG Voting Policy Overlay, please contact [email protected]. You can also download Sustainalytics’ 2021 ESG Voting Policy Overlay Annual Report here for additional insights.
Sustainalytics’ Stewardship Services enable investors to promote sustainability and demonstrate investor action as part of their fiduciary duty. As an overlay to Sustainalytics industry-leading research, we help hundreds of the world’s largest investors practice good stewardship by integrating ESG considerations in investment decisions and active ownership, all to the benefit of acting in the best long-term interest of clients’ beneficiaries.
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