What’s the Story?

Last week, Vanguard, one of the world’s largest fund managers reported a huge drop in their voting support of ESG related shareholder proposals.

Only 2% of the 359 proposals for the proxy voting year ended 30 June 2023 were supported. This is down from the 12% seen for the 290 proposals on ESG in 2022.

This drop in support for ESG follows Black Rock’s recent announcement that it’s voting support on ESG too has dropped to 7% in 2023 from the 20% seen in 2022.

In recent times, ESG has become politicised in the USA with multiple Republican-led states, boycotting BlackRock in 2022 for its ESG practices, including Florida pulling $2 billion in assets from a BlackRock fund. Indeed, Larry Fink, the Blackrock CEO, is reported as dropping “ESG” as a business term.

Aside from this, The SEC November 2021 rule changes on shareholder vote proposals have changed the nature of the voting proposals.

Vanguard explains that earlier proposals on disclosure often now extend to specific requests for management action. But in addition, many companies are addressing the substance of the ESG issues underlying the requested votes. In short, consultation with companies beats compulsion via votes.

Why Does it Matter?

Strategy and risk is one of the four major voting pillars for Vanguard. ESG falls squarely into this category. The other three categories are board composition and effectiveness, executive compensation, and shareholder rights.

The big drop in Vanguard and Blackrock support for shareholder specific ESG proposals is not a flag that ESG is immaterial and un-monitored. Rather it is due to other factors.

What the voting support statistic ignores is Vanguard’s company, engagement profile. In 2023, Vanguard had 1049 engagements with 832 companies out of 4231, where a proposal was voted upon. Put another way, Vanguard had direct consultation with some 20% of its major investee companies. We can assume this is weighted in favour of the larger companies, and so active engagement is alive and well and impactful.

Vanguard also explained that in many cases, shareholder votes on ESG issues were redundant either due to additional disclosures or due to the fact that the ESG issue was already under active management.

Major institutional investors, particularly large tracker investors, including State Street, control some 20% to 30% of US equity votes. These voices matter, spoken softly in consultation or spoken loudly, in vote outcomes.

Newspoint View

The various facets of ESG remain of vital business importance.

The old concept of goodwill has long been recognised as a catchall label for good business practice. More modern business thinking has increased the emphasis and granularity of the ESG elements of goodwill.

It is much welcomed that sophisticated, leading global investors, understand this importance fully, and are resistant to both the popular, headline grabbing ESG vote support, but also resistant to the often ill-informed politicised viewpoint of ESG in shareholder value creation.

The ESG story continues to unfold. As predicted, the road ahead may not always be straight and smooth. Nonetheless, it is good to see business leaders and major investors agree on the importance of thoughtful ESG management and outcomes.

The Vanguard statistics breakdown the vote proposals into type and by management proposed or shareholder proposed. Shareholder proposed votes on ESG for 2023 exceed all other shareholder proposed votes put together. But by contrast, there were zero management proposed ESG votes.

In light of this, perhaps management might begin to propose some votes on ESG issues which are live at the company, for example, a voluntary say on climate.

Executive Compensation and Incentive Design

Reward and Share Plans 

Remuneration Advisory and Support

ESG and Sustainability

Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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