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Greetings from New York City,

Webinars galore here at Diligent. I'm hosting one on November 17 to talk about some of the work we've been doing on compensation, which is proving to be a hot area with regulators lately. Register here to find out what we've been up to.

Yesterday, we completed our "game plan" for proxy season series with a webinar on the universal proxy card with speakers from Sidley Austin, Schulte Roth & Zabel, and Glass Lewis. You can watch that webinar here and register to watch the entire series on demand here.

Kind regards,
Josh Black

Our Proxy Voting Annual Review 2022 shows that the utilities sector (49) saw the most environmental shareholder proposals in the 21/22 proxy season.

Which sector do you expect to see the most next proxy season?

14% - Utilities (again)
18% - Financial services
61% - Energy
7% - Other 

 

Josh Black, Editor-in-chief, Diligent
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Pass-through voting is back on the agenda, with investors clearer than ever that ESG activism is a political hot potato.

This week, BlackRock, Vanguard, and State Street Global Advisors all announced initiatives to give asset owners greater ability to vote shares in index funds managed by the "big three," continuing to add momentum to an initiative kicked off with much fanfare by BlackRock a year ago.

As BlackRock's CEO Larry Fink wrote this week, take-up is "partly being driven by the public debate around issues that can impact the value of companies and how different asset owners choose to navigate them."

"Our clients have diverse perspectives, and a growing number would like the option to weigh in on how their index funds vote on important proxy questions at the companies held in the funds," said Anne Robinson, Vanguard’s general counsel, in a statement to Bloomberg News this week.

The mantra of investor choice suggests that the schemes are predominantly marketing devices, with the additional benefit of passing increasingly contentious decisions about the proper limits of ESG onto clients as pension funds move in opposite directions depending on the political orientation of their beneficiaries. 

Several Republican states have yanked funds from BlackRock in recent months, after accusing it of boycotting energy companies. Meanwhile, in September, New York City Comptroller Brad Lander wrote in a public letter to Fink that "BlackRock cannot simultaneously declare that climate risk is a systemic financial risk and argue that BlackRock has no role in mitigating the risks that climate change poses to its investments by supporting decarbonization in the real economy."

Offering allocators and even retail investors the power to vote their own shares may be politically astute but it won't make the political tension go away. The U.S. midterm elections in that sense.

While State Street is jumping on the bandwagon, its stewardship team released a thoughtful white paper this week tying the issue back to shareholder activism. Like many investors, its support for activist candidates in proxy fights has fallen, and it explained that it believes that is partly due to greater responsiveness from boards and management teams, partly from sympathy for the challenges of managing through COVID, and because activists are starting to get a little short-termist in their approaches (remember, this is activists that go all the way in proxy fights, which doesn’t apply to every fund).

State Street also warned of three potential consequences from disrupting the combination of investment and stewardship discretion that the index funds have hitherto employed:

•    "Amplifying the voting influence of select shareholders, such as activists with short-term interests, those outsourcing responsibility to proxy research advisors, and company insiders,

•    "Creating challenges for companies to reach a voting quorum, and

•    "Diminishing the opportunity for clients to benefit from the experience of institutional investors in exercising a long-term perspective in voting decisions."

It's been a long year in proxy voting, with 2021's record season for ESG shareholder proposals giving way to much less enthusiastic support this year, expectations of greater retail investor interest in annual meetings largely dashed, and the Department of Labor working to reverse Trump-era changes that discouraged the use of ESG investing for ERISA funds (a common kind of retirement savings account), only for investors to start passing the buck. 

In this topsy-turvy world, one wonders whether the most significant result of the enthusiasm for pass-through voting won’t be a volte-face in a year or two's time.

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Investor-led climate initiatives are putting engagement ahead of targets in a bid to maintain their big-tent approaches.

Green investor coalitions have faced their fair share of negative press this year, being subject to claims of amounting to little more than greenwashing and failing to hold members to account on their climate commitments.

In an October 27 progress report, The Glasgow Financial Alliance for Net-zero (GFANZ) revealed that its 550 members will no longer be required to agree to use science-based scenarios to phase-out the financing of new sources of fossil fuels.

This news came shortly after several financial institutions, including JPMorgan and Bank of America, revealed they were considering exiting the group, amid concerns of the legal implications of failing to adhere to increasingly stringent decarbonization targets.

While GFANZ's target easing may be a welcome change for some of its members, responsible investment organization ShareAction said it was "extremely concerned" by the change in direction.

"This comes at a crunch point for the planet," Jeanne Martin, head of banking program at ShareAction, said in a press release. "It's clearer than ever that voluntary initiatives alone aren't enough to drive the urgent action needed to secure a liveable future."

GFANZ is hardly the only investor coalition that has faced negative press this year. At the start of the year, a study published by professors at the University College Dublin, Queen's University Belfast, and the University of Edinburgh, found that being a member of the Net-zero Asset Owners Alliance (NZAOA) "does not correlate with an increase in director pro-climate voting, compared to that of those not in the alliance."

Reports, published by Majority Action and ShareAction, similarly found that not only are Climate Action 100+'s (CA100+) efforts to hold companies accountable being "systematically undermined" by the voting behavior of its largest investor signatories, but the initiative is enabling investors to "greenwash their activities" through signing up to the initiative while "neglecting to use their influence to drive emissions reductions."

"Climate is a really urgent topic that requires swift action," Emmanuelle Palikuca, head of sustainability advisory at Alliance Advisors told Insightia in an interview. "That's a lot of pressure, but it's because of the many risks associated with climate change that significant action needs to be taken."

For investor coalitions to truly drive change and win back public trust, they must reinforce to their members the importance of issuer engagement and of holding companies to account.

ShareAction has consistently advocated for investor coalitions to "raise the bar on engagement," encouraging the CA100+ steering committee in May to "set minimum escalation expectations for engagements undertaken via CA100+" and to "publish a list of engagement objectives and milestones for each focus company."

Thankfully, it seems like coalitions are listening and plan to ramp up their expectations ahead of the new year. Last month, CA100+ revealed it will update its Net-zero Company Benchmark, to ensure it "continues to effectively support investor engagements with focus companies." A public consultation is also currently open, aimed at "identifying engagement priorities" for signatories.

On Tuesday, GFANZ also took steps to remedy concerns about its target easing, publishing guidance "critical for public accountability" and holding companies to account on pledges made.

The moment of truth will be seeing how investors vote on and engage with issuers come the 2023 proxy season.

Kieran Poole is joined by Emmanuelle Palikuca of Alliance Advisors and Insightia's Rebecca Sherratt to discuss The Proxy Voting Annual Review 2022.  
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