Investors Filing More Shareholder Proposals on Environmental Issues, and More Companies are Listening

Posted on March 20, 2013 by Christopher Davis

Investors, including public, labor and religious pension funds and socially responsible investment (SRI) funds, are filing increasing numbers of shareholder resolutions on environmental, social and governance (ESG) issues.  Each spring, investors vote their proxies on these shareholder proposals, including many focused on environmental matters.  The average number of votes on environmental proposals are increasing as well.  In addition, a growing number of such resolutions are “withdrawn”, based on an agreement that the company will take specified actions consistent with the proposal.  Ceres tracks ESG resolutions filed by members of its investor network, and nearly 40% have been withdrawn by agreement in recent years.

ESG proposals generally call for reports, policy changes or actions by companies to address ESG-related business risks and opportunities, such as filing a sustainability report, setting a greenhouse gas emission reduction target, improving energy efficiency or linking executive compensation to ESG metrics.  As outlined in a recent Bloomberg BNA article, emerging topics featured in 2013 resolutions include physical risks from climate change, risks from hydraulic fracturing including methane emissions, “stranded asset” risks associated with energy companies’ fossil fuel reserves and sourcing sustainable palm oil to reduce deforestation. According to a recent analysis, investors now file about 50% more shareholder proposals on environmental and social issues than they did a decade ago, with nearly 400 filed each year.

But there has not been as dramatic an increase in the number of proposals voted on because proponents have withdrawn an increasing number of their proposals, generally after reaching agreements with the company.  Such negotiated “withdrawals” are a sign that corporate America is increasingly willing to adopt new practices to address social and environmental concerns.  Although votes on shareholder proposals are legally nonbinding, companies now appear to pay more attention to them.

One likely reason for greater corporate responsiveness is that the shareholder resolutions are garnering higher votes – the average vote on such proposals has grown from 11.9% in 2003 to 18.5% in 2012, according to As You Sow.  In addition,  according to a recent study by the IRRC Institute entitled “Growing Traction for Environmental and Social Proposals at U.S. Companies”, the number E&S resolutions grew by one-third between 2005 and 2011 to about 40 percent of all shareholder proposals going to a vote, and the number of votes above 30% on such proposals grew from 3% in 2005 to 31% in 2011.

Investors who have filed the most ESG resolutions during the 2013 proxy season to date are:  socially responsible investment firms (29%), pension funds (26%), and faith-based institutional investors (18%).  Surprisingly, philanthropic foundations have filed only 7%, while unions have filed 8%, and individual investors 6%.  Special interest groups such as animal rights organizations accounted for the remaining 6%. 

The fastest growing type of resolution filed over the last several years has related to political spending disclosure, representing 33% of 2013 resolutions so far, with ‘sustainable governance’ resolutions representing another 14% of this year’s resolutions.  Sustainable governance resolutions include those asking for annual sustainability reports, as well as requests linking executive compensation to ESG metrics, such as reduced pollution or improved worker safety.  Climate change and other environmental issues are the focus of 26% of the 2013 resolutions. 

As ESG filings and average votes continue to grow, companies are increasingly faced with the question of how best to respond to a shareholder resolution.  Corporate managers nearly always oppose these resolutions, and frequently ask for the SEC’s approval to exclude them from their proxy statement, although the resolutions often serve as early warnings for emerging financial risks such as climate change.  The Society of Corporate Secretaries of Governance Professionals recommends that companies:  1) meet with the filer to discuss the request; and 2) consider whether and to what extent the company can implement the proposal or take other actions that will satisfy the filer.

Companies receiving resolutions should keep in the mind that the shareholder filer’s ultimate goal is not to get a high vote, but rather for the company to address the issue raised in the resolution, which the shareholder believes presents an important risk or otherwise affects the value of their investment.  And filers are generally willing to negotiate in good faith and build a productive working relationship with the company.  Some banks that received resolutions about predatory lending practices prior to the financial crisis probably wish they had paid more attention to the risks raised in the resolutions.  Nearly all companies and investors would have been better off if they had done so, and the same lesson may very well apply to resolutions on environmental issues.