Getting ESG Ready for Proxy Season 2020

The 2020 proxy season is just around the corner. Fall has long been a time for issuers to review corporate governance practices, but there is an increasing need to consider the environmental and social aspects of ESG as well:

Investors are expressing the importance of ESG through proxy voting: Edelman’s 2018 Trust Barometer of Canadian Institutional Investors found that 91% of Canadian institutional investors changed their voting and/or engagement policies to be more attentive to ESG risks. Further, 65% of investors said this change occurred within the past year.

During the 2019 proxy voting season, there was an increase in level of opposition for director elections and an increase in average level of support for environmental and social shareholder proposals (both in the U.S. and in Canada). Investors are carefully scrutinizing board diversity, skills and commitment, and seeking to hold directors accountable for oversight of ESG risks and opportunities. Responding to this demand, leading proxy advisors ISS and Glass Lewis now integrate environmental and social ratings into their proxy reports, alongside their traditional governance research.

Investors are ramping up ESG engagement activities, both individually and collectively. Powerful investor coalitions are asking how companies are managing material ESG factors such as board and workforce diversity, human capital management, climate change, and changing consumer preferences related to products’ impacts on society. For example, the Climate Action 100+ coalition, backed by over 370 investors with more than $35 trillion in assets under management, is targeting the world’s largest and most systemically important greenhouse gas emitters to encourage them to curb emissions, improve governance and strengthen climate-related financial disclosures. Many of the target companies have received shareholder proposals on environmental issues. Notably, Climate Action 100+ filed a climate change shareholder proposal at BP that was backed by the largest ever number of co-filers (for a climate change shareholder proposal) and achieved vote support of over 99%. Although only a few Canadian companies are covered by Climate Action 100+, it is worth noting that one of the recommendations of Canada’s Expert Panel on Sustainable Finance was for leading investment institutions to establish a similar coalition focusing on climate engagement with Canadian companies.

You may be under-estimating how important ESG is to your investors: A Bank of America Merrill Lynch survey asked U.S. executives to estimate the percentage of company shares held by investors using sustainable investing strategies and found that executives underestimated the amount by around 20%.

The ESG landscape is evolving rapidly – how can issuers balance competing ESG pressures related to new and evolving disclosure requirements, investor expectations, data surveys, reporting, regulation and ESG ratings? Ultimately companies need to develop a comprehensive ESG strategy, but getting started can seem daunting. A good first step is to assess the company’s current ESG approach. Initial questions to ask include:

• How does our current ESG disclosure line up with best practice?
• What are the ESG proxy voting and engagement priorities of our key investors?
• What are the different ESG ratings, assessments and benchmarks and why do they matter for our company?

ESG Global Advisors offers an ESG Quick Wins service to help companies explore these questions – whether they are new to ESG or seeking an ESG “tune-up”. We assist our clients to develop a deeper understanding of how investors are thinking about ESG and how it might impact their business. For companies that would like more information: ESG Quick Wins or contact ESG Global Advisors.