ESG Trends From the 2018 Proxy Season

Report Reveals Increased Focus on Environmental, Social, Governance Issues

The proxy season for 2018 has shown trends that shareholders are increasingly investing in environmental, social and governance (ESG) issues. How do companies address these issues? In addition to traditional investor relations dialogue with portfolio managers, companies should initiate governance, stewardship and proxy voting teams. Read more on the top 2018 corporate proxy trends by Ron Schneider, Director of Corporate Governance Services at Donnelley Financial Solutions.

The 2018 corporate proxy season resulted in several emerging trends, providing insights into investor priorities that will shape next year’s shareholder campaigns. Most notably, shareholders are increasingly flexing their muscles on environmental, social and governance issues.

Given the growing interest by investors in these topics, companies that have not yet addressed them should be encouraged to initiate outreach and engagement with top investors. These groups include stewardship, governance and proxy voting teams that many investors have, in addition to traditional investor relations dialogue with portfolio managers and securities analysts.

Here are some of the top trends from 2018 corporate proxies:

1. Environmental Issues Grow in Importance

Many CSR shareholder proposals are being recast to focus on the sustainability of the company in an era of climate change. Because of this recasting, clearer links between CSR issues and shareholder value are drawn, attracting support from significant investors. These issues include commitments to fuel efficiency, renewable energy, recyclable materials and reducing greenhouse gases, to name a few.

2. Sustainability as a Board Concern

More U.S. public companies are integrating sustainability into their board charters. At a large oil and gas company’s 2018 annual meeting, for example, shareholders filed a proposal requesting the company have at least one board member with expertise in environmental matters relevant to hydrocarbon exploration and that the member be recognized by the business and environmental communities as an authority on environmental matters.

3. Diversity on Boards Should Not Be Ignored

As part of evaluating a board’s quality and competencies, investors consider director age, tenure and diversity – which include gender, race and ethnicity, as well as diversity of perspectives, experience and skills. Though age or term limits and diversity quotas are not presently required in the U.S., there is increasing attention on overall board composition.

For example, Vanguard and AXA joined forces with the Thirty Percent Coalition to promote gender diversity on corporate boards. In 2019, new policies will go into effect at two of the most prominent proxy advisory services, Institutional Shareholders Services (ISS) and Glass Lewis (GL), allowing recommendations against boards that lack diversity.

4. Investors Still Want to See an Independent Board Chairman

In 2018, for the fourth year in a row, proposals to require an independent board chairman were the second most popular type of shareholder proposal filed. An independent board chairman can create an independent source of authority to address the concerns of the board.

5. Institutional Investors Demand Greater ESG Integration

It’s no longer sufficient to just have an ESG policy or report ESG-type data, which 55 percent of global companies do today. Investors need decision-useful data on key material issues that are strategic to the company, all with a clear link between ESG issues and corporate strategy, risk management and operational context.

This is where the key ESG reporting frameworks — the CDP (formerly, the Carbon Disclosure Project), GRI (Global Reporting Initiative), TCFD (Task Force on Climate-Related Financial Disclosures) and SASB (Sustainability Accounting Standards Board) — are embraced by both corporations disclosing data and investors using the data disclosed.

In June 2017, for instance, Trian adopted a policy encouraging companies within its portfolios to implement ESG-related initiatives that it believes will improve their long-term performance. Meanwhile, in its April 2017 ESG policy, Blue Harbour defined the principles that will guide how it evaluates material ESG issues during the investment process.

6. Growing Demand for Decision-Useful ESG Data is Driving the Proliferation of Rating Firms

Investors globally are integrating ESG ratings into their investment-making decisions to help identify risks or opportunities that may not be apparent in traditional financial analysis. Ratings firms collect and analyze ESG data using several approaches, including questionnaires, surveys, collection and standardization of public data and government and NGO databases, as well as company disclosures and media sources.

For example, Bloomberg’s Professional Services Platform collects enormous amounts of ESG data from published and publicly-filed company content and integrates both narratives and raw data into the firm’s Equities, Bloomberg Intelligence and Fixed Income platforms.

7. Evolving From Qualitative Disclosure to Quantitative Disclosure

Over the past several years, growing numbers of public companies have begun to disclose more about their performance against specific ESG criteria. Many experts believe that sustainability reporting will need to evolve from ESG disclosures in qualitative terms to using quantitative measures that apply ESG frameworks, where appropriate.

ESG-related disclosure is here to stay. Corporate stakeholders, including institutional investors, want more than short-term profits reflecting a narrow managerial vision of value creation. To get the most impact from their ESG efforts, companies should identify those initiatives that make a significant difference to their business, are important to their stakeholders and can be measured.

8. Transparency Around CEO/Median Employee Pay Ratio

Internal pay equity has been a topic of great interest to stakeholder groups for years. After a 2015 SEC approval on a Dodd-Frank requirement was implemented, which stated that companies must calculate and disclose the ratio between CEO and median employee pay, companies’ first Pay Ratio disclosures appeared in 2018 proxy statements. It will be interesting to see how investors and others incorporate this information moving forward into engagement discussions and proxy voting.