a blunt but valuable instrument

Welcome back. The US Securities and Exchange Commission still doesn’t have a permanent boss, as Donald Trump’s nominee Paul Atkins waits his turn to be confirmed by the Senate. But that hasn’t stopped the regulator, under acting chair Mark Uyeda, from significantly changing the environment for investors who want to influence corporate behaviour.

Asset management giant BlackRock has temporarily suspended “stewardship” meetings with companies, after the SEC issued new guidance that seems to impose more onerous disclosure requirements around these encounters, the FT reported yesterday.

In another major move, the SEC has reversed a 2021 decision allowing investors to propose more ambitious environmental and social resolutions at companies’ annual meetings. But as I explain in today’s newsletter, those shareholder proposals had already been looking like an increasingly blunt instrument.

Shareholder proposals

US regulatory shift changes the playing field for shareholder action

When a tool works only one in 70 times, you have to ask whether it’s still worth using.

That was the hit rate for environmental and social shareholder resolutions filed at major listed companies last year, according to new research published by the non-profit group ShareAction. Out of 279 such shareholder proposals that came up for a vote, only four got majority support.

This is a far cry from the heady days of 2021, when more than a fifth of such proposals were successful. Back then, US asset managers’ average support rate for these proposals was 40 per cent. That dropped to just 19 per cent last year.

There’s now a dramatic divide between voting behaviour on either side of the Atlantic, according to the new research, which focused on 70 major asset managers mainly in the US and Europe. Among the Europeans, average voting support for these proposals rose from 68 per cent in 2021 to 82 per cent last year. But this was more than counterbalanced by the US decline, which was driven largely by the biggest asset managers — especially the leading duo of BlackRock and Vanguard.

BlackRock’s support rate plummeted from 40 per cent in 2021 to 4 per cent last year. Vanguard’s fell from 26 per cent to 0.4 per cent.

Like other asset managers, BlackRock and Vanguard have attributed this drop to the declining quality of sustainability-related resolutions. They argue that they were keen to back earlier pushes for basic climate-related disclosures from companies — but more recently, they’ve had to oppose a wave of more intrusive resolutions that would interfere with effective corporate management.

There is some basis for this argument. In November 2021, under Joe Biden’s appointee Gary Gensler, the SEC announced a major shift in its implementation of a rule that allowed companies to block “prescriptive” shareholder proposals — especially those that included specific goals or timeframes for achieving them.

Gensler’s SEC said that, in deciding whether environmental and social proposals could be excluded, it would henceforth focus on the “social policy significance” of the issue involved — not on the issue’s financial significance to the company.

Critics of the move worried that this would unleash a flood of frivolous environmental and social resolutions that would hinder executives’ ability to run their companies. Were these fears justified — and does this account for the asset managers’ about-turn on proxy votes?

A recent paper, by academics at the National University of Singapore and Harvard, sought to answer that question. It used machine learning to sort environmental and social proposals filed at US companies, according to whether or not they were “prescriptive” (using various criteria drawn from SEC guidance).

The paper found that the proportion of such resolutions did go up, from 32 per cent in 2021 to 47 per cent in 2023 — but this hardly seems sufficient to explain the dramatic change in US asset managers’ voting behaviour.

Another striking data point comes from the proxy advisory firms ISS and Glass Lewis, which provide voting advice to investors. The proportion of sustainability-related resolutions that they recommend supporting has gone down since 2021, but only by a few percentage points apiece.

While they deny it, it’s hard not to wonder whether US asset managers’ voting patterns have been swayed by the political backlash against “woke capitalism”. In particular, Texas officials’ decision last year to pull a $8.5bn pension investment mandate from BlackRock quickened pulses across the industry.

But many other pension plans, in the US and around the world, remain eager to mitigate long-term environmental and social risks — as well they might, given their duty to consider beneficiaries’ welfare decades into the future.

A new study by Majority Action found that most of the biggest US pension plans — notably those in New York, California and Wisconsin — showed overwhelming support for climate-related resolutions in votes that they cast through their directly held share portfolios. But pension funds outsource much of their investment to asset managers, often without setting clear expectations on the use of shareholder votes.

Last week, a group of pension funds and other long-term asset owners controlling $1.5tn called on asset managers handling their money to engage more effectively with companies on climate action, or face the chop. If more big asset owners take a proactive stance with their asset managers on these issues — and make clear how they want their votes to be cast — the green shareholder proposal may yet, in time, find a second wind.

For now, the SEC’s tougher stance has changed the game for investors pushing for a more serious corporate approach to environmental and social issues, at least in the US. An optimistic reading is that this may force the authors of shareholder resolutions to craft more pragmatic proposals that have a better chance of gaining majority support and driving change.

The question at this point, however, is whether even those pragmatic proposals have a chance of going to a vote — or whether the SEC will now exclude all kinds of environmental and social resolutions, including those that would have been allowed long before Gensler’s rule change in 2021.

Even if hardly any of these resolutions were passed last year, a large number garnered a substantial minority of shareholder votes, sending a useful message to management and the wider market. We’ll soon see how aggressively the regulator uses its power to eliminate those signals.

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