The Impact of ESG on Proxy Season and Proxy Voting

Companies in all industries face growing pressure to implement credible strategies for addressing environmental, social and governance (ESG) issues. ESG-focused investors have become an increasingly influential force for change that most companies can no longer ignore. In fact, a 2022 MSCI report states that, “ESG investing has become a prevailing part of investing,” and predicts that the trend will only grow stronger. But companies also face increasing regulatory scrutiny of ESG issues as well as legal risks, according to Business Law Today. Yet, with more reasons than ever to improve ESG disclosures, even well-motivated companies may not make full use of a basic tool for telling their ESG stories to their most active and engaged investors: the proxy statement. Fortunately, following a few fundamental principles can help companies integrate ESG factors into proxy statements and make a positive contribution to investor engagement.

What is a Proxy Statement?

Public companies in the U.S. are required to file a proxy statement with the SEC and distribute it to all shareholders prior to the company’s annual meeting (or certain special shareholder meetings). The statement provides relevant information about matters that will be addressed and voted on at such meetings, which investors need to make informed decisions when they vote on proposals and board elections. Proxy statements typically include information about the board of directors, executive compensation, shareholder proposals, management statements on specific matters or policies and proposals to add or remove members from the board.

Voting gives shareholders a say in how a company is run, but investors also have the option of assigning their voting rights to someone else to act on their behalf, a practice called proxy voting. Some institutional investors exercise voting rights on behalf of their investors, which can give these large institutions a significant influence. For ESG issues, proxy voting and institutional investors have become increasingly important, with activist investors attempting to change company policies, elect their preferred directors to the board or remove directors they oppose.

For all these reasons, the proxy statement is playing a more important role in corporate governance and can be a valuable tool for communicating ESG program highlights and initiatives. Not only can an effective ESG strategy mitigate potential risks, but it can contribute to achieving positive outcomes, as pointed out by Jim Cleary, executive vice president and chief financial officer for global healthcare company AmerisourceBergen. “There are also indirect benefits from ESG initiatives,” he said in a recent interview for Nasdaq’s ESG Trendsetters series. “Examples include being a more resilient business by being able to adapt to extreme weather events, becoming an employer of choice, winning long-term shareholders and lowering the cost of capital.”

So how can companies communicate their ESG practices using the proxy statement as a disclosure medium? One good place to start is by learning from companies that provide good examples.

Proxy Statement Examples

Some well-known companies have been leading the way for years, using proxy statements to highlight their ESG policies and how their principles align with business objectives. Among Fortune 50 companies, according to an analysis published by the Harvard Law School Forum for Corporate Governance, most already include information about a variety of ESG factors in their proxy statements, and the rate rises above 90% of companies for some topics.

Fortunately, support is available to help companies find the best way forward. Over the last decade, Nasdaq has developed a comprehensive suite of ESG solutions to help client companies achieve their objectives. The ESG Advisory Program leverages Nasdaq’s extensive in-house expertise, bringing together data, insights and a team of analysts to help clients prioritize and guide their ESG efforts.

While many solutions need to be tailored to the specific needs of a company, there are three general principles that should guide ESG disclosures in proxy statements, as recommended by the Harvard Law School Forum for Corporate Governance.

First, companies should identify a peer group of comparable companies and evaluate ESG trends and standards among them.

However, this principle needs to be interpreted for different situations. For example, Facebook’s peer group includes not only the most obvious names, such as Alphabet and Amazon, but also companies that might not normally be considered similar, such as Disney, Verizon, Comcast and Uber. A diverse peer group makes sense for Facebook because its multifaceted business model touches a variety of sectors. Apple defines a primary peer group of mostly tech companies and a secondary peer group that includes Nike and Coca-Cola, among others.

Second, one may look to relevant industry practices to evaluate whether the company can work to incorporate ESG disclosures into their proxy statements consistent with their peers.

If a different approach is chosen, the reason behind the decision should be explained. This can be an opportunity to highlight positive differences. For example, while many companies assign board oversight of ESG policies to traditional committees that already have other roles, Coca-Cola has a dedicated ESG and Public Policy Committee to focus on the relevant issues. The committee is highlighted in the proxy statement and its responsibilities are described.

Third, a company should make sure that all reported ESG metrics and data are accurate.

Establishing a clearly defined oversight role for the board on ESG matters may help with accountability, but reporting is a specialized area that may require outside expertise and support, not only for external stakeholders but for internal processes as well. For example, Nasdaq OneReport simplifies the process of ESG data capture, engagement, oversight and disclosure. In addition, Metrio, a leading provider of end-to-end ESG analytics and reporting services, was recently acquired by Nasdaq to improve support for client companies.

Many companies adopt established reporting frameworks, such as the Sustainability Accounting Standards Board standards or Global Reporting Initiative Standards, which provide guidance and offer industry-specific metrics and comparability. Global medical device company Medtronic adopted SASB standards in 2015 because the focus on financially material ESG metrics could inform the internal decision-making process and help them communicate relevant data to external stakeholders.

“It’s about understanding the risks identified and who owns them, so we can start having conversations with the right stakeholders,” explained Ginny Cassidy, director of the company’s enterprise sustainability program.

What to do and not to do when including ESG in Proxy Statements

Studying other companies can be instructive, but if the wide variety of practices makes it difficult to identify clear principles, another good place to start is with a simple list of do’s and don’ts, as suggested by international law firm Perkins Coie. On the positive side, a company should do the following:

• Explicitly define ESG priorities
• Make sure ESG metrics are material and appropriate for a proxy statement
• Compare the draft proxy statement with peer-group companies that are considered ESG leaders
• Identify reporting standards or frameworks that are being used for the statement

But even if these four things are done well, companies also need to make sure that they avoid basic missteps or unforced errors. Reiterating the complete corporate responsibility report or ESG report would be a mistake because these documents often contain information that is not material for investors. Including metrics that have not been thoroughly validated would be an error, as any inaccurate information could raise questions about credibility. Finally, another misstep would be to make grand promises but fail to follow through and deliver. After all, ESG investors generally want information about measurable and actionable programs.

How Can ESG Contribute to Proxy Voting?

A recent regulatory change highlights the growing importance of ESG issues for proxy voting. In 2021, the US Department of Labor (DOL) amended its rules for ERISA-covered retirement plans on investment selection and specifically addressed including ESG issues in the investment process. The bottom line is that when these plans exercise shareholder rights and vote proxies, they now can include ESG factors as material considerations in their risk-return analysis.

Regardless of regulatory factors, ESG issues have played an increasingly important role in proxy voting over the past couple of years, and shareholder proposals focused on ESG factors are becoming more frequent, a trend that is expected to continue. According to a recent Institutional Investor report, some pension funds are taking a more active stance on voting proxies in line with their own ESG policies.

Other institutional investors, ranging from high-profile asset managers (such as UBS and Fidelity) to insurance companies, are also focusing more on ESG issues in their proxy-voting policies.

Individual investors typically do not own enough shares to have much direct impact, but when many individual investors share the same priorities (or can express them through like-minded proxies with more influence) their voice can be heard. Companies face mounting pressure to address ESG issues primarily because a growing number of all types of investors large and small are making these concerns a priority in their investment decisions. As a result, companies that want to avoid falling behind industry peers may want to be proactive about addressing ESG factors in their proxy statements.