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What ESG Issues Are on Investors’ Minds?

Morningstar research into fund groups’ proxy votes found the ESG issues that are a priority for investors.

As investor concerns over ESG risks intensify, support for sustainability-focused shareholder resolutions brought to the ballot is also on the rise. These resolutions, which are filed as part of the shareholder-voting process, are an important tool for addressing a variety of ESG issues, such as climate change, lobbying disclosures, and diversity. The resolutions also enable investors to articulate their priorities and exert influence on corporate governance.

In our report “Proxy Voting by 50 U.S. Fund Families,” we take a look at how fund providers are engaging in the proxy voting process. Here, we break down asset managers’ proxy vote patterns on a handful of key ESG issues in 2019 and provide further context for these resolutions.

ESG Issue #1: Climate Change

  • Total number of resolutions voted: 16
  • Average support across 50 fund families: 51%
  • Addressing: Requests for disclosure about the management of greenhouse-gas emissions; two-degree scenario resilience and carbon asset risk; renewable energy targets and energy-efficiency measures; and the public health impacts of climate change.

Nine of the 16 climate change resolutions ask companies to set goals for the reduction of greenhouse-gas emissions. These resolutions typically request that companies report on plans to achieve the goals set by the Paris Agreement.

However, at least five other similar resolutions were omitted from company ballots after target companies sought and received no-action assurances from the SEC on the grounds that the proposal was an effort by shareholders to micromanage the company.

ESG Issue #2: Lobbying Disclosure

  • Total number of resolutions voted: 24
  • Average support across 50 fund families: 49%
  • Addressing: Requests for disclosure of lobbying policies; oversight and expenditures on direct, indirect, and grassroots lobbying communications; indirect lobbying payments including fees paid to trade associations.

Companies frequently pay fees to trade associations. As investors continue pushing companies to reduce their carbon footprints and plan for low-carbon-policy scenarios, transparency around the lobbying process is becoming increasingly important.

Trade associations such as the American Petroleum Institute, the American Fuel & Petrochemical Manufacturers, the National Association of Manufacturers, and the U.S. Chamber of Commerce have lobbied against climate policy at both federal and state levels. Strategies include setting up lobbying front groups, writing model legislation that pre-empts or rolls back state-level climate policies, and attacking state-led climate-liability lawsuits.

Climate policy inaction threatens trillions of dollars in investments by 2050, and investors are now paying attention to the risks of corporate lobbying.

ESG Issue #3: Diversity

  • Total number of resolutions voted: 11
  • Average support across 50 fund families: 71%
  • Addressing: Requests for board diversity, workforce diversity disclosure, and senior management diversity.

Diversity resolutions experienced one of the highest levels of support in 2019. Of the 11 diversity-related resolutions, five addressed board diversity, one asked for details of senior management diversity, and five asked for disclosure of companies’ workforce diversity, referencing the Equal Employment Opportunity Commission’s job categories.

Fourteen fund groups supported all of them, and the only one that failed to support any was TCW. Of the largest fund families, Pimco showed the highest support for resolutions in this category (backing all seven that it voted on). Fidelity, Fidelity’s index funds managed by Geode, and Franklin Templeton were close behind, each supporting more than 85% of the diversity resolutions on which they voted.

ESG Issue #4: Cybersecurity, Data Protection

  • Total number of resolutions voted: 9
  • Average support across 50 fund families: 37%
  • Addressing: Requests for disclosure of potential for misuse of facial-recognition technologies for political purposes; use of search censorship in China; the governance of fake and offensive online content; and governance of cybersecurity and data privacy.

Cybersecurity and data protection are new areas of concern for investors, and they are gaining prominence as big tech companies continue to draw attention over data breaches and invasions on user privacy.

Social media companies and telecom giant Verizon were targeted with resolutions addressing concerns over online content; meanwhile, tech companies with advanced facial recognition were targeted with privacy concerns and potential for government abuse.

While this category received an average of 37% support from funds in the large fund families surveyed, new high-profile content scandals or cybersecurity breaches could significantly increase the perceived investment risk, especially in the context of the upcoming presidential election.

ESG Issue #5: Pay Equity

  • Total number of resolutions voted: 14
  • Average support across 50 fund families: 48%
  • Addressing: Requests for disclosure of the reputational, competitive, and operational risks to the company associated with emerging public policies addressing the gender pay gap, and risks related to recruiting and retaining female talent.

Pay equity garnered less support among the 50 fund families than diversity resolutions. Of the 10 largest fund groups, Pimco voted almost unanimously for gender-pay equity resolutions, except for one vote cast against pay-equity disclosure at TJX Companies by the PIMCO Global Core Asset Allocation Fund.

Of all fund groups, only Allianz Global Investors and Blackstone supported 100% of gender-pay equity resolutions; five failed to support any of the resolutions: DFA, Hartford (Wellington), Northern Trust, TCW, and Vanguard.

Proxy Votes on ESG Issues Are Trending Upward

Support for resolutions addressing ESG concerns reached a record high in 2019, which means that corporate management may be more willing to engage with shareholders’ raising ESG concerns. This could substantially change the mix of shareholder resolutions that end up on the ballot in the 2020 proxy season.

On ESG issues, investors’ interests align with those of other stakeholder groups. How companies treat their employees, the environment, and the communities in which they operate can be a source of long-term shareholder value.

Understanding how investors and other stakeholders raise ESG concerns, as well as how asset managers approach ESG concerns in their proxy voting, is important. It can help you provide value for your clients by helping them align their investments with their values.

For the full analysis of major fund families’ proxy voting trends, download our report.
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