Market & Regulatory Perspectives Ahead of Proxy Season

Attitudes toward ESG remain varied across stakeholder groups with 2022 seeing an uptick in “ESG-backlash,” a response which, according to some investors, stemmed from overly prescriptive shareholder proposals. In addition, through the course of 2021-2022, 18 states passed “anti-ESG” legislation in an effort to curtail state-funded investment arms from participating in ESG investing activities or from adopting certain ESG policies, such as decreasing investment in carbon-intensive sectors.

Key forces influencing 2023’s proxy season include

Buy-side Perspectives Point toward Enhanced Focus on ESG:

• Despite public push-back among certain groups, our proprietary Voice of Investor® research demonstrates ESG has been firmly catalyzed within the investor community, with each measure seeing increased emphasis as an investment factor by at least 20% over a four-year period.
• While AUM inflows have been throttled after a record 2021 and amid the Great Reset of 2022, sustainable assets under management as a percentage of total managed assets has been on a steady rise across the globe, increasing from 4.6% to 7.1% over the same four-year timeframe. Source: Morningstar
• The increase in focus and funding has translated into an uptick of ESG-related shareholder proposals in 2022, particularly concerning Environmental and Social (E&S) matters.

Regulatory Efforts Continue to Mount

As it relates to this year’s proxy, several rules will now be in effect or under greater scrutiny:

• New pay vs. performance disclosure, requiring companies to provide a Pay vs. Performance Table that links executive pay with issuer-selected financial performance measures.
• Universal proxy cards.
• Enhanced Board leadership and risk oversight disclosure.

Proxy Advisors Double Down on ESG Expectations

In addition to the new regulatory requirements, proxy advisory firms Glass Lewis and ISS issued updated 2023 guidance, primarily focused on 3 key measures:

• Increased and enhanced disclosure of climate risks, recommending companies align with the TCFD framework.
• Increased Board oversight and accountability, particularly regarding climate and social issues.
• Detailed DEI disclosure.

In light of shifting markets, regulatory tailwinds, and ahead of your annual general meeting, consider the following selected strategies and best practices:

• Make a clear case for the effectiveness of the Board’s makeup today and update / develop a skills and composition matrix
• Develop a communication strategy for how to respond to ESG skepticism
• Refresh or conduct an ESG materiality assessment

For additional insights and best in class examples, reach out to us to read the full report please fill out the form below.