In this thoughtful article from the Managing Editor at ISS Analytics, The Long View: US Proxy Voting Trends on E&S Issues from 2000 to 2018, the author contends that, notwithstanding high-level data showing relatively static median vote support for shareholder proposals over the last 19 years, that data is deceptive: "the reality is that investor voting behavior among owners of U.S. companies has changed significantly—perhaps almost revolutionarily—over the past two decades." What's more, "the most significant change in investors' voting behavior pertains to environmental and social issues, as these proposals are earning record levels of support in recent years."

The author contends that support for E&S proposals began to increase after the 2008 financial crisis, which created a new focus on governance and sustainable business practices, including environmental and social issues. Over the last 10 years, the median level of support for E&S shareholder proposals increased as a percentage of votes cast from 6% in 2008 to 24% in 2018, reflecting a "dramatic change in investors' attitudes towards environmental and social issues." Similarly, in 2018, 36% of E&S shareholder proposals received support of over 30% of votes cast, up from 7% in 2008. This change in voting results reflected increased pressure from the public and regulators, global policy initiatives, major disaster events (such as the 2010 Deepwater Horizon oil spill and the 2011 Fukushima nuclear disaster) and "the evolution of the debate by proponents from a values-based framework to a value-oriented discussion of managing potential business risks." As investors became more actively engaged, policy issues, such as climate change and diversity, rose to the forefront.

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As discussed in this PubCo post, a survey by EY showed that investors take information about ESG (environmental, social and governance) issues into account in making investment decisions. EY surveyed over 320 institutional investors, one-third of which had over $10 billion in assets under management, about the importance of nonfinancial reporting, in particular, the role ESG analysis plays in their investment decision-making. Looking at data over several years, EY found that there was a global trend toward increased interest in nonfinancial information on the part of investment professionals as well as an enhanced focus on ESG factors, albeit an informal one, in the investor decision-making process. Analyzing information over a three-year period, EY concludes that ESG factors are now playing an increasingly influential role in investment decision-making. Interestingly, EY contended that ESG analysis has shifted over time from a primary focus on corporate governance issues to a now equal interest in environmental issues, particularly climate change.

Another trend identified by the author is the shift in the way proponents framed their proposals from requests that companies adopt specific E&S policies or take specific actions to proposals "seeking disclosure, risk assessment, and oversight of particular issues." As a result, the proposals seemed "less dogmatic about business practices, and allow[ed] for dialogue and engagement in a relatively cost-effective way." In addition, the emphasis of the basic E&S proposal was converted from a pure "values" focus to an "economic discussion about how environmental and social risks can impact the company's long-term value." This change served to encourage more engagement about long-term economic value, allowing proponents to position themselves as "long-term investors and to dispel previous perceptions of them as solely social or environmental advocates." This shift, along with the rise in ESG investing, also eventually led to a change in the voting strategies of many large investors from abstentions—which averaged 16% in 2010 and dropped to 3% in 2018—to votes in favor, reaching an average of 25% in 2018. Even more significant, the Paris Climate Accord "made climate change risk management a top policy priority."

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Notably, in 2017, climate change proposals actually succeeded in obtaining majority votes in favor at three major companies. The proposals asked each of the companies—Occidental Petroleum, PPL and ExxonMobil—to issue a report providing a "2 degree scenario analysis"—a term that refers to the goal of the Paris Climate Accord of limiting global temperature increases to 2 degrees Celsius (3.6 degrees Fahrenheit). The report was to assess the impact on the company's asset portfolio of long-term climate change, explaining (as stated in the Occidental proxy) "how capital planning and business strategies incorporate analyses of the short- and long-term financial risks of a lower carbon economy," including specifically, "the impacts of multiple, fluctuating demand and price scenarios on the company's existing reserves and resource portfolio." At Occidental, the proposal was approved by a 2/3 vote. The likely difference in these votes was the that some of the largest institutional holders—including mammoth asset managers BlackRock and Vanguard—reportedly switched sides on some of these votes, after years of limiting their actions to just cajoling. Some commentators attributed these victories to a feeling among climate-risk-focused investors that, in the current deregulatory environment, they may need to take more affirmative steps on their own. According to Reuters, the executive director of the 50/50 Climate Project speculated, after the Occidental vote, that actions by the current administration such as "the dismantling of Obama-era climate policies may have moved big investors to take on a more active role." It's also possible that other factors may have contributed to the result at ExxonMobil, including probes into ExxonMobil's past climate change risk reporting. (See Reuters.) (See this PubCo post.)

In addition, the author points out that there has also been an increase in support for shareholder proposals on social issues, such as board and employment diversity, as well as significant health and safety issues, such as the opioid epidemic and gun safety.

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Pressure from institutional investors has recently served to elevate the importance of the issue of board gender diversity. (See this PubCo post for data from Equilar for Q2 of 2018.) For example, the voting guidelines regarding board composition issued last year by BlackRock made clear that BlackRock expected "boards to be comprised of a diverse selection of individuals who bring their personal and professional experiences to bear in order to create a constructive debate of competing views and opinions in the boardroom. In addition to other elements of diversity, we would normally expect to see at least two women directors on every board." (See this PubCo post.) Similarly, State Street Global Advisors, which initiated its "Fearless Girl" campaign in 2017, announced that, during the first half of 2018, it had voted against reelection of board members at 581 companies. Starting in 2020, State Street will vote against the entire slate of board members on the nominating committee if a company does not have at least one woman on its board, and has not engaged in successful dialogue on board gender diversity for three consecutive years. More generally, in its survey of over 60 institutional investors with an aggregate of $32 trillion under management, the EY Center for Board Matters reported that, among investors' top priorities for companies in 2018, board composition, particularly gender diversity, was a top priority for 82%. About half of respondents reported that they consider board diversity in voting, while a quarter do so in the context of proxy contests and shareholder proposals. The driver appears to be the "interest in effective board composition, given the wide range of studies demonstrating the benefits of diversity, including how diverse perspectives enhance issue identification and problem-solving ability and impede 'group think.'" (See this PubCo post.)

Gun safety advocates have also submitted shareholder proposals to companies involved with firearms. Proposals related to firearms safety have rarely succeeded in the past, in part because many investors focused on social responsibility do not own shares in firearms manufacturers. However, as reported by Bloomberg, index funds own about 25% of the shares of U.S. gun manufacturers, and, as discussed above, many of those funds are now voting more frequently in favor of some social proposals. For example, in 2018, a proposal was submitted to a gun manufacturer requesting a report on gun safety. The proposal requested that the report address "[e]vidence of monitoring of violent events associated with products produced by the company," "[e]fforts underway to research and produce safer guns and gun products," and "[a]ssessment of the corporate reputational and financial risks related to gun violence in the U.S." As discussed in this article, the reference to research on safer guns refers to "smart gun technology (such as using thumbprint readers, like those used on smartphones)." The proposal received a vote in favor of 68% of votes cast, including favorable votes from the company's largest holder, BlackRock. Proxy advisory firm ISS had also recommended a vote in favor of the proposal. According to Georgeson/Proxy Insight, the favorable vote was "almost double the average level of support for all E&S proposals this year." (See this PubCo post.)

Another trend the author identifies is the increase in the proportion of E&S proposals withdrawn, as proponents instead engage with companies and reach agreement on disclosures or adoption of policies. According to the article, 48% of E&S proposals were withdrawn in 2018, while only 37% went to a vote, reversing the historical proportions.

Notwithstanding all of these positive indicia, the author cautions that we shouldn't expect E&S proposals to achieve the ready level of acceptance of the most successful governance proposals, such as declassifying the board. That's because issues like board declassification require only a binary decision—declassify or don't declassify. E&S proposals, however, tend to require a more qualitative assessment of existing company practices, current levels of disclosure and company performance. As a result, the author does not expect E&S proposals to regularly "average above-majority support levels given the nature of the requests."

Nevertheless, the author concludes that the record withdrawal rate in 2018, together with record level of support for those proposals that went to a vote "indicate an inflection point for environmental and social issues, as these considerations move to the mainstream of investment management." As a result, the author contends that "we can expect a high percentage of proposals achieving significant support levels for the years to come, as investors encourage more companies to improve disclosures and practices on these issues."

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