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New environmental and social issues will make the 2022 proxy season "unprecedented"

During the 2022 proxy season, shareholders submitted an extraordinary number of proposals pertaining to a wide range of environmental and social issues, keeping businesses across many industries on their toes.

More stringent requirements for climate-related initiatives, audits of racial justice and civil rights violations, and diversity, equity, and inclusion initiatives were added to the shareholder agenda (DEI).

Numerous articles following the proxy season emphasized record numbers. A record-breaking 924 shareholder proposals had already been submitted, according to Georgeson, a company that tracks shareholder engagement. Georgeson examined annual meeting results for Russell 3000 Index companies from July 1, 2021, through May 16, and found that this was a record-breaking number. The highest point was 837 in 2021.

A different report, the Proxy Preview 2022, highlighted a "unprecedented" proxy season, citing a record-breaking 282 votes and 34 majorities votes observed before July 13 in favor of disclosure and action on shareholder resolutions related to environmental, social, and governance (ESG).

According to Harlan Tufford, vice president of ESG research at investment adviser MSCI, "U.S. shareholder proposals have long focused on the 'governance' portion of ESG—issues like shareholder rights and independent board chairs—but 2021 saw (the start of) a significant increase in support for proposals targeting environmental and social change."

It is also important to consider the overall historical impact of shareholder proposals, according to Tufford. A common suggestion made by American businesses over the past five years has been for them to publish yearly sustainability reports.

"Increasingly, however, we’re seeing proposals calling for deeds rather than words, in particular for the implementation of greenhouse gas (GHG) emissions reductions targets," he said.

There are now more stringent requirements for climate-related initiatives. According to Georgeson's report, while shareholders proposed more general GHG emissions reduction targets during the 2021 proxy season, most proposals submitted during the 2022 proxy season specifically sought targets for Scopes 1, 2, and 3 emissions.

Some shareholders in the insurance sector tried to push the envelope by requesting that firms like Chubb and Travelers completely refrain from funding fossil fuel extraction projects. Resolutions at Chubb and Travelers requesting disclosures on the carbon impact of financing extraction projects received 72.2 percent and 55.8 percent of shareholder support, respectively, despite the fact that those proposals were unsuccessful.

Because companies reached agreements with shareholders, more climate-related proposals were withdrawn.

According to Heidi Welsh, executive director of the nonprofit Sustainable Investments Institute, which carries out independent research on social and environmental issues influencing corporate behavior, "the primary push on climate change was all about GHG emissions and net-zero goals, and a lot of companies agreed to that."

A resolution requesting that Boeing align the full scope of its GHG emissions with the Paris Agreement's target of achieving net-zero emissions by 2050 was supported by 91 percent of the company's shareholders. Shareholder support for comparable resolutions at General Electric and Sysco was 98% and 92%, respectively.

Along with climate change and DEI, a number of shareholder proposals during the 2022 proxy season for the first time requested racial equity audits or civil rights audits.

Welsh noted that while it usually takes time for proposals to gain support, this year there were eight majority votes, which is unusual and quite striking for a "new" issue.

The analysis of the company's "adverse impacts on nonwhite stakeholders and communities of color," with input from "civil rights organizations, employees, and customers," was specifically requested in resolutions of this kind. Altria, Apple, Home Depot, Johnson & Johnson, Maximus, McDonald's, Stericycle, and Waste Management were the eight businesses that received the majority of the votes.

During this year's proxy season, there was increased attention paid to corporate-related political spending on elections and lobbying, as well as a heightened focus on businesses that backed politically sensitive causes. One such proposal was that businesses disassociate themselves from all political contributions.

According to Andrew Behar, CEO of nonprofit shareholder advocacy group As You Sow, "we believe that companies should remove themselves from the political process and that funding political candidates is not a good idea for business."

Companies should be aware that shareholder engagement processes are escalating as a result of shareholder proposals and proxy fights.

In place of conflict, dialogue can result in compromise, according to Tufford. "Creating dialogue opportunities between directors/senior managers and a company’s investment community can help to stave off the most disruptive kinds of engagement and activism and better align the company’s activities with investor expectations going forward."

Companies would do themselves a disservice if they did not collaborate and communicate with their largest shareholder investors in advance of the 2023 proxy season and beyond.

According to Edward Greene, managing director at Georgeson, "it is critical they have that communication, and it’s critical everyone is singing from the same hymn book" Practically speaking, he said, that means making sure all messaging is consistent, such as verifying that whatever the investor relations team says on earnings calls corresponds with messages sent by the executive team.

Additionally, businesses have tools at their disposal to comprehend where shareholders are concentrating their efforts. Businesses can look through shareholder proposals by sector or company on the website of the Sustainability Accounting Standards Board, for instance.

Firms can also run a gap analysis to assess how their disclosures stack up against those of their competitors. When a company discusses its disclosure requirements internally, "conversation also definitely includes the compliance team," according to Greene. Compliance can be especially helpful by collaborating with the business to make sure ESG disclosures are accurate, truthful, and comprehensive.

If the company receives a shareholder proposal and has not resolved these issues beforehand, Greene said, it will be at a disadvantage because it will not know how the company's largest shareholders feel about any number of contentious issues and the disclosures they are asking for.

"It’s in the spirit of wanting to build a just and sustainable world that more shareholders are coming forward and wanting to collaborate with companies. I think companies realize they want that, too. I honestly feel like we’re at a real incredible pivot point in history," according to Behar.



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