The first proxy season since Donald Trump swept back into power and waged war on prominent three letter acronyms – DEI (diversity, equity and inclusion) and ESG (environmental, social and governance) – has been and gone. While overshadowed somewhat by tariff-related drama, there have been a number of crucial observations for those working in responsible and sustainable investment.
Up to this point, we had already seen US asset managers retrench on responsible investment and climate-related activity. The number of managers exiting the Climate Action 100+ collaboration group has been significant. Meanwhile, in the new war against DEI, federal agencies must identify up to nine companies with ‘the most egregious and discriminatory DEI practitioners’, leaving some facing severe consequences.
Companies are thus rolling back DEI programmes or repurposing them to avoid scrutiny. Others have removed diversity targets from remuneration and removed references on websites. It goes further too. Some US asset managers have dropped expectations for board diversity from their voting policies, whilst some proxy voting advisers have removed DEI considerations from their analysis and recommendations.
Meanwhile the US regulator delivered guidance that means if an asset manager holds more than 5% of a company, caution must be exerted during the voting and engagement process around AGMs. Those managers, usually the monolith index tracker houses, that own more than 5% of a company, need to ensure that they do not use this ownership power to influence a company.
With the new guidance it is now commonly interpreted that in any dialogue large investors are unable to ask the company to make a change, if it is linked to a voting outcome. This isn’t just about DEI or ESG related issues, but these are often the most contentious in the US. One can look at this in two ways: 1) it curbs shareholder rights or 2) it means that the largest players in markets have reduced influence which may be helpful for upholding market standards.
This proxy season, therefore, became interesting to view as a participant. Like any good investment manager, we report on how many shareholder proposals we have supported and categorise these by the type. But there are nuances that are perhaps lost at the headline level. If you look at a report and you see a lot of votes against environmental or social issues, you may think, well that manager is anti-ESG and anti-DEI. However not all shareholder proposals are created equal.
Let’s take two proposals asking for an audit of the company’s activity related to DEI. Both are seemingly asking for the same thing – quantitative information on how the company is behaving. However, dig into the actual wording and you will soon see that one will be focused on how having such policies is in some way discriminatory, whilst the other is seeking to quantify the positive impact of the company’s actions. It should be noted that this is a very particular US issue as we do not see the quantity of shareholder proposals in other markets.
So, what does this mean for us? Most obviously, investors must always read the shareholder proposals carefully and voting statistics are not proof of taking a certain stance. More than that, however, it is important to better understand how the political and legal backdrop in America will influence company and investor behaviour.
In our engagements with asset managers on their withdrawal from Climate Action 100+ the most compelling rationale came from a manager who explained that it faced an existential threat from potential litigation and outflows in the US because of being a member. While long-term progress must still be the priority, short-term political volatility cannot be ignored.
However, all is not lost; the Financial Times recently reported that a number of large European pension funds are moving assets from asset managers that were felt to be falling short on sustainability. Whilst at the Shell AGM, just over 20% of votes supported a shareholder resolution calling for disclosure in how its pivot into liquid natural gas (LNG) is consistent with its climate targets. Furthermore, investor demand for responsible investment remains high, although a littler lower than 2022’s zenith. The FCA’s recent Financial Lives survey found nearly three-quarters (72%) of investors wanted to ‘do some good as well as provide a financial return.’
Proxy season may have highlighted that responsible investment remains a divisive topic within political and corporate circles. But for investors, the demand and expectations remain as strong as ever.
