The 2021 proxy voting season did not disappoint in reflecting the ever-increasing focus on environmental, social, and governance (ESG) issues more broadly in capital markets. Climate change dominated the ballot with both increasing numbers of shareholder proposals in the United States and the arrival of ‘Say on Climate’ in Canada. Let’s look at some noteworthy lessons from 2021 as many companies prepare to engage with shareholders, prior to the 2022 AGM season.

Unprecedented support for shareholder proposals

Climate change, the political upheaval of 2020, and the ongoing COVID-19 pandemic continue to make their mark on investors’ engagement and voting activities. Support for environmental and social proposals continues to grow, as evidenced by the record 35 shareholder proposals passed in the United States. In Canada, two shareholder proposals passed in 2021, both endorsed by management. One was a ‘Say on Climate’ proposal at CP Rail (85% support). The other successful shareholder proposal, at TMX Group, received 98% support for producing a report dealing with impacts on Indigenous communities, employees, and suppliers.

Asset managers are under increasing scrutiny for their voting practices, and investors broadly are putting additional resources towards stewardship as interest in ESG continues to grow.

Climate Change remains the dominant voting issue

Investors are increasing their attention on climate change risk in their portfolios, as evidenced by record numbers of climate-related proposals filed in 2021 in the U.S. and a record number of proposals passing (84 and 12, respectively). The proposals are evolving past requesting enhanced disclosure, with more proponents pushing for stronger, more ambitious commitments from companies, such as setting net zero targets by 2050 and interim targets. An increasing number of climate lobbying proposals were also on the ballot in 2021. Most of these passed, showing a concerted desire for companies’ lobbying activities to be transparent and aligned with their public climate-related commitments and statements.

A new addition to the climate agenda this past year in Canada was the push for an annual advisory vote on climate issues, coined ‘Say on Climate’. This follows the example set by Say on Pay, granting shareholders an opportunity to opine on a company’s climate strategy via an advisory vote put forward by management.

Say on Climate proposals will likely be seen in greater numbers in 2022, but the experience so far has been mixed. Based on the voting results from shareholder proposals requesting an advisory vote on a company’s climate strategy, the average support was 33%. However, if management places the climate vote on the ballot, we see overwhelming support above 90%. The issue has largely split the investment community, with some seeing it as a positive way to encourage the development of ambitious climate plans. The other side has argued that management plans will simply be rubber-stamped and that voting against directors is a more effective approach to express dissatisfaction with Board oversight of climate risk.

I would expect investors to give this additional consideration for 2022 and potentially refine their thinking. Conversations with management and Board directors are likely to feed into this, so companies should think about their position on it in anticipation of being asked.

Diversity, Equity, and Inclusion proposals reaching beyond gender

Social issues are not taking a back seat to the climate crisis, as voting activity related to diversity and inclusion also escalated this season. This is especially true in the United States, where political upheaval and a national focus on racial equity and justice has contributed to increased attention from investors on diversity, equity, and inclusion (DEI). This is against the backdrop of investors’ publicly stated intentions to become more active in encouraging gender diversity on corporate Boards through voting rights. 

The 2021 voting season saw more U.S. proposals asking companies to publish reports about their diversity efforts and to disclose EEO-1 survey data. Companies were also pushed to adopt targets regarding Board diversity and to report on gender and racial pay gaps in their organization.

A notable shareholder proposal that appeared on several ballots in 2021 asked companies to conduct a racial equity audit. This is an independent analysis of their business to identify any practices that have a discriminatory effect or contribute to systemic racism in society. Citibank was the first firm to announce that it will conduct a third-party race equity audit, after a shareholder proposal on the topic received 39% support.

While environmental and social issues took a lot of the spotlight in 2021, it is important to remember that compensation concerns are still prevalent, as the COVID-19 pandemic continues. In response to the pandemic, investors will remain critical of major changes to compensation that do not appear reasonable. In 2021, six Canadian companies experienced a failed say on pay vote – the highest number in the last several years. Changes to compensation must be carefully considered and, if pursued, well-articulated for investors when casting their votes.

Planning for 2022

While it is hard to predict precisely what is to come for next year’s AGM season, one of the best ways to prepare is to proactively engage with your shareholder base. One of the key features of the Canadian landscape is the relatively low level of shareholder proposals that come to a vote compared to the United States. This can largely be attributed to constructive and beneficial relationships between investors and their shareholders. According to ISS, over half of all shareholder proposals filed in Canada during 2021 were withdrawn before reaching the ballot.

I have seen companies get more proactive on their investor outreach to spot emerging trends before they reach the ballot, which is smart and will pay off in the long run for those who invest the time and energy.

Jennifer Coulson is Vice President, ESG, Public Markets, at BCI.