What were the major trends of the 2024 proxy season on ESG shareholder proposals?

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As discussed in the Proxy Preview 2023 from the Sustainable Investments Institute, As You Sow and Proxy Impact, proponents of shareholder proposals don’t often expect to gain a majority vote—even if they did, the proposals are rarely binding.  Rather, the goal is frequently to raise the issue for management and shareholders and hope to secure a substantial enough vote in favor to convince management to take action or, as the WSJ reports, to “create pressure for companies to change [or] to take a position on hot-button issues.” The Preview identified as one of the biggest changes for the 2023 proxy season an increase in proposals identified as “anti-ESG,” and the Preview expected these proposals to increase, despite “the cool reception they receive.” According to a co-author of the report, “[c]omplex environmental and social challenges are not going away just because they prompt controversy….Proxy season will give companies feedback on reform ideas, but there’s no indication attacks on ESG investing are going to dampen investor appetite for facts and disclosure, which make the capital markets work better.”  (See this PubCo post.)

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In this paper, BlackRock Investment Stewardship explained the shift in its voting on E&S proposals that began back in the 2022 proxy season. In 2021, BIS “supported 47% of environmental and social shareholder proposals,” but 2022? Not so much. Why is that? According to BIS, climate-related shareholder proposals submitted in 2021 focused on “material business risks” or requested reports providing information that would be useful to investors to help them assess a company’s “ability to generate durable long-term value.” BIS considered these proposals “to be consistent with long-term value creation” and not undue constraints on management’s strategic efforts to create shareholder value. But many of the proposals in 2022 were “unduly constraining on management or were overly prescriptive as to information sought or timeframes. Others failed to recognize the progress made such that companies had largely met the ask of the proposal.” In voting on behalf of its clients, BIS said that it “supported 24% of E&S shareholder proposals in the U.S. [in 2022], down from 43% [in 2021], reflecting how these factors made these proposals less supportable in the 2021-22 proxy year.”  (See this PubCo post.)

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You may recall that, in January, ExxonMobil filed a complaint against Arjuna Capital, LLC and Follow This, the two proponents of a climate-related shareholder proposal, seeking a declaratory judgment that it could exclude their proposal from its 2024 annual meeting proxy statement. In summary, the proposal asked Exxon to accelerate the reduction of GHG emissions in the medium term and to disclose new plans, targets and timetables for these reductions.   Exxon said that it took this action in part because it viewed the SEC’s shareholder proposal process as a “flawed” system “that does not serve investors’ interests and has become ripe for abuse by activists with minimal shares and no interest in growing long-term shareholder value.” (See this PubCo post)

Then, the two proponents notified Exxon that they had withdrawn their proposal and promised not to refile; therefore, they said, the case was moot. But Exxon refused to withdraw its complaint because it believed that there was still a critical live controversy for the Court to resolve.  And the Federal District Court for the Northern District of Texas agreed—at least as to Arjuna.  While the Court dismissed the case against Follow This, an association organized in the Netherlands, for lack of personal jurisdiction, it allowed the case against Arjuna to proceed on the basis of both subject matter and personal jurisdiction, citing precedent that “a defendant’s voluntary cessation of a challenged practice does not deprive a federal court of its power to determine the legality of the practice.”  According to the Court, the “voluntary-cessation doctrine requires more than platitudes to render a case moot;…to moot Exxon’s claim, Defendants must show that it is ‘absolutely clear’ the relevant conduct ‘could not reasonably be expected to recur.’” But the argument continued, even after the decision was rendered, as Arjuna continued to submit letters to Exxon in which Arjuna “unconditionally and irrevocably covenant[ed] to refrain henceforth from submitting any proposal for consideration by Exxon shareholders relating to GHG or climate change,” and Exxon continued to contend that the letters were not enough.  (See this PubCo post.)  Finally, in June, after a hearing on the matter, the Court called a halt, issuing an Order that Exxon’s claim was moot and dismissing the action without prejudice. But not before the Court got in a few digs at Arjuna, activism and even at the SEC. (See this PubCo post.)

The case was not without collateral consequences for Exxon—or, at least, the threat of them. As reported in Reuters, proxy advisor Glass Lewis recommended that shareholders vote against one of Exxon’s directors, asserting that Exxon’s “unusual and aggressive tactics” in pursuing the litigation “could threaten to deter both investors’ willingness to submit and ability to vote on materially relevant issues.” Exxon didn’t take that lying down. Bloomberg has reported that, in a “ramp up in its attack on a shareholder voting system,” Exxon urged that Glass Lewis recuse itself from making recommendations on Exxon’s upcoming shareholder vote because, Exxon said, it failed to disclose that it was a member of the Interfaith Center on Corporate Responsibility, “which opposes Exxon’s lawsuit” and “is responsible for 40% of all shareholder proposals received over the past decade….Glass Lewis’ failure to proactively disclose the nature and extent of its relationship with ICCR appears to contradict its own internal policy and is inconsistent with the expectations of investors.” 

Likewise, reported Forbes, the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the U.S., citing the Exxon litigation, announced its plans to vote against the Exxon board, and the California State Teachers’ Retirement System (CalSTRS) followed suit in opposing two directors. Similarly, the New York State Common Retirement Fund announced plans to vote against 10 Exxon directors and the Illinois State Treasurer urged shareholders to oppose Exxon’s directors. Forbes quoted a statement from CalPERS: “Now, decades of shareholder rights are under threat from a lawsuit filed by the leaders of a powerful U.S. corporation, designed to punish two small groups that dared to speak truth to power. If successful, the legal action could diminish the role—and the rights—of every investor in improving a company’s bottom line. That’s why on May 29, 2024, CalPERS will cast our shareholder votes in opposition to all 12 members of ExxonMobil’s board of directors and its chief executive officer.”  And CalPERS went further, raising broader implications of the litigation: “But let’s be clear: This is not about climate change. The company’s decision to seek new, broad corporate power puts every issue on the table. If ExxonMobil succeeds in silencing voices and upending the rules of shareholder democracy, what other subjects will the leaders of any company make off limits? Worker safety? Excessive executive compensation? Might future shareholders who seek answers from a company’s leaders be ignored because of the legal precedent now sought by ExxonMobil?”  Reuters reported that Norway’s $1.6 trillion sovereign wealth fund, one of Exxon’s largest shareholders, stated that it would vote against the election of one Exxon director, and another article in Reuters reported that Democratic officials encouraged several asset managers to vote against key Exxon directors, contending that the litigation would “undermine shareholder rights.” At the same time, the article reported, Republican officials from 19 states urged major money managers not to vote against Exxon directors, contending that Exxon’s directors “deserve our thanks.”

The Exxon shareholder meeting was held on May 29. The objecting advisors and investors appear to have made a dent, but only a small one. As reported by Exxon, “[s]ubject to final tabulation of votes, which should not materially change the results, on average 95% of the votes cast were voted to elect, as Directors, the 12 nominees listed in the proxy statement. Director support ranged from 87% to 98%. Support last year ranged from 91% to 99% with an average support of 96%.”  (See this PubCo post.)