Guest Post: The Impact of ESG on Proxy Season and Proxy Voting
Companies in all industries face growing pressure to implement credible strategies for addressing environmental, social and governance (ESG) issues. ESG-focused investors have become an increasingly influential force for change that most companies can no longer ignore. In fact, a 2022 MSCI report states that, “ESG investing has become a prevailing part of investing,” and predicts that the trend will only grow stronger. But companies also face increasing regulatory scrutiny of ESG issues as well as legal risks, according to Business Law Today. Yet, with more reasons than ever to improve ESG disclosures, even well-motivated companies may not make full use of a basic tool for telling their ESG stories to their most active and engaged investors: the proxy statement. Fortunately, following a few fundamental principles can help companies integrate ESG factors into proxy statements and make a positive contribution to investor engagement.
What is a Proxy Statement?
Public companies in the U.S. are required to file a proxy statement with the SEC and distribute it to all shareholders prior to the company’s annual meeting (or certain special shareholder meetings). The statement provides relevant information about matters that will be addressed and voted on at such meetings, which investors need to make informed decisions when they vote on proposals and board elections. Proxy statements typically include information about the board of directors, executive compensation, shareholder proposals, management statements on specific matters or policies and proposals to add or remove members from the board.
Voting gives shareholders a say in how a company is run, but investors also have the option of assigning their voting rights to someone else to act on their behalf, a practice called proxy voting. Some institutional investors exercise voting rights on behalf of their investors, which can give these large institutions a significant influence. For ESG issues, proxy voting and institutional investors have become increasingly important, with activist investors attempting to change company policies, elect their preferred directors to the board or remove directors they oppose.
For all these reasons, the proxy statement is playing a more important role in corporate governance and can be a valuable tool for communicating ESG program highlights and initiatives. Not only can an effective ESG strategy mitigate potential risks, but it can contribute to achieving positive outcomes, as pointed out by Jim Cleary, executive vice president and chief financial officer for global healthcare company AmerisourceBergen. “There are also indirect benefits from ESG initiatives,” he said in a recent interview for Nasdaq’s ESG Trendsetters series. “Examples include being a more resilient business by being able to adapt to extreme weather events, becoming an employer of choice, winning long-term shareholders and lowering the cost of capital.”
So how can companies communicate their ESG practices using the proxy statement as a disclosure medium? One good place to start is by learning from companies that provide good examples.
Proxy Statement Examples
Some well-known companies have been leading the way for years, using proxy statements to highlight their ESG policies and how their principles align with business objectives. Among Fortune 50 companies, according to an analysis published by the Harvard Law School Forum for Corporate Governance, most already include information about a variety of ESG factors in their proxy statements, and the rate rises above 90% of companies for some topics.
Fortunately, support is available to help companies find the best way forward. Over the last decade, Nasdaq has developed a comprehensive suite of ESG solutions to help client companies achieve their objectives. The ESG Advisory Program leverages Nasdaq’s extensive in-house expertise, bringing together data, insights and a team of analysts to help clients prioritize and guide their ESG efforts.
While many solutions need to be tailored to the specific needs of a company, there are three general principles that should guide ESG disclosures in proxy statements, as recommended by the Harvard Law School Forum for Corporate Governance. First, companies should identify a peer group of comparable companies and evaluate ESG trends and standards among them. However, this principle needs to be interpreted for different situations. For example, Facebook’s peer group includes not only the most obvious names, such as Alphabet and Amazon, but also companies that might not normally be considered similar, such as Disney, Verizon, Comcast and Uber. A diverse peer group makes sense for Facebook because its multifaceted business model touches a variety of sectors. Apple defines a primary peer group of mostly tech companies and a secondary peer group that includes Nike and Coca-Cola, among others.
Continue reading on our website to learn about what to do and what not to do when including ESG in proxy statements.