Environmental, Social, and Governance

When BlackRock released the 2024 Global Voting Spotlight outlining its proxy voting activities for the year, advocates and media outlets were quick to point out that support for environmental, social, and governance proposals reached a new low. However, the raw numbers do not tell the full picture. A closer look shows a record high number of ESG related proposals, the overwhelming majority of which were either redundant, overreaching, violated laws, or were anti-ESG.

ESG is a type of investing where non-financial factors are considered in the investment strategy and management of a fund. These factors also drive decisions by corporate management that are attempting to meet demands. The result has been a wave of sustainability reporting and ESG reporting regulations throughout the world, and an accompanying backlash from conservatives and business groups that view it as overreaching. BlackRock CEO Larry Fink was an early adopter of ESG, but has recently stepped away from the term, while still pushing the principles.

In BlackRock’s 2024 Global Voting Spotlight, released on August 21, ESG related proposals fall into three categories: climate and natural capital and company impacts on people. Climate and natural capital relate to climate change and the environment, the “E” of ESG. These are often tied to the larger climate change movement and the Paris Agreement’s net-zero 2050 goal. The social category is labeled “company impacts on people” and includes impacts on “a company’s employees, its broader value chain, or the communities in which it operates.” Governance is still labeled governance, a catch-all for proposals relating to the operation of the company including “matters affecting shareholder rights such as proposals to amend governance structures, as well as proposals on executive compensation or capital/share classification structures.”

Notably, the 2024 Global Voting Spotlight focused on shareholder proposals, rather than management proposals. Management proposals originate from the board of directors of the company. They have been vetted and worked through a clear process. As a result, those tend to have a high passage rate. BlackRock approved 88% of the management proposals.

Shareholder proposals originate from individuals or organizations that own shares in the company. Each company has its own process for how a shareholder can introduce a proposal for approval by the shareholders.

Only 867 shareholder proposals were voted on in the proxy year, compared to 168,400 management proposals. Of the 867, 374 related to the governance of the company, 332 related to company impacts on people (social), and 161 related to climate and natural capital (environment).

BlackRock only voted in favor of 99 of the shareholder proposals, approximately 11.4% of them. This has been consistent as BlackRock states they generally follow management for the direction of a company, while shareholder proposals tend to be in conflict with management proposals. However, they cite an additional reason this year.

“Our analysis indicates that a relatively small number of shareholder proponents and advocacy groups filed the majority of proposals at U.S.-based companies – with fewer than 10 filing approximately 80% of proposals in the 2023-24 proxy year. Based on our review of proxy materials, these proponents often filed similar proposals at multiple companies, regardless of the specifics of their sectors or business models.”

This is consistent with global trends in climate activism. Climate friendly organizations are attempting multiple avenues to force companies to reduce greenhouse gas emission, including legal action, lobbying, and using shareholder rights as an avenue to impose climate friendly actions. The use of shareholder proposals has had minimal success, typically because the proposals are overly ambitious or do not fit the company.

The BlackRock report also stated, “However, we still observed many poor-quality proposals come to a vote, particularly on proposals that attempted to address climate and natural capital or company impacts on people-related issues. Consistent with last year, we found the majority of proposals addressing these topics were overreaching, lacked economic merit, or sought outcomes that were unlikely to promote long-term shareholder value. A significant percentage were focused on business risks that companies already had processes in place to address, making them redundant. In addition, as described in the prior section, we saw a greater number of proposals seeking to roll back company efforts to address material sustainability-related risks. As a result, our support for proposals on climate and natural capital and company impacts on people that we voted on globally remained low at ~4% (20 out of 493).”

Specifically addressing environmental proposals, the report divided them into three categories: value chain and Scope 3 emission reductions, climate-related corporate political activities, and natural capital-related proposals.

Climate-related risk disclosures and sustainability disclosures made by companies are divided into three scopes. Scope 1 looks at the direct GHG emissions of the company. Scope 2 includes GHG emissions from power sources used by the company to get energy. Scope 3 are all other GHG emissions relating to the actions of the company, including emissions from supplies and emissions from consumers.

Scope 3 has been controversial due to the massive amount of research that must be used to provide that date. While Scope 3 is the standard in the European Union, the U.S. Securities and Exchange Commission chose to not include it in their climate-related risk disclosure rule. As a result, most U.S. companies are not engaging in Scope 3.

Natural capital-related proposals were primarily focused on disclosures relating to single-use plastic. “BIS did not support these proposals, largely due to the fact that most companies with material risks related to these issues already had enhanced disclosures and/or policies in place which sufficiently addressed the asks of the proponents.”

Of the 161 shareholder proposals on climate and natural capital, BlackRock only supported 4 of the 161.

Further, BlackRock stated, “In addition, within this same set of proposals, we saw a greater number seeking to roll back company efforts to address material sustainability-related risks. We determined that these proposals were also overly prescriptive or lacked economic merit.” The vote totals did not indicate if the proposals were for or against ESG, only divided into category. As a result, votes that were in essence in favor of ESG are counted as a “no” vote in the ESG tally.

While the support from BlackRock was low, it was within their normal range. Any drop of support is tied to the reality that companies have aggressively adopted sustainability, climate change, and other ESG policies over the past few years. Proposals are also originating from within the company’s management, rather than shareholders, and are not included in BlackRock’s report. New proposals from shareholders are the outliers of the ESG industry, not the mainstream.