Following the leader? The effect of ESG recommendations by proxy advisers

One role of a proxy adviser is to provide voting recommendations to larger investors (asset managers, pension and investment funds etc) to help them remain meaningfully engaged with how to vote their shares in investee companies. Recommendations often relate to issues which are particularly complex or technical, which it would otherwise be difficult for an investor with hundreds or thousands of shareholdings to track without assistance. Such issues include executive pay, corporate governance and increasingly ESG.

On 24 November Glass Lewis published its 2021 UK proxy paper guidelines which expressly included ESG matters, reflecting their mounting importance to companies and asset managers alike.

Glass Lewis’ two key ESG updates for 2021 are:

• Environmental and social risk oversight
  Glass Lewis will note a concern when FTSE 100 boards do not provide disclosure concerning board-level oversight of environmental or social issues. For post-January 2022 shareholder meetings, it will generally recommend against governance chairs who fail to provide explicit disclosure on the board’s role in overseeing such issues.
• ESG initiatives
  Glass Lewis will generally support shareholder proposals that seek to improve governance structures or promote disclosure that serves shareholders' long-term interests. It will assess proposals on environmental and social issues in the context of financial materiality.

It will be interesting to see how new guidelines affect voting outcomes in practice. In recent months there have been mutterings that investors too often default to “robo-voting” along the same lines as those recommended by their proxy advisers. If that is right, one might expect voting in line with these recommendations to immediately become (to misappropriate this year’s most tired trope) the “new normal”.

This is overly simplistic. A study earlier this year showed that the world’s largest fund managers voted differently to their proxy advisers’ recommendations around three-quarters of the time on environmental, social and political lobbying proposals. Such investors were found to routinely ignore their proxy advisers’ recommendations, opting rather to vote to block environmental and social action in investee companies. Such findings directly go against the allegations above of operating on autopilot when it comes to proxy firm recommendations.

It will be interesting to see whether voting behaviour quickly falls in line with these guidelines (and discrete recommendations Glass Lewis makes under them), which might substantiate a possible inclination to autopilot by those using proxy services but would be commensurate with the increased focus on getting ESG right. Alternatively investors may well continue to come to their own conclusions in respect of ESG risk management, irrespective of what their proxy advisers think.

It is interesting to note that although Glass Lewis’ updates did extend to remuneration – companies should retain discretion in relation to executive remuneration to ensure it aligns not only with company performance but also shareholder and employee experience – ESG was not expressly mentioned in their remuneration-related recommendations.