Shareholders are making their voices heard to influence ESG performance.
Proxy voting isn’t a new concept, but the strategy has grown more popular at annual and special meetings to fuel investor activism around environmental, social and governance (ESG) progress.
“It has always been a tool for investors to speak their voice. As a shareholder you’re an owner of the company, so you have a say in the company. But it wasn’t that commonly used – this has changed,” says Solène Hanquier, head of ESG strategies at Desjardins.
How a company is perceived in the public eye has become a strong motivator. Many shareholder proposals are withdrawn before they ever go public because the potential of being seen as an ESG underachiever is often enough for companies to take action.
“When you submit a shareholder proposal, it creates a conversation with the company,” Ms. Hanquier says.
Fostering such dialogues between investors and companies can improve both ESG and financial performance. A recent study by investment boutique Mackenzie Betterworld found funds that employed engagement strategies over three- and five-year periods outperformed their respective peer groups.
Collective shareholder action has been particularly effective when it comes to climate change, says Rosa van den Beemt, vice-president of stewardship and responsible investing at BMO Global Asset Management.
“In the last 10 years, as ESG has become more prominent and sustainability issues have become more dire, investors have started to leverage their roles as stewards of their investments. They want those investments to still be around over the long term,” she says.
Passive investing has seen a substantial uptick in the past few years with vehicles such as exchange-traded funds (ETFs) entering the market. This has shifted the focus of investors from not only individual companies but the fund managers themselves.
“Over 60 per cent of our assets under management are in ETFs, so then the engagement and proxy voting becomes even more important,” says Ms. van den Beemt. “Our investors want to know that there is a team working for them on issues that they care about.”
As the relationship between shareholder interest and the environment has increased, efforts have emerged to leverage this demand into real corporate progress.
This July, Climate Engagement Canada (CEC) released its Focus List, laying out plans to work with the boards of 40 TSX-listed companies to set measurable emission reduction targets in their sectors. Forty-five per cent of these companies come from the oil and gas or mining sectors. CEC, which is led by several investor networks, aims to help drive Canada’s largest emitting companies on their road to net zero.
Increasingly, investors don’t want their money going into companies that will do harm, explains Kevin Thomas, chief executive officer at Shareholder Association for Research and Education (SHARE), one of the CEC’s founding groups.
Just because a company doesn’t have a spotless ESG record today doesn’t mean they should be written off, Mr. Thomas says. What shareholder engagement and proxy voting facilitates is the idea that any company can always improve.
“It’s not a question of whether you should be invested in a company, but whether they can be a better company,” he says.
The boards of Canadian public companies could themselves be in for a shakeup.
Desjardins Global Asset Management, BMO Global Asset Management and ISS (a proxy advisory firm) have updated their proxy voting policies to push for more diverse boards. Starting in 2023, the Desjardins policy states that boards must comprise at least 30-per-cent women, and at least one director must be a member of a minority group.
Two years ago, the Desjardins policy called for at least one woman to be on the board, “so this is a big evolution,” Ms. Hanquier says, and it’s an example of how shareholders have the ability to influence a company’s ESG performance.