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Investors and their membership organizations play a critical role in shaping (and many times, course-correcting) corporate behavior on ESG issues. Investor influence strategies often include dialogues with company management, shareholder proposals, and proxy voting, divestment, and public policy engagement. Proxy voting in particular can have a tangible impact on corporate financial and sustainability performance. Wondering why proxy voting is a driver of success when it comes to ESG investing, here’s why.
First, what is proxy voting and how does it work?
Proxy voting is a formal mechanism for investors to voice their support or concerns for a shareholder proposal. Exercising this right enables investors to essentially agree, disagree, or abstain on a vote for a shareholder proposal. Casting a vote is an effective mechanism to influence change since it allows the entire shareholder base to weigh in on an issue - it’s the power of the masses.
Proxy season tends to be in the springtime when most Annual General Meetings are held. This is often the forum for proposing shareholder resolutions on pressing issues, showing support for environmental and social shareholder proposals, and raising concerns over management or governance.
Why proxy enforces when it comes to ESG investing
Investors can leverage shareholder rights to drive a meaningful change in investee company behavior and improve the portfolio’s impact performance. Aneuvia engages with the management teams of investee companies on two aspects – quantity and quality. We ask a company to increase ESG-related disclosures (quantity) and consequently focus on improving its disclosed ESG performance (quality).
In our latest whitepaper, we explore the disconnect between a corporation’s commitment to ESG standards versus their reporting of outcomes and steps taken to meet those commitments. Given the effects of the COVID-19 pandemic, progress towards the United Nations Sustainable Development Goals (SDGs) is likely to be pushed back by another decade. Juxtaposed to this, many corporations continue to make vague sustainability commitments while chasing profits at the environment and society’s expense. Our whitepaper proves that as 2020 ends, no corporation will have achieved its zero-deforestation targets and none of the largest carbon emitters align with the Paris Agreement and remain elusive despite pressure from consumers.
This is where proxy voting can be a driver of success, transparency, and accountability. Sustainable institutional investors should vote against shareholder resolutions in demand of better ESG-related disclosures and effective social and environmental impact.
It’s become very easy for companies to merely associate with causes. Whether it’s posting a black square on Instagram in support of Black Lives Matter or creating a branded hashtag in support of climate change, cause marketing - the idea of supporting a cause - doesn’t necessarily suggest impactful activism, which is more about actively contributing to positive outcomes. Ultimately, businesses often talk ‘purpose’ without following through with action, and this is labeled as “impact washing,” “greenwashing,” or “slacktivism.”
The cost and backlash of ‘purpose hypocrisy’ are greatest to those who fail to acknowledge it. Today’s consumers are paying more attention to how brands respond in times of crisis. 46% of consumers report paying more attention to brand communications than they did pre-COVID. And silence comes with a price: 56% of consumers say they have no respect for businesses that remain silent on important issues (Edelman Trust Barometer).
This begs the question, “How can investors assess which investments are impactful enough?” In our latest whitepaper, we discuss the power of transparency to mitigate the possibility of “impact washing.’ The following four factors are key in helping investors decide whether their public equity investments are impactful enough:
- Intentionality: Frame the problem that you are solving for and demonstrate an intention to generate positive social or environmental impact through investments.
- Additionality: Seek to produce beneficial social or environmental outcomes that would not occur if not for the investment. Be consistent - and don’t capitalize on ‘moments in time’ - to demonstrate ongoing value.
- Active ownership: Engage with investee companies to improve ESG or impact-related disclosures, mitigate negative impact, and drive positive impact in communities through activism.
- Impact measurement: Commit to measuring progress and report regularly on social and environmental performance of impact investments.
The opportunity is bigger now than ever before, particularly as people look to businesses to create positive change. However, it is equally important that companies take action on the issues that they stand for, as opposed to the slacktivism of proclaiming mere association. The world is waking up to hypocrisy by calling out such companies and investors who claim purpose, but lack action. So, as investors, it’s important to signal the difference between trust and transparency.