New ESG developments in 2024 proxy season suggest changes in shareholder engagement

Climate change, corporate political influence, and artificial intelligence (AI) were among the top environmental, social & governance (ESG) issues showing up in shareholder proposals during the 2024 proxy season, according to the Proxy Preview report.

In fact, climate change worries dominated the top shareholder votes at several major restaurant chains during proxy season, which traditionally occurs in Spring. The Accountability Board, a newly formed shareholder advocacy group focusing on the food industry, submitted resolutions addressing climate concerns at three companies and received at least 50% support.

At the same time, proxy trend expert June Hu, Special Counsel at Sullivan & Cromwell, coordinates the firm’s ESG practice and is part of the team that was drafting the firm’s 12th annual proxy season review, which looks at shareholder proposal across the S&P Composite 1500. In her work, Hu cites other significant developments, including that in Environmental issues, there was a differentiation in proposals with those focusing on only Scope 1 and 2 emissions receiving more support than those that included Scope 3, which focuses on supply chain emissions.

Further, under the Social rubric, Hu points out how the Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard, in which the court held that race-based affirmative action programs in college admissions processes were unconstitutional, has impacted shareholder proposals around diversity, equity & inclusion (DEI). And from the Governance angle, a recent decision by the Delaware Supreme Court has impacted shareholder proposals around advancing notice bylaws and the director nomination process.

New tactics emerge during 2024 proxy season

Beyond these significant developments concerning ESG-related issues, Hu says she sees two noteworthy themes from the 2024 proxy season that are likely to impact shareholder proposals and company-to-investor engagement going forward. The first is how investors are experimenting with new types of proposals and ways to bring issues to the table. Hu notes how unions led the way with the labor coalition, the Strategic Organizing Center, for example, launching an effort to replace three Starbucks board members, but withdrawing after progress was made during engagement.

The second, yet less noticed, theme focused on working around Securities and Exchange Commission (SEC) Rule 14a-8, which only allows one proposal per shareholder and provides a framework to allow a shareholder to request that a proposal be included in the company’s proxy statement, to be voted upon at the company’s shareholder meeting.

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“The divide between pro- and anti-ESG actions by some states will continue unless there is a Supreme Court decision that restricts state laws.”

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Unions submitted five proposals to mining company Warrior Met Coal, and the company voluntarily included all five shareholder proposals on the ballot. When the proposals went to vote, they achieved notable results. The successes at the Warrior Met Coal engagement point to proponents of proposals using a new method to get more than one issue up for a vote and potentially having more success than the typical SEC 14a-8 engagement.

Factors driving reduction of shareholder proposals

Some argue the reduction of ESG-related shareholder proposals in 2024 is evidence of decreased support for ESG issues among investors, but this is not completely accurate, Hu explains, adding that there are other factors influencing this reduction, including:

Increases in regulatory developments — In fact, ESG-related regulations are on the rise. In situations in which investors are asking a company to do more beyond the regulatory requirement, the company could be exposing itself to greater legal liability. As a result, some investors were more willing to let companies off the hook, given the expanded legal risk exposure.

Ongoing polarization increases uncertainty — The multifaceted nature of diverging approaches to ESG-related regulation between the United States and the European Union, and among the US federal government and various US states has left some investors hesitant to lean on either side of an issue.

Scrutiny on investors and diverging state laws — Interestingly, this lack of certainty is forcing more private engagement between companies and their investors. This increase in one-on-one dialogue has focused on whether the board and management could properly oversee companies’ courses of action.

To be sure, these emerging ESG issues and new trends and engagement tactics are driving changes in the corporate governance landscape. To manage through the complexity, Hu suggests that in-house counsel stay focused on the material and relevant issues that most impact the company while staying apprised of new legal and regulatory requirements, as well as case law that could impact the organization.

Staying informed is certainly easier said than done, of course. The combined complexity and uncertainty of the environment is making this process more difficult and time consuming. For example, the diverging regulatory approaches between the US and EU create differing regimes of mandatory requirements, Hu explains. In addition, there are emerging issues on the horizon, such as nature, biodiversity, and human rights in the supply chain that have yet to enter the mainstream in the US but are gaining traction in shareholder proposals in the EU.

Looking beyond the US election

As Hu looks out a few months into the post-election environment in the US, she does not expect the uncertainty to subside. “The divide between pro- and anti-ESG actions by some states will continue unless there is a Supreme Court decision that restricts state laws,” Hu says.

Yet, as the ESG landscape continues to evolve, companies and investors alike must navigate an increasingly complex and polarized environment. The future of corporate governance and shareholder engagement will likely be shaped by a combination of regulatory changes, emerging issues, and the need for more nuanced, private dialogues between management and stakeholders that requires adaptability and vigilance from all parties involved.

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You can find more on corporate governance issues around ESG, here.