The ESG Meritocracy: An Interview with Gabrielle Wolf, Director, and Craig Pais, Investor Engagement Manager, at Innisfree M&A

July 1st, 2021 11:39 AM Eastern Standard Time

Helped by emissions disclosure and targeted lobbying proposals, environmental issues have dominated this proxy season. What goals are uniting investors?

Gabrielle Wolf: This proxy season, environmental proposals passed in greater numbers than in prior years: in particular, proposals to reduce GHG emissions, proposals requesting a report on the alignment of lobbying activities with the Paris Climate Agreement and proposals requesting energy companies report on political contributions or lobbying payments dominated the landscape. In addition, institutional investors moved climate narratives beyond merely supporting shareholder proposals and voted against directors for a lack of oversight over environmental risks. Many institutional investors (including BlackRock, Capital Group and others) changed their proxy voting guidelines to enable them to vote for shareholder proposals that would push companies further in the right direction, even if said companies were already issuing comprehensive sustainability reports or otherwise being partially responsive to the proposal. As investor support coalesces around existing sustainability disclosure frameworks, the results of shareholder proposals and director elections in the 2021 proxy season demonstrate the need for companies to do more than clearly communicate sustainability performance data. Prominent institutional investors are pressing companies to track progress against quantifiable sustainability goals and show meaningful improvement.

“Say on climate” proposals have quite quickly become commonplace but with different results. How successful has the campaign been and how should companies position themselves?

Wolf: 75% of proposals to establish an annual “say on climate” vote, whereby shareholders would be given a non-binding opportunity to vote on an issuer’s progress against its emissions reduction goals, failed. This mediocre voting record is surprising in light of the “Big Three’s” stewardship priorities. BlackRock, Vanguard and State Street’s voting policies call for TCFD disclosures and require issuers to set forth a coherent strategy or transition plan to reduce material climate-related risks. Yet, State Street, other large institutional investors and pension funds expressed reservations about “say on climate” votes, worrying that shareholders will express their dissatisfaction with companies’ climate strategies through a non-binding vote instead of holding the board directly accountable. Indeed, some institutional investors started voting against directors of companies that failed to provide meaningful sustainability disclosures and have not pledged to do so soon. For a company to garner strong voting support for its directors, it must not only disclose clear policies to manage climate risk but also provide a detailed roadmap to achieve its stated climate targets – even (and especially) if those targets are not easily achievable. Companies should set measurable goals in their emissions reduction plans. Investors are ready to hold directors accountable for complete failures of climate risk oversight, but also demonstrated a willingness to accept less-than-perfection when a company shows it is taking action and improving as compared to prior years.

How important is the result of the Exxon Mobil proxy contest, and what has changed as a result?

Wolf: Much ink has been spilled on the importance of the outcome of Engine No. 1’s proxy contest against ExxonMobil, in which three of the four dissident nominees were elected to the board. Engine No. 1 emerged as a new fund in December 2020 and owned only 0.02% of the $250B market cap behemoth; yet, it won the support of three of the four biggest pension funds and the three largest index funds in the first major ESG-focused proxy contest. That said, heralding the win as the beginning of a green revolution ignores that Engine No. 1’s environmental arguments were integrally related to ExxonMobil’s fiscal bottom line. Engine No. 1 pushed Exxon to diversify from being an oil & gas company to an energy company not only for the sake of saving the planet, but also for the sake of shareholder returns. We’ve learned a dissident must demonstrate that ESG grievances drove share price declines in order to gain support from institutional investors. Said another way: the ExxonMobil vote showed that sustainability arguments can be extremely effective when they have strategic and economic merit.

Craig Pais: Engine No. 1’s success in the ExxonMobil contest shows just how significant ESG issues have become. The dissident’s victory is a warning sign to energy companies unprepared for the global energy transition: major pension funds and the largest asset managers are willing to hold boards accountable when it comes to financially material ESG concerns like climate change. We have seen that an activist can be incredibly successful – even with a relatively small investment – as long as it has a compelling case for change that resonates with shareholders. Engine No. 1’s campaign may very well encourage additional ESG activism. And the firm’s success is a reminder of the importance of regularly engaging with your shareholders, including small but vocal investors.

How significant have ESG factors been in “say on pay” revolts this proxy season?

Pais: Shareholders typically vote against Say on Pay proposals due to an insufficient linkage between the company’s financial performance and its executive compensation plan. Some investors are asking companies to link specific ESG criteria to executive compensation, but this movement is in its early stages. We have yet to see any shareholder proposals calling for such linkages pass; however, investors are beginning to include language in their voting guidelines articulating their general expectations when it comes to metric design. ESG metrics that are financially material, measurable, transparent, and linked to the company’s overall strategy are most effective. In the most recent proxy season, there was an increase in vote failures and a general decrease in support for Say on Pay proposals. But investor frustration was primarily directed at companies that exercised discretion to boost incentive plan payouts or modified incentive programs in a way that investors felt was inappropriate or unjustifiable (e.g., retroactively adjusting performance targets or time horizons). Companies that had employee layoffs and/or received government assistance faced more scrutiny this past season. Beyond simple fairness, optics and reputational risk are important with discretionary pay actions for executives. Where companies presented a clear business case and documented process for program adjustments, investors were more understanding.

Are EEO-1 disclosure or other diversity-themed proposals the next big thing in ESG? What are major institutional investors demanding when it comes to diversity?

Pais: Given the dire need to address global warming, climate change is commonly viewed as the top priority for investors, but diversity is a close second. In the most recent proxy season, 5 of 9 shareholder proposals passed calling for annual reports assessing diversity, equity, and inclusion efforts or to adopt policies to annually disclose EEO-1 data.

On board diversity, the “Big Three” index funds started voting against the chair of the nominating and governance committee if the company failed to disclose board diversity demographics or if its progress on board diversity fell behind market norms and expectations.

On workforce diversity, the three funds are calling for companies to disclose demographic data. Next year, State Street will vote against the Chair of the Compensation Committee at S&P 500 companies that do not disclose EEO-1 data. BlackRock expects companies to disclose EEO-1 data, and if it finds the disclosure to be inadequate, it will vote against directors responsible for human capital management. Vanguard asks companies to disclose workforce diversity measures at the executive, nonexecutive, and overall workforce levels, but it has not been as prescriptive in requiring the disclosure of EEO-1 data.

About Innisfree

Founded in 1997, Innisfree M&A Incorporated (New York), along with its wholly-owned subsidiary Lake Isle M&A Incorporated (London), is a high-stakes shareholder engagement firm, delivering shareholder intelligence, strategic advice and proxy solicitation services to the world’s leading corporations and investors when it matters most. Its integrated approach and unsurpassed analytics–ActiveIQ™–set Innisfree apart as the firm of choice. Innisfree provides expert advice on a wide range of matters, including shareholder activism, executive compensation proposals, corporate governance issues and investor relations.

With an experienced professional staff in New York, London, Pittsburgh and Richmond, VA, Innisfree has represented hundreds of clients in over 20 countries.


Innisfree M&A Incorporated
Arthur B. Crozier, 212-750-5833

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