Corporate governance: Investor sentiment is not clear this AGM season

Every annual general meeting (AGM) season has traditionally brought with it a few symbolic moments for sustainable finance – events that serve as broader indicator of the market’s mood when it comes to environmental and social issues.

The most obvious, perhaps, was the showdown at ExxonMobil’s 2021 annual meeting, in which shareholders dramatically elected board members with climate transition expertise, against the wishes of the firm’s management, and at the expense of long-standing executives.

Last year, on the back of high profile public debate about racial justice, requests for racial equity audits rose nearly 300% year-on-year, according to proxy advisor Minerva. The record-breaking support those requests received from shareholders was a clear indication of the growth in interest around social issues at asset managers.  

But this year, investor sentiment is less clear.

“It’s proving hard to distil strong signals from this AGM season,” said Simon Rawson, deputy chief executive officer of campaign group ShareAction, and head of its corporate engagement work. “It feels like there’s a moment of reflection happening across all camps: those that support responsible investment and those that are sceptical of it.”

Rawson said that one of the only themes to come through strongly at the ballot so far is the growing polarisation between Europe and the US.

While European investors are continuing to voice their support for climate resolutions (institutional investors including ERAFP, MN and PGGM have even filed proposals this year), the growing pressure on investors in the US to abandon their sustainability efforts has been accompanied by voting results that Rawson described as “well below expectations based on last year”.

Last week, just 4.8% of Morgan Stanley’s shareholders supported a proposal asking it to publish a phase-out plan for new fossil fuel financing. Last year, a similar proposal at the bank received 8.3%. The proposal was also filed at Bank of America, where backing fell from 11% in 2022 to 7% this year; and Citigroup (12.8% to 9.94%), among others.

Will Martindale, co-head of sustainability at London-based asset manager Cardano, said the divergence is not just along regional lines.

“The market seems to be splitting into three,” he noted.

There are investors like Dutch pension fund ABP, and the UK’s National Employment Savings Trust (NEST), which are starting to exclude high emitters – namely fossil fuel companies – that seem inconsistent with their climate commitments. “So they’re not able to be involved in the shareholder process,” said Martindale.

Then there are what he describes as “high conviction universal owners” who are stepping up their stewardship activities – investors like Brunel and USS, who made headlines this AGM season by announcing their plan to vote against the reappointment of the chair of BP on climate grounds.

“And then there are other investors that seem to have quietly dropped away, which is disappointing,” he concluded. Martindale wouldn’t be drawn on which investors those were, but the underwhelming votes at US banks indicates it’s a growing trend.

BP’s annual meeting last month should have been one of 2023’s bellwether moments for sustainable finance. Shareholders threw their weight behind the oil major’s climate plan at last year’s AGM, accompanied by much fanfare, but BP has since reneged on the plan in light of changes to near-term economic conditions.

Some assumed that investors would make an example of the firm this year, by supporting a climate resolution tabled by Dutch campaign group Follow This, which was largely ignored in 2022 in favour of the board’s own proposal.

But in reality it received less than 17% of the vote up less than 3% on last year. Shell also faced the Follow This resolution at its AGM this week, where it received 20% support.

“But if you look at tactics as opposed to content, it seems that investors might be favouring votes against directors over shareholder proposals this season – at least in Europe,” Rawson pointed out.

It’s true that BP saw a notable 10% vote against its chair, Helge Lunde, driven in part by its row-back on climate. The chair of Shell received a 7% vote against his re-election, with some investors like the Church of England Pension Fund saying climate as a driver for that decision.

“The increasing votes against directors is an interesting trend, and one of the few heartening themes to come through so far this voting season,” said Rawson. “The problem is that it’s not a single-issue vote, so you never quite know what the result really signals.”

For some investors, it may be an escalation: taking action against board members could be a sign that shareholders are beginning to see sustainability issues as integral to corporate governance. For others, it could be a de-escalation – a way of making ESG motivations less visible. It’s impossible to prove that a vote against a director has been done in pursuit of environmental or social objectives (unless the investor says so), and that could be helpful for those wanting to keep a low-profile in the ever-polarising US sustainable finance landscape.

But Martindale worries that there might be a more fundamental regression this AGM season, after years of progress through initiatives like Climate Action 100+, Glasgow Financial Alliance for Net-Zero (GFANZ) and the climate campaign at Exxon in 2021.

“It felt like they were signs that the investment community was collaborating to make real progress,” he said. “But that’s started to drop off in the last year or two, and I get the sense there doesn’t seem to be quite the levels of conviction there were three or four years ago when it comes to stewardship and voting. This year we’ll see whether that’s a broader trend.”

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