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Aug 11, 2022

Three important ESG factors reviewed for the 2022 proxy season

Changing guidelines on diversity and inclusion, climate change and Covid-19 & executive compensation

The proxy voting season is the time from April to June where many publicly traded companies host their AGMs. This is also the time when shareholders, or their delegated proxy, vote on issues put forth on the company’s ballot.

In the case of mutual funds, when investee companies have their AGMs, the asset manager may vote proxies on behalf of the funds’ unitholders. As a result, proxy voting can be an important aspect to consider when choosing an asset manager. Through proxy voting, asset managers can convey their views to boards and management, especially on governance-related practices.

Recently, we have seen an increasing number of environmental and social-related shareholder proposals, such as requests for enhanced disclosure on workforce diversity practices or climate-related risks and opportunities. For the 2022 proxy voting season, shareholders submitted a record 924 ESG-related proposals to US companies, according to data tracked by investor intelligence firm Georgeson.

Material ESG factors may have an impact on the long-term, risk-adjusted performance of these companies. During the proxy voting season, asset managers may have an opportunity to convey their views on some of these material concerns through their voting decisions on these ESG-related proposals.

At RBC Global Asset Management (RBC GAM), we make each voting decision independently, in accordance with our proxy voting guidelines. These custom guidelines provide an overview of the principles we support and how we will generally vote on particular issues. They are updated yearly to reflect our views on emerging trends in corporate governance and responsible investment.

A summary of the key changes we made to our guidelines for the 2022 proxy voting season can be found below.

1. Diversity and inclusion

Investors continue to request that issuers improve gender diversity disclosures and increase the representation of women on their boards. As of July 31, 2021, women held roughly 23.4 percent of board seats across all Toronto Stock Exchange (TSX) listed companies disclosing such information, up 2 percentage points from the year prior, according to the Osler Diversity Disclosure Practices report 2021.

Across the S&P/TSX Composite Index, women held 31.5 percent of board seats in 2021, according to Benefits Canada. Across S&P 500 Index-listed firms, women represented 30 percent of all directorships in 2021, up from 28 percent in 2020, according to a 2021 report from SpencerStuart.

With regard to racial and ethnic diversity, we have seen some signs of progress on boards, though much work remains to be done. Between May 2020 and May 2021, 33 percent of newly appointed independent board members across the S&P 500 Index were black, compared with 11 percent the previous year, according to SpencerStuart.

Update on 2022 guidelines: This year, we added a recommendation for boards to adopt policies, goals and timelines to improve the diversity of boards and senior management, with a specific focus on under-represented groups. In our view, board diversity should be aligned with the diversity of the communities in which the company operates and sells its goods and services.

The disclosure of board-level diversity is slowly improving, and we recommend that companies publicly disclose information on the diversity of their boards of directors. We encourage companies to also disclose information on the diversity of their executive and/or senior management teams and wider workforce.

2. Climate change

After another year of extreme weather events, in combination with the 26th UN Climate Change Conference, climate was a top priority during this proxy season. On March 21, 2022, the SEC issued a statement considering a proposal to mandate climate-risk disclosures by public companies. The proposed rules would require disclosures in the company’s annual public regulatory filings regarding its governance, risk management and strategy with respect to climate-related risks.

In addition, the rules would require disclosure of any targets or commitments made by a company, its plan to achieve those targets and its transition plan, if it has them, and its Scope 1 and Scope 2 greenhouse gas emissions. Some firms would be required to disclose Scope 3 emissions if deemed material to the company, according to the SEC.

Update on 2022 guidelines: We recommend that companies disclose in line with the recommendations of the TCFD. Last year, RBC GAM published ‘Our net-zero ambition’, in which we say we expect issuers in which we are invested to do the following:

•           Work toward identifying and publicly disclosing material financial and strategic impacts resulting from the transition to a net-zero economy

•           Establish credible targets and action plans aligned to the global ambition of achieving net-zero emissions by 2050 or sooner, where climate represents a financially material risk. We also expect them to demonstrate progress in meeting their commitments.

As a result of ‘Our net-zero ambition’, we have updated our climate change-related shareholder proposal guidelines to reflect these updates.

3. Covid-19 & executive compensation

In 2021, we saw record low say-on-pay support in Canada, indicating that shareholders may have become increasingly critical of executive pay misaligned with financial performance throughout the second year of the Covid-19 pandemic. In the US, there was similarly low support for these proposals, with a total of 63 Russell 3000 Index companies (including 18 S&P 500 Index companies) receiving less than 50 percent support, according to a recent report from White & Case.

Update on 2022 guidelines: We assess say-on-pay proposals on a case-by-case basis. We have maintained a dedicated section in our guidelines on the impacts of Covid-19 on executive compensation and, broadly, we recognize that many board compensation committees faced unprecedented challenges in adjusting and structuring compensation plans in light of the economic impacts of the pandemic. But additional disclosure is particularly warranted in instances where a company made significant cuts to its workforce or furloughed employees as a result of the pandemic.

Nureen Nagra

Nureen Nagra is an ESG Analyst on the Corporate Governance and Responsible Investment team for at RBC Global Asset Management (RBC GAM). The CGRI team supports RBC GAM’s investment teams in integrating material environmental, social and governance...
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