Regulation could stifle stewardship effectiveness

Investor stewardship is beginning to come of age. Look no further than recent global media to see that the environmental, social and governance (ESG) interests of investors are starting to be accounted for in ways they never have before.

When it comes to climate change in particular, investors are demanding tangible action from companies and their voices are being heard. The 2021 annual proxy season was unprecedented, with a record number of climate and environment related shareholder proposals put forward. Climate Action 100+, the largest ever investor-led climate engagement with more than 570 investors responsible for over $54 trillion in assets under management, has led much of the charge.

In May, we saw a dramatic shake up at ExxonMobil where a majority of shareholders voted to replace members of the board with a selection of candidates experienced in clean energy and energy transitions. This was following concerns that the company was moving too slowly to align its strategy with global climate action.

Meanwhile at Chevron Corporation’s annual general meeting (AGM), 61 per cent of shareholders voted in favour of proposals for Scope 3 emissions reductions targets. In addition, a first-time proposal for climate-related financial risk reporting nearly passed, with 48 percent of the vote.

In Australia, the case of Rio Tinto has also been notable. Institutional investors echoed global outrage at the weak response from Rio Tinto following their destruction of sacred Aboriginal caves, destroying 46,000-year-old shelters, and lobbied to remove senior executives. At the company’s AGM in May, more than 60 per cent of investors voted against the pay-outs to former executives, notably including the former CEO.

It’s clear there is a shift underway, with investors stepping up their active ownership practices.

As shareholders of companies around the world, investors have a fiduciary duty to use their influence to maximise overall long-term value. This includes the value of ESG assets, upon which returns, and their clients’ and beneficiaries’ interests ultimately depend.

At PRI we’ve been working with global investors on Active Ownership 2.0 since 2019, an aspirational standard to help usher in a more ambitious era of stewardship, whereby investors seek outcomes, prioritise systemic sustainability issues and collaborate to overcome issues of collective action. With major deadlines for action on the Sustainable Development Goals and the Paris Agreement looming, we only see this trend continuing to accelerate.

Capital is truly global, and therefore investors are and will continue to respond to international corporations with both individual and collaborative stewardship practices. Yet, not every government has grasped the inevitability and importance of this global trend. My home country of Australia is the prime example, where the Treasury recently issued proposals that would create ineffective and burdensome disclosure obligations on proxy advisors, including in the advice they provide to Australian superannuation funds.

Proxy advisors play a valuable role in the market – enabling more informed voting in a cost-effective way. Many institutional investors use proxy advisory firms’ recommendations to supplement their research and understanding of multiple, detailed and sometimes dense proxies for their portfolio. They generally provide high quality, independent analysis, linked to voting recommendations based on institutional investors’ priorities.

Without confidence in the impartiality of proxy firms’ recommendations, investors — particularly smaller and mid-size investors — would lack the capacity to synthesise the relevant information they need to determine how they will vote their proxies and would have difficulty fulfilling their fiduciary duties as a result.

Of course, more transparency and accountability for proxy advisers and how investors vote is welcome. There has been a tendency among some proxy advisers to overlook how environmental and social factors affect long-term shareholder value, and a failure to scrutinise boards for these failures. However, measures such as those proposed in Australia focus more on reducing their ability to challenge management and hold boards accountable – the precise opposite of what is needed.

Yet, the Australian government isn’t the first to venture down this road, with similar Trump-era reforms having previously been enacted in the US.  Although they are already moving to rectify this retrograde policy which is impeding investors. The Securities and Exchange Commission (SEC) chair and staff from the division of corporate finance are currently considering whether or not to recommend the Commission revisit the interpretation, guidance and rules and in the meantime have decided not to enforce them until their review is complete. By failing to learn lessons from their predecessors, the Australian Treasury’s reforms could place complex and ineffective disclosure obligations on superannuation funds that would not result in any material benefit and may add additional costs and confusion to the detriment of members.

At PRI we’ve submitted a response to the Treasury’s consultation, with key recommendations on how to move forward. Our more than 4,000 signatories, who represent, A$133 trillion in AUM,  190+ of whom are based in Australia, have committed in line with our second principle, to be active owners and to incorporate ESG issues into their ownership policies and practices. It’s our belief that investors should be using all the stewardship tools available to them to their fullest potential—including voting—to advance the systemic issues that are most critical to investors and their beneficiaries.

With a distinct lack of empirical evidence as to their rationale, it’s clear the Treasury’s reforms would constitute a backward step for responsible investors.