Three trends showing AGMs are no longer sleepy affairs on ESG issues
The landscape for corporate governance has seen a revolution over the past few decades. It used to be that annual general meetings (AGMs) were sleepy affairs where company resolutions were generally rubber-stamped by shareholders with little appetite to rock the boat. However, a series of governance crises and a concurrent evolution in regulation have encouraged asset managers and other institutions to deepen their expertise in the governance field – and driven corporates to improve their accountability to shareholders.
Traditional governance topics continue to develop, including the steady evolution of ‘say-on-pay’ votes across various geographies. Most notable, though, has been the integration of shareholder expectations around ESG.
Three major trends from the 2023 AGM season highlight how ESG topics are increasingly entwined in the meeting process and how shareholder voting has become a concrete avenue to enact meaningful stewardship of assets.
Executive pay and ‘social acceptability’
Globally, executive pay attracted renewed attention this year. After two financial years impacted by the COVID-19 crisis, we saw significant spikes in pay packages, mainly driven by an increase in quantum and windfall gains in some cases. Many responsible investors, including AXA IM, advocate for fairer compensation structures, especially in a time of economic crisis.
Our view is that the cost-of-living crisis presents a risk to investment performance due to its potential impact on worker productivity. In turbulent times, protecting the most vulnerable employees and insisting on retention could be key to navigate through the crisis as an employer.
To avoid widening the gap between average worker pay and the total remuneration available to executives, many investors specifically asked whether companies had taken steps to support their lowest paid employees and pushed for increases in executive base salary to be proportionally lower than the overall workforce.
While a large majority of UK employers took appropriate action, some were widely considered to be lagging and this translated into a notable increase in dissent at AGMs around remuneration-related items.1
There was another side to this debate, however. Some companies blamed large investors for encouraging a ‘skills drain’ by exerting engagement and voting pressure on executive pay policies. This raised the spectre of companies being put at a competitive disadvantage relative to US competitors, a point raised by London Stock Exchange chief executive officer (CEO) Julia Hoggett.2 Her comments were largely rejected by investors, but this need to rethink the difficult balance between fairness and competitivity is one of the key takeaways from the AGM season.
Fragmentation around ESG
We witnessed an important and challenging moment in how the world addresses ESG during the 2023 AGM season.
Whilst 2023 saw an increase (+12% from 2022) in the overall volume of ESG-related shareholder proposals, in the US, although the overall volume of ESG-related shareholder proposals continued to increase, so did the number of ‘anti-ESG’ proposals. Overall, we estimate to have voted on 54 anti-ESG proposals in H1, which was more than twice the number voted on in the first half of 2022.
Growing nuance on ESG is also reflected in voting results. In the US, average support on environmental or social shareholder resolutions has declined in a trend likely to reflect the increased prescriptiveness of the resolutions whilst the current debate coloured by political support for the oil and gas sector in certain states is likely to have made domestic investors more cautious, and potentially more reluctant to support ESG resolutions. A good illustration of the world divide on ESG lies in the results recorded on climate resolutions filed, year after year, by the non-governmental organisation, Follow This at all major oil and gas companies. This year the proposal submitted at France-based TotalEnergies recorded 30% approval,3 while at US company Chevron support fell to some 10% of investors from 33% a year earlier.4
We expect fragmentation around ESG to encourage ESG-focused investors to reiterate the evidence of links between ESG factors and long-term financial performance. In this regard, we remain steadfast in our ESG commitments and have increased our level of support for ESG resolutions in H1 2023.
Growing focus on voting activities
In June 2023, the European Parliament approved its draft of the Corporate Sustainability Due Diligence Directive (CSDDD),5 requiring companies to consider the potential negative impact of their activities on human rights and the environment. One provision directly targets the responsibilities of asset managers and investors, requiring them to engage with investee companies and exercise voting rights with the aim of inducing companies to minimise or end any adverse environmental or social impact.
Although the final version of the directive is still under discussion between European institutions, this development, along with the expansion of ESG-related offerings from asset managers, is likely to further emphasise scrutiny on asset managers’ stewardship approaches, often most clearly reflected in voting decisions. Asset owners are increasingly scrutinising how their managers cast votes on their behalf on specific resolutions, helping to address any potential misalignment between the wishes of pension savers and asset manager voting patterns.
We expect that evolutions in market guidance, stewardship codes, and sustainability-linked regulation will further focus on voting as a powerful lever for asset managers to maximise the success of their stewardship policies and secure sustainable outcomes.
In that context, we think recent regulatory moves in the UK and Europe – that would give firms more power to implement unequal voting rights structures – risk diluting the leverage of asset manager and institutional investor votes and in turn risk damaging the effectiveness of collective stewardship efforts.6