Dive Brief:

• Shareholder proposals focused on changing environmental and social practices among Russell 3000 companies rose 52% this year compared with 2021, fueled in part by a push for corporate action against climate change, according to Freshfields.
• At the same time, “conservative” shareholder proposals — or those opposing changes to companies’ environmental or social practices — increased to 65 this year, a 150% surge compared with 2022, according to Freshfields, a law firm. “Anti-ESG [environmental, social and governance] trends have impacted all areas of shareholder engagement.”
• Shareholders during the 2023 proxy season submitted more proposals aligned with current “cultural trends,” including reproductive rights, workers’ rights, human rights, political contributions and environmental concerns, Freshfields said.

Dive Insight:

Republican lawmakers have stepped up their opposition to ESG activism in a series of hearings in the U.S. House this month, saying such pressure harms Main Street investors and thwarts company efforts to increase shareholder value.

“Last year ESG shareholder proposals continued their upward trajectory, as activist investors continue their assault on the returns of actual retail investors,” Rep. Bill Huizenga, R-Mich., said Thursday at a hearing by the Financial Services Committee’s subcommittee on capital markets.

In six hearings between July 12 and July 18, the Republican-controlled committee plans to probe the relationship of proxy advisory firms to shareholder activism, how environmental and social policy may influence financial regulation and whether ESG activism drives up the costs for insurance and housing.

Biden administration regulators, Democratic lawmakers and ESG activists are calling for more transparency on climate risk and other points of sustainability, triggering a backlash from Republican legislators, business organizations and more than a dozen state attorneys general.

“I am greatly concerned with the Biden administration's continued efforts to force non material environmental, social and political issues on Americans, companies and investors,” Rep. Ann Wagner, a Missouri Republican and capital markets subcommittee chair, said at the start of the hearing Thursday.

“The prioritization of shareholder proposals that deviate from the company's strategic direction or long term goals has transformed boardrooms into partisan platforms, where fringe political agendas overshadow sound financial management and business strategy,” she said.

The Securities and Exchange Commission seeks to achieve uniformity and consistency in corporate reporting on sustainability. The agency has postponed twice a final rule mandating that companies describe on Form 10-K their levels of greenhouse gas emissions and strategy toward reducing climate risk. It plans to release the rule later this year.

Democratic lawmakers Thursday pushed back against Republican efforts to torpedo the SEC’s proposal and tighten regulation of proxy advisory firms.

“This month we have a series of hearings designed to prevent shareholders from getting the information they want, to decide whether to invest and make sure those shareholders don’t affect the behavior of the corporations they own,” Rep. Brad Sherman of California, the subcommittee’s ranking Democrat, said at the start of the hearing.

“Where a material portion of the investment community finds something material, it is our job to get them the information and allow them to affect the corporate behavior of the companies they own,” Sherman said.

Each shareholder proposal imposes direct costs on a company exceeding $150,000 along with “public relations risks associated with being pressured to opine on controversial topics over which they have little control,” Chris Netram, managing vice president for policy at the National Association of Manufacturers, told the committee.

Netram called on Congress to reduce the influence of proxy advisory firms on corporate governance, “prevent activists from hijacking the proxy ballot” and “address the onslaught of ESG disclosure mandates by requiring public companies to report only that information which is material to their shareholders.”

During the 2023 proxy season, only about 1.2% of shareholder proposals focused on social issues received majority support, according to Elizabeth Bieber, head of shareholder engagement and activism defense at Freshfields. About 1% of shareholder proposals on environmental issues gained a majority vote.

“Even a 100% vote in favor of a shareholder proposal is advisory only,” Nell Minow, vice chair of ValueEdge Advisors, told the subcommittee. “Company executives can and do ignore significant, even majority votes.”

Moreover, “there is no evidence that ESG-based investment decisions are based on non-financial criteria,” she said. Referring to ESG measurements, she said, “no one has to use them, and they are purely market driven.”

SEC Chair Gary Gensler repeatedly has said that investors with $130 trillion in assets under management have asked companies to disclose their climate risks.