The Greening of Proxy Voting
Art by Tilda Rose
In mid-October, the Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) proposed new rules that put environmental, social and governance (ESG) factors firmly back into fiduciary investment analysis.
The proposed rules discuss both the selection of “a plan investment or investment course of action” and the “exercise of shareholder rights, including proxy voting.” Put simply, the proposal returns the proxy voting landscape to where it was prior to actions taken by the Trump administration—meaning plan fiduciaries may engage with the proxy voting process as part of their normal fiduciary duties.
Sources say this is as it should be, as larger investment managers and advisory organizations have made proxy voting an integral part of their businesses. John Hoeppner, head of U.S. stewardship and sustainable investments for Legal & General Investment Management America, oversees an 18-person team focused on stewardship activities. His organization, which manages $1.8 trillion globally, takes “very careful pains to have a highly bespoke custom strategy” in voting proxies, Hoeppner says.
The situation is similar at other firms—Hoeppner estimates that roughly 60% to 70% of the largest managers have custom proxy voting guidelines. However, these firms might also subscribe to proxy advisory services such as Glass-Lewis or Institutional Shareholder Services (ISS), the owner of PLANADVISER magazine. While a fund may state that its in-house proxy team does not default to a service’s voting recommendations, the services nonetheless often have considerable influence on voting patterns, he says.
Under the DOL’s proposal, funds or asset owners increasing their focus on ESG factors may require changes in their proxy voting disclosures and guidelines, according to Adam Shoffner, fund chief compliance officer at compliance and technology firm Foreside. For example, an asset owner that subscribes to a standard set of proxy advisory opinions may need to update the type of proxy advice it receives.
Gabriel Alsina, head of Americas, Continental Europe (ex-France) and global custom research at ISS, says ISS’ benchmark policy reviews environmental and social considerations when providing voting recommendations in some situations. ISS also offers specialty policies that focus on sustainability, socially responsible investing (SRI) and climate.
The DOL’s prior guidance had not diminished the importance of ESG issues to institutional investors, says Alsina, who adds that demand for environmental and social research has increased. “E, S and G have become inseparable to most institutional investors, providing distinct avenues to assess risk and preserve long-term shareholder value,” he says. “Proxy voting guidelines have evolved to add more environmental and social criteria into consideration, not less.”
More Changes Coming?
Beyond the regulatory environment, the proxy market is evolving. One recent example came in early October, when BlackRock Inc. announced that, starting on January 1, 2022, it would expand the proxy voting options available to its institutional clients invested in certain index strategies. Currently, BlackRock typically votes on behalf of its funds’ investors. According to a press release from the firm, approximately 40% of the $4.8 trillion index equity assets BlackRock manages for its clients will be eligible for these new voting options.
Per the announcement, clients will have a few options when voting: They will be able to vote proxies according to their own policies and transmit their votes using their own voting infrastructure; they may choose from a menu of third-party proxy voting policies; and they may vote directly on select resolutions or companies, among other capabilities. Those clients that wish to will be able to continue to rely on the BlackRock Investment Stewardship program, which votes proxies on behalf of clients.
Separate from the DOL action, the Securities and Exchange Commission (SEC) has proposed amendments to Form N-PX, “Annual Report of Proxy Voting Record of Registered Management Investment Company.” According to a legal update from Stradley Ronon, the proposed amendments are designed to enhance disclosure by requiring funds to identify the subject matter of the reported proxy votes.
From an adviser’s perspective, the information on the revised Form N-PX would provide greater insight into how closely a fund’s voting patterns align with the plan sponsor’s values. For example, if BlackRock’s change causes more fund managers to allow split proxy voting, it could create new opportunities for plans to vote their values versus defaulting to the fund manager.
It could also result in the development of proxy advisory services that focus on specific themes. Hoeppner says the industry is not there yet, but he speculates that proxy advisory services that have pro-environmental or pro-manufacturing perspectives, for instance, could emerge. Plan advisers could use these services to help their plan clients determine their votes.