A new year means new investor voting guidelines, giving issuers an indication of how their shareholders will hold them to account on a variety of corporate governance topics.

67 investors have made 1,087 material policy changes to their voting policies ahead of the 2023 proxy season, making clear that climate change and diversity continue to be priorities, and that executive pay should align with employee compensation more broadly.

Sitting on the fence

The rise of the anti-ESG movement in 2022 has resulted in leading asset managers being forced to balance the wants of pro-ESG clients while also trying to prove to regulators and elected officials that their investment decisions are helping emissions-intensive industries flourish.

These unusual circumstances have yielded more muted policy changes from leading investors at least as far as environmental reporting is concerned.

In December, the world’s largest fund manager announced it anticipated “few changes” to its 2023 voting policies and engagement strategy. BlackRock CEO Larry Fink’s March annual letter adopted a similarly neutral tone, stating “it is for governments to make policy and enact legislation, and not for companies, including asset managers, to be the environmental police.”

Vanguard’s policy updates were similarly passive, noting that it expects “climate-competent” boards to seek diverse perspectives regarding managing material climate risk. State Street Global Advisors (SSGA) CEO’s letter outlined that while recently “there has been a great deal of discussion in the market regarding environmental, social, and governance (ESG) issues, it has consistently viewed these issues through a “lens of long-term value creation.”

“We did not see the need to make any material changes for 2023 to the policies that our internally managed equity funds follow,” John Galloway, principal and global head of investment stewardship at Vanguard, told Insightia. “Vanguard funds do not seek to dictate company strategy or operations, nor do we look to use the fund’s votes to address any issue besides shareholder value creation.”

State Street Global Advisors has yet to publish a 2023 voting policy update but in his letter to portfolio company CEOs, its own Chief Executive Yie-Hsin Hung put climate risk management second in a list of four priorities for 2023, alongside effective board oversight, human capital management, and diversity, equity, and inclusion disclosures. The investor’s biggest change in priorities is that it will “1) no longer use numerical limits to identify overcommitted directors, and instead 2) vote against the chair of the nominating and governance committee at companies in the S&P 500 that do not disclose their internal policy on director time commitments.”

The go-getters

The big names in the investing world may have been hesitant to enhance their expectations ahead of the 2023 proxy season, but this certainly wasn’t the case for proxy advisers and other fund managers. Diversity and climate change ranked as the first and second most common policy change areas this year, with 86 and 59 material changes made, respectively.

For the first time this year, Glass Lewis will recommend voting against governance committee chairs at companies in the Russell 1000 and the S&P/TSX Composite indexes (the latter representing the top 250 Toronto-listed companies) in instances when the company is deemed to have failed to provide “explicit disclosure” concerning board oversight of environmental and social issues.

Nominating committee chairs at Russell 1000 boards which fail to feature at least one director from an underrepresented community, in terms of race, LGBT status, or gender identity, will also face negative recommendations from the adviser.

An increasing number of investors are also aligning their expectations with internationally recognized ESG reporting frameworks and initiatives. BlackRock’s only material policy modifications suggested that reporting in line with Taskforce for Nature-related Financial Disclosure (TNFD) recommendations “may prove useful for some companies” and companies “encouraged” to publish their climate-related reporting “sufficiently in advance of their annual meeting.”

Border to Coast revealed it will now vote against oil company chairs where companies fail to meet one of the first four indicators of the Climate Action 100+ (CA100+) benchmark. The U.K. fund manager will also oppose sustainability committee chairs in the banking sector where the company is deemed to have “materially failed” the first four indicators of the Transition Pathway Initiative’s (TPI) sector framework, which largely concern adopting decarbonization targets and climate policymaking.

Regional nuances

Of the 193 European policy changes made this year, 41 concerned either compensation or the cost-of-living crisis.

Allianz Global Investors revealed it will now vote against directors of large-cap European companies that fail to link executive pay policies to ESG performance metrics, noting that “many companies fail to adopt long-term incentives that are truly aligned with the interest of shareholders by rewarding outperformance, not merely market movement.”

$459-million fund manager Abrdn’s U.K. policy updates cited the cost-of-living crisis as a reason for companies to be more cautious when setting executive pay, stating “we would be concerned by reputational issues arising from decisions made in these unusual circumstances and may make this a factor in our voting decisions at relevant annual meetings.”

87 policy changes were made for Asian-listed companies in 2023, 10 of which concerned corporate climate-related reporting.

This focus on sustainability is nothing surprising, given that Japan recently made Task Force for Climate-related Financial Disclosure (TCFD)-aligned reporting mandatory for Prime market-listed companies, while 2022 was also the first year that Hong Kong Exchange (HKEX)-listed companies were required to publish reports disclosing the board’s oversight of ESG-related risks and opportunities.

Starting this year, BlackRock will look to Japan-listed companies to disclose any strategies they have in place to “mitigate” risks associated with a range of climate-related scenarios, it said. Companies are also encouraged to report on biodiversity concerns, given the “growing materiality” of nature-related risks and opportunities.

“Initially, Japanese issuers didn’t really listen to investor requests for enhanced climate-related reporting and oversight,” Oki Matsumoto, chair of Japan Catalyst, told Insightia in an interview. “But now, some leading asset managers base their investment decisions on various ESG indices, so issuers are keen to comply with ESG requirements to attract these more ESG-conscious investors.”