Stewardship in the Age of ESG: Voting Practices of the Top 65 Investors

Just over half (52%) of the 65 largest global investors hold a public position on the issue of linking ESG metrics to executive compensation, according to a new SquareWell Partners study. 

Split on ESG Metrics. The study confirms that although some large European investors actively promote the use of ESG metrics in pay plans (including climate metrics,) others are more guarded. A common concern is that companies will use non-financial metrics to simply increase pay, so many investors demand “materiality, transparency and quantifiable goals.” As the study’s author noted, investors “view these measures as potentially free money, so if used, they need to be defended.” 

Go deeper. The report, which examined a variety of publications by the top 65 investors (about half of which are North American), found the following: 

• Stewardship. Most large investors (55) have a dedicated stewardship team, which reduces their reliance on proxy advisors. ISS serves as primary proxy advisor to 51 of the 65 investors, but most investors on the list claimed their reliance on proxy advisor recommendation is low. The Center has found that small to mid-size investors are more likely to follow ISS recommendations closely.
  
  
• Assessment. Almost all large investors (other than Sovereign Wealth Funds) publish their own voting policies, which are required reading for companies in their portfolio. Vanguard even publishes seven regional voting policies.
  
  
  1. Combined Chair/CEO. The report found that of the 50 investors who disclose a policy on combined Chair/CEO roles, two thirds vote on a case-by-case basis rather than automatically voting against the combined role.
     
     
  2. Stock Ownership. 29 of the top investors publish specific positions on ownership guidelines, while 17 (including Federated Hermes) call for share retention post-employment. 
     
     
• ESG and Activism. Amid a plethora of ESG ratings, data providers and initiatives, investors mention MSCI and Sustainalytics most often, and 54 of the top 65 support the Taskforce on Climate-Related Financial Disclosures (TCFD). 
  
  
  1. HCM. 27 investors published expectations on social topics such as supply chain (see State Street) and cost of living (see AXA). 
     
     
  2. ESG Proposals. Somewhat unusually for large investors, 13 of the top 65 submitted an ESG proposal in the past 3 years (see Norges Bank on emission reduction).