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Opinion: shareholder activism is the latest partisan battleground
University of California, Berkeley
Paul Hastings, Washington, DC
Shareholder activism is a well-trodden path for investors seeking to advance public companies’ environmental, social, and governance (ESG) objectives. In 2021, the Securities and Exchange Commission reduced barriers to shareholder activism, which was followed by a record number of shareholder proposals during the 2022 proxy season. But ESG proponents are not the only ones taking advantage of liberalised proxy rules. Some shareholders, hoping to defend corporate America from what they perceive as the influence of certain, ‘liberal’ social causes, are becoming increasingly active. In fact, anti-ESG proposals doubled from 2021 to 2022.
The 2023 season shows this trend continuing, with a surge of 74 anti-ESG proposals for annual meetings held before 31 May, up from 43 over the same period last year. Most of the anti-ESG proposals this year have asked companies to assess the ‘risks’ of diversity and inclusion programmes.
The sharp increase in anti-ESG proposals follows the larger movement against so-called ‘woke capitalism’, which has gained traction at the US state level. 29 states have enacted or proposed legislation prohibiting state funds from either considering ESG risks or doing business with institutions that consider ESG factors in investment decisions. In February, the US House of Representatives saw the formation of an ESG ‘working group’ with the goal of ‘reining in’ market actors who impose, what the group terms, their ideological preferences on consumers and shareholders.
At the corporate level, it is not clear the extent to which the nascent anti-ESG movement will undermine efforts to incorporate factors such as climate science and diversity into investment evaluation metrics. So far, the impact of reactionary shareholder proposals has been limited. Of 529 ESG-related shareholder proposals in 2022, anti-ESG groups filed only five per cent. Those resolutions received 3.5 per cent support on average, and none passed.
Moreover, anti-ESG proposals are rarely substantive, with many deliberately mirroring pro-ESG language to challenge efforts to bolster environmental reporting and diversity policies. For example, many recent diversity-related proposals put forward by shareholder activists recommend that companies undergo racial equity audits. In response, think-tanks such as the National Center for Public Policy Research put forward mirror-image calls for racial equity audits at the same companies, designed to uncover what they term anti-white bias. The strategy to copy ESG language has caused confusion, leading corporate governance advisers to recommend that companies identify the supporters of each proposal in proxy statements.
With the number of both ESG and anti-ESG proposals rising each year, companies may begin to feel proposal fatigue. But given the heightened political pressure on businesses, companies should expect these issues to persist. Staying silent about controversial issues can be risky, especially if it means ignoring the perspectives of other stakeholders such as employees and customers. Still, business executives may wish to avoid accusations of promoting certain agendas if those agendas consider factors that fall outside of the traditional financial sphere.
But ignoring ESG risks can come at a price, and many companies understand that social and environmental forces drive risk to businesses’ bottom lines. Insurance companies, for example, have pushed back against state laws that could prohibit them from considering climate-related changes in weather patterns when underwriting and pricing insurance products. Banking associations in certain states have also vocally opposed anti-ESG laws, citing the limitations they place on banks’ abilities to make the most prudent investment decisions. Other pro-business actors criticise the laws for their overreach, finding the blacklisting of institutions to be antithetical to free market principles. To some, ESG is seen as a political opportunity, but to those focused on the sustainability of a business, ESG is a tool for understanding long-term risk.
At the moment, anti-ESG shareholder activism contains more bark than bite. But its growth could trigger backsliding and cause companies to downplay their corporate ESG activities. While pro-ESG shareholder activism is no silver bullet, studies have demonstrated its efficacy in a few crucial ways. Environmental shareholder activism increases companies’ voluntary climate change risk disclosures, improving transparency around greenhouse gasses and environmental risks. Even proposals that don’t make it in the proxy advance conversations about long-term corporate sustainability in the C-suite and the boardroom. Further, shareholder proposals are an effective means of improving the gender diversity of boards. ESG is an important tool in the stakeholder capitalism movement, and efforts to undermine it should be taken seriously. At the very least, the rise in anti-ESG activism signals a more politicised and contentious corporate environment, which is less conducive to doing business.
 Andrew Edgecliffe-Johnson & Brooke Masters, ‘Political proxies: conservative activists file record shareholder proposals’, Financial Times, 27 March 2022, www.ft.com/content/827f1510-8494-4736-a0dc-e5cdcd0e9a64
 Clara Hudson, ‘Conservative Shareholder Proposals Rise Amid Anti-ESG Rumbles’, Bloomberg Law, 31 August 2022, https://news.bloomberglaw.com/securities-law/conservative-shareholder-proposals-rise-amid-anti-esg-rumbles
 Dieter Holger, ‘Companies Face Another Packed Year of Sustainability Shareholder Votes’, The Wall Street Journal, 22 March 2023, www.wsj.com/articles/companies-face-another-packed-year-of-sustainability-shareholder-votes-94c2c8bb
 Witold Henisz, ‘How to Confront the Anti-ESG Campaign’, Knowledge at Wharton (30 August 2022), https://knowledge.wharton.upenn.edu/article/how-to-confront-the-anti-esg-campaign/.
 Geoffrey Burgess, Sue Meng, Andrew Levine & William Regner, ‘House Republicans Announce ESG Working Group,’ Debevoise & Plimpton, 15 February 2023, www.debevoise.com/insights/publications/2023/02/15-esg-weekly-update
 Marc Filippino, Colby Smith, Frederica Cocco & Andrew Edgecliffe-Johnson, ‘The rise of conservative shareholder activism’, Financial Times, 11 April 2022, www.ft.com/content/b8096a7c-781e-483d-873a-67e8feda2c72
 Heidi Welsh, ‘Anti-ESG Shareholder Proposals in 2023’, Harvard Law School Forum on Corporate Governance, 1 June 2023, https://corpgov.law.harvard.edu/2023/06/01/anti-esg-shareholder-proposals-in-2023/
 Filippino, supra note 8.
 Welsh, supra note 9.
 Martin Lipton & Carmen Lu, ‘Navigating the Current ESG Landscape: Recommendations for the Board and Management,’ Harvard Law School Forum on Corporate Governance, 23 May 2023, https://corpgov.law.harvard.edu/2023/05/23/navigating-the-current-esg-landscape-recommendations-for-the-board-and-management
 Andrew Winston, ‘Why Business Leaders Must Resist the Anti-ESG Movement’, Harvard Business Review, 5 April 2023, https://hbr.org/2023/04/why-business-leaders-must-resist-the-anti-esg-movement
 Justin Worland, ‘The Business Community Is Terrified of the ESG Backlash. It’s Just Starting to Fight Back’, Time, 5 April 2023, https://time.com/6267352/esg-business-backlash/.
 Caroline Flammer, Michael Toffel & Kala Viswanathan, ‘Shareholder activism and firms’ voluntary disclosure of climate change risks’, Strategic Management Journal, 25 May 2021, https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.3313
 Christine Wiedman & Carol Marquardt, ‘Can Shareholder Activism Improve Gender Diversity on Corporate Boards?,’ 2015 Canadian Academic Accounting Association Annual Conference, 1 December 2014, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2538909