In 2023, shareholders submitted a record number of environmental, social, and governance (ESG) proposals to company boards. The Sustainable Investments Institute counted as of August630 ESG proposals. This record submission volume also led to a record number of votes—Diligent Marketplace Intelligence reported that by June, companies had already surpassed the total number of votes for the entire previous year.

However, the increase in the number of votes did not bring a rise in support rates. According to Diligent data, support for environmental proposals fell from 34.2% in 2022 to 21.7%, while support for social proposals dropped from 24.5% to 17.7%.

One factor driving this decline is that political discussions surrounding ESG have spawned more anti-ESG proposals, which are also counted within the ESG proposal category. Combined with subpoenas issued by U.S. House Republicans and state-level officials,subpoenas, major asset managers have also begun to reduce their support for environmental and social shareholder proposals.

According to an October report from The Conference Board, the approval rate for all shareholder proposals in 2023 fell to 23% from 31% in 2022. This decline was not limited to the ESG sphere; approval rates for executive compensation and human capital management proposals also decreased.

Merel Spierings, a senior researcher at The Conference Board and one of the report's authors, warned that companies may face more proposals on "hot-button social and environmental issues" in 2024 than in 2023, even if some of those proposals are unlikely to gain majority support.

"Although shareholder proposal support rates declined during the 2023 proxy voting season, as the U.S. enters a federal election year, companies must prepare for more politically motivated proposals next year." — Merel Spierings

Large asset managers are the main drivers of the decline in support rates

The success of shareholder proposals is not always measured by whether they pass—all proposals are non-binding. Proposals that fail but receive substantial support can still signal investor interest to companies. Heidi Welsh, executive director of the Sustainable Investments Institute, told ESG Dive that proxy voting itself often means investors or advocates have already engaged with the company on an issue, but the company has refused to take action.

When assessing the decline in ESG approval rates, experts believe the focus should start with the voting decisions of the three major asset managers. Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility, told ESG Dive that the proxy voting patterns of large asset managers have regressed, and he believes political pressure is influencing the voting landscape on environmental and social issues.

"Given their philosophy—understanding climate risk and other systemic risks—and their voting records, this retreat is noteworthy. It may be that all the political pressure is making them reluctant to publicly support ESG resolutions." — Josh Zinner

As the largest asset managers in the U.S., BlackRock and Vanguard wield extraordinary influence during the proxy voting season. Julie Gorte, senior vice president of sustainable investing at Impax Asset Management, told ESG Dive: "They vote more than anyone else because of the sheer size of their assets under management."

In 2023, BlackRock's and Vanguard's support for environmental and social proposals plummeted from 20% and 12%, respectively, to7% and 2%. Both companies attributed the decline in support to proposals being too prescriptive, but Zinner and Welsh both refuted this claim, stating that last year's proposals were similar or identical to those in previous years.

Vanguard's August investment management report stated: "Our focus remains on identifying proposals that target financially material risks specific to a company, supporting proposals that may fill gaps in a company's existing practices (without interfering with company strategy and operations), and giving companies full flexibility in implementation."

A BlackRock spokesperson cited the company's own report, which noted that many proposals' demands had been "substantially satisfied" by companies, and that "among single-issue proposals, there has also been an increase in the number of demands that are not economically justified."

Taken together, the decline in support from these asset managers for environmental and social proposals has dragged down overall resolution support rates. The Harvard Law School Forum on Corporate Governance estimated that without the votes of the three major asset managers, the number of proposals receiving more than 40% support—considered the threshold for key resolutions—would have more than doubled from 28 to 59. Additionally, the report estimated that excluding the votes of the three major asset managers, the average support for "near-pass" resolutions (those receiving between 30% and 40% of votes) would have jumped from 34% to 44%.

"If you exclude them, the voting results don't actually change much." — Julie Gorte

Anti-ESG proposals increase, but support rates are extremely low

While the influence of large asset managers on ESG proposals has drawn significant attention, the increase in proposals requiring companies to take anti-ESG measures has received less notice. According to data from the Sustainable Investments Institute, the number of anti-ESG proposals has tripled over the past three years, rising from 30 in 2021 to 79 in 2023.

Two-thirds of these proposals involved abandoning diversity, equity, and inclusion (DEI) practices and anti-racism initiatives; another 25% involved corporate political engagement; and just over 10% were environment-related. The report stated that at least 52 would go to a vote, but none reached the support threshold required for resubmission within a year, with an average support rate of only 2.4%.

Welsh said the groups submitting these resolutions come from a mix of "coalitions," but all originate from the far right of the U.S. political spectrum.

"These are political groups; they are advancing a political agenda, not genuine investors. The capital markets do not rate these proposals highly." — Heidi Welsh

These proposals and their proponents draw inspiration from Republican elected officials, who have used the House, state legislatures, and state-level positions to make ESG investing and the application of ESG principles more difficult. Specific forms include subpoenas from the House Judiciary Committee, or laws boycotting companies that use ESG—a recent bill proposed in New Hampshire even makes the intentional use of state funds for ESG investing afelony punishable by up to 20 years in prison。

Politics and artificial intelligence will dominate the 2024 proxy voting stage

With more ESG-related and anti-ESG proposals expected, several issues have become recurring themes for the 2024 proxy voting season.

First, the ESG environmental and political landscape is inseparable in an election year. Although Florida Governor Ron DeSantis—who has a record of anti-ESG legislation—and businessman Vivek Ramaswamy—who has promoted "anti-woke" investing ideas—have dropped out of the Republican presidential nomination race, both have since endorsed the frontrunner, former President Donald Trump.

Gorte believes the political discourse will intensify before it subsides.

"I don't think this political discourse will be with us forever. It was chosen as a campaign issue, it will heat up this year, and it's driven by some well-funded people. So it won't disappear in the short term, but I don't think it will be a permanent feature of the financial industry." — Julie Gorte

Second, following the explosion of ChatGPT and other AI models, artificial intelligence is expected to become a major topic of board discussions this year. The U.S. Securities and Exchange Commission ruled this month that Disney and Apple cannot exclude AI-related proposals submitted to their respective boards by the AFL-CIO, so votes on these proposals are confirmed to take place at both companies.

Welsh and Gorte expect more AI proposals this year. Welsh said the AFL-CIO—the largest federation of unions in the U.S.—has submitted similar proposals to six companies.

However, AI technology also brings potential social issues such as data privacy, misinformation, and discrimination risks.

"AI can be both enormously helpful and enormously destructive. Unless you train the models very carefully, it will be increasingly difficult to use it to improve business." — Julie Gorte

Gorte noted that shareholder proposals typically lag national discussions by about a year, and she expects biodiversity issues to become the next wave of proposal topics to land on executives' desks.

Vanguard and State Street did not respond to requests for comment for this article.