In 2023, the number of environmental, social, and governance (ESG) proposals submitted by shareholders to company boards hit a record high. The Sustainable Investments Institute counted, as of August,630 ESG proposals. This record number of submissions also led to a record number of votes on ESG issues, with Diligent Marketplace Intelligence reporting that, as of June, the total number of company votes had already exceeded the full-year level of the previous year.

However, the increase in the number of votes was accompanied by a decline in shareholder support. 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 the rise in anti-ESG proposals due to political discourse surrounding ESG—such proposals are counted as ESG proposals in the statistics. Combined with subpoenas issued by Republicans in the U.S. House of Representatives and state-level officials,subpoenas, large asset managers have also begun to reduce their support for environmental and social shareholder proposals.

The Conference Board reported in October that the overall passage rate of shareholder proposals fell from 31% in 2022 to 23% in 2023. This decline is not limited to ESG issues; the passage rates for executive compensation and human capital management proposals also decreased.

In the same report, Merel Spierings, a senior researcher at The Conference Board, warned companies that the number of proposals on "hot social and environmental issues" in 2024 could exceed the record level of 2023, even though many of these proposals are unlikely to gain majority support.

"Despite the decline in shareholder proposal support during the 2023 proxy season, companies must prepare for more politically motivated proposals next year as the country enters the federal election cycle," Spierings said.

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

The success of a shareholder proposal is not always marked by a simple passage—especially considering that all proposals are non-binding. Proposals that fail but receive significant support can send a broad signal to companies about investor interest. In fact, proxy voting itself often means that investors or advocates have already engaged with the company on an issue, but the company has refused to take action, Heidi Welsh, executive director of the Sustainable Investments Institute, told ESG Dive, a sister publication of CFO Dive.

When assessing the decline in ESG support, experts believe that the proxy voting decisions of the three major asset managers should be examined first.

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 voting patterns on environmental and social issues.

"Given their investment philosophy—understanding climate risk and other systemic risks—and their voting record, this retreat is noteworthy. It may be that all the political pressure is causing them to hesitate in supporting ESG resolutions," Zinner said.

As the largest asset managers in the U.S., BlackRock and Vanguard have outsized influence during the proxy voting season. Simply put, "because of the sheer size of assets they manage, their voting weight exceeds that of any other institution," Julie Gorte, senior vice president for sustainable investing at Impax Asset Management, told ESG Dive.

In 2023, BlackRock and Vanguard significantly reduced their support for environmental and social proposals,dropping from 20% and 12% to 7% and 2%, respectively. At the time, both companies attributed the decline in support to proposals being too prescriptive. However, both Zinner and Welsh disputed this, stating that last year's proposals were similar or identical to those submitted in previous years.

Vanguard's investment stewardship report released in August stated: "Our focus remains on identifying proposals that address specific, financially material risks for companies, supporting proposals that may fill gaps in current company practices (without interfering with company strategy and operations), and giving companies sufficient flexibility in implementation."

A BlackRock spokesperson pointed to the asset manager's own report, which stated that many proposals' demands had been "substantially satisfied" by companies, and that "there has also been an increase in the number of single-issue proposals that do not require economic value."

Taken together, the decline in support for environmental and social proposals by these asset managers has lowered the overall level of support for resolutions. The Harvard Law School Forum on Corporate Governance estimates that without their votes, the number of proposals receiving more than 40% support—a threshold considered critical for resolutions—would more than double, from 28 to 59. Additionally, the report estimates that the average support for "near-pass" resolutions (those receiving more than 30% but less than 40% of votes) would jump from 34% to 44%.

"If you exclude them, the voting situation hasn't actually changed much," Gorte said.

Anti-ESG proposals increase, but support remains low

While the impact of large asset managers on ESG proposals has received widespread attention, the increase in proposals requiring companies to take anti-ESG measures has been less noticed. According to the Sustainable Investments Institute, the number of anti-ESG proposals has tripled over the past three years, with 79 proposals submitted to companies in 2023, compared to 30 in 2021.

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

Welsh said that these resolutions were submitted by a range of different groups, but all originate from the far right of the U.S. political spectrum.

"These are political groups; they are advancing a political agenda. They are not investors, and the capital markets do not rate these proposals highly," Welsh said.

These proposals and their submitters have taken cues from Republican elected officials, who use their positions in the House of Representatives, state legislatures, and state-level offices to make ESG investing and the application of ESG principles more difficult. This includes forms such as subpoenas from the House Judiciary Committee, or laws that boycott companies using ESG—including a recent bill in New Hampshire that would make the intentional use of state funds for ESG purposes afelony, punishable by up to 20 years in prison。

Politics and AI will become central topics on the proxy voting stage

With more ESG-related and anti-ESG proposals expected to come, several themes have begun to emerge as ongoing focal points for the 2024 proxy voting season.

One is the inseparable link between the ESG environment and the political environment in an election year. Although Florida Governor Ron DeSantis and businessman Vivek Ramaswamy—the former with arecord of anti-ESG legislation, and the latter who haspromoted "anti-woke" investment philosophiesand dismissed ESG initiatives—have both dropped out of the Republican presidential nomination race, they have since thrown their support behind the frontrunner, former President Donald Trump.

According to Gorte, the political discourse is expected to become more heated before it subsides.

"I don't think this political discourse will be with us forever. I think it was chosen as a campaign issue, it will intensify this year, and it's driven by people with deep pockets. So it won't disappear quickly, but I also don't think it's a permanent feature of the financial industry," Gorte said.

The second is that artificial intelligence is expected to become a major topic in board discussions this year, following the explosive growth of ChatGPT and other AI models. Votes on AI guidelines and practices have been scheduled atDisney and Apple, after the U.S. Securities and Exchange Commission ruled this month that these two companies cannot exclude proposals submitted to their respective boards by the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO).

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

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

"AI has enormous potential to be both helpful and harmful," Gorte said. "Unless you train the models very carefully, it will become increasingly difficult to use it in ways that improve business."

Gorte said that shareholder proposals typically lag national discussions by about a year, and she also expects that how companies treat biodiversity will become the next proposal frontier on executives' desks.

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