ESG reporting, AGMs and governance developments

The ever-evolving world of ESG can make it difficult for issuers to keep up to date and to know exactly how to approach various issues in a transparent and evident way. This blog covers topics that we have discussed with a number of our clients, along with some practical guidance that we suggest companies observe. Specifically, we outline the concerns that we are hearing from companies regarding ESG reporting, Proxy Advisors, AGM Voting and Corporate Governance.

What we’re hearing: ESG reporting

Companies are under an increasing amount of pressure to disclose ESG-related data from external stakeholders, such as regulators and investors. Companies are concerned with:

• The ‘labyrinth’ of legislation and reporting frameworks with which companies are having to comply with.
• The jurisdictional differences of the reporting frameworks being put forward by regulators.
• The concern with cost pressures and the fact that smaller-sized companies do not have the resources to be able to produce reports in line with regulatory expectations or those that match their larger cap peers.

However, the most common question that we get asked is: who is ESG reporting for? In our experience, different types of companies will prioritise different stakeholders – some will see ESG reporting as a box-ticking exercise for regulators, others as part of their investor engagement.

Things to consider

The key, when reporting, is to focus on the stakeholders who are the most important to the Company’s business model. There is an understanding amongst regulators and investors that getting to a certain level of reporting requires time, and that these stakeholders want the company to focus on the following:

• The board and senior management having clear roles and responsibilities,
• Collecting data that is material to the company’s business model, and
• Setting plans that reduce the company’s risk exposure/impact on their overall strategies.

On the other hand, (potential) employees are keen to see case studies on what the company has been doing, whether that is environmental or socially-driven.

The foundation of a good Sustainability report relies on conducting a materiality analysis that appropriately identifies how your key stakeholders consider these types of issues, in terms of their impact on the business (risks and opportunities) as well as the company’s impact on the environment and society (positive or negative impact).

For each material topic, regulations and standards help inform companies what – and how – they should report. Sustainability Reporting regulations have somewhat converged over the past couple of years (including the TCFD and ISSB) so that companies report in the following structure: Governance, Strategy, Risk (Impact and Opportunity) Management and Metrics & Targets. 

Read our ISSB memo, for more on recommended steps to producing a compliant report that aligns with regulatory requirements.

What we’re hearing: AGMs and proxy advisors

Owing to the nature of our work and the approach we take in providing advice to clients, many of our conversations focus on how proxy advisors construct their policies and how investors incorporate proxy advisor vote recommendations into their decision-making. Their concerns are centered around the approach and priorities of proxy advisors as well as difficulties in how to engage with them and highlight noncompliance with a ‘comply or explain’ ethos to receive positive recommendations.

Things to consider

Proxy advisors consider the views of their clients on an annual basis. This informs their policies which may guide their clients’ voting behaviour when also incorporating their own analysis. Georgeson’s ISS Policy Survey memo covered the process where ISS circulated a client survey to understand their views before updating its 2024 policy. Within this survey, ISS’s clients responded to a range of questions from human rights, executive remuneration as well as director independence classification.

We often recommend engaging with proxy advisors throughout the year so that issues can be put onto their radar in a timely manner, rather than during the AGM season where proxy advisors and stewardship teams time is stretched. We have found that successful engagement relies on building a continued relationship with them throughout the year, providing them with an understanding of the Company’s thinking and future strategy.

In short, build a relationship throughout the year, not just when you need to talk.

What we’re hearing: The impact of voting choice on AGM voting

Voting choice (when asset managers allow voting decisions to be made by their underlying clients) and how it may impact AGM voting is a hot topic. Although it is still very early days, our key takeaways from conversations with the market include:

• The offering of voting choice by asset managers can be viewed as a deflection of pressure on their outsized voting power.
• There is no specific disclosure of clients that opt into client voting choice, posing a challenge for companies when engaging with their shareholders.
• Companies may not get a defined view from asset managers as votes may be split across multiple shareholders which gives a fractured decision and more complicated engagement roadmap.

Things to consider

In our opinion, voting choice could cause a situation where:

• Shareholder democratisation with retail clients plays a larger role
• There is an increase in the influence of proxy advisors as institutional and retail investors, combined into pooled funds, apply various third-party voting policies
• Asset managers keeping the voting decisions in-house due to limited take up of voting choice among their underlying clients.

We are yet to see voting choice have a material impact on the voting at AGMs. However, this is a rapidly evolving area with a growing demand and expectation amongst asset owners to have their voting preferences taken into consideration.

In order to handle these issues, it is important for issuers to engage with investors and ensure that they understand how voting decisions are made by the investment manager and stewardship teams, and ultimately, who has the final vote decision. In addition, there are technologies that are enabling this transition which companies need to keep track of and should consider utilising in order to have more robust engagement with shareholders. Georgeson’s memo on Voting Choice covers these issues in more detail.

What we’re hearing: Corporate governance developments

Governance trends and how companies navigate through a myriad of policies set by proxy agencies and investors is a continued focus for all. We regularly get asked how companies can better understand their shareholders to know what their priorities are when engaging with proxies and investors, and how this could affect their voting patterns.

Some of the questions we get asked include:

• Who should we be engaging with at asset managers and who ultimately has the vote decision at the AGM?
• What are the key developments and trends in policy updates and what should we be focusing on?
• How does the Stewardship Code affect engagements?
• Why do stewardship teams promote “comply or explain” but do not incorporate the explanation into their vote decision?
• How best to engage with shareholders
• What does success look? Iis 80% approval seen as a good outcome?

Things to consider

Our advice is to get to know your shareholders. Direct engagements concerning the AGM should be focused on who has the final vote decision and sign-off, rather than asking questions about the investment manager’s support. This will therefore ensure that in the future, companies are engaging with the right teams and individuals who will be making the vote decisions.

An example of where policies differ is where directors may be overboarded. Proxy advisors and shareholders often provide different guidance. Some companies we engage with are concerned that it has become a tick-box exercise rather than really understanding the individual directors time commitment and the company’s strategy.

Working more closely with asset managers and their stewardship teams within to understand their policies and red lines, as well as being transparent in company reporting, will be highly beneficial for Companies. Georgeson can help companies ensure they are engaging with the best contacts and that the company’s reporting and communication aligns with investor and proxy advisor expectations.

Stewardship teams at asset managers need to produce a variety of case studies based on being active owners and the need to show that they have affected change through engagement. Teams will potentially hold back on the worst offenders to take credit for any change which can be reported positively. An awareness of not falling too far behind guidance is relevant to not become a case study.

 

This notice is provided by Georgeson for general informational purposes only and is not intended and should not be construed as legal, regulatory, financial or tax advice. Georgeson is not licensed or authorised to practice law in any jurisdictions and hence does not provide any legal advice and it does not hold itself out as doing so. Neither Georgeson nor any of its affiliates or contributors accept any responsibility or liability for the quality, accuracy or completeness of any information contained in this notice. It is important that you seek independent professional advice relating to the subject matter of this notice before relying on it.