The annual general meeting is the traditional opportunity for shareholders to voice their concerns at the companies whose shares they own. Environmental, social and governance (ESG) factors are one of the main focus points for the yearly ritual at which investors vote, usually by proxy (not in person).

However, an anti-ESG backlash in recent years has led to a pushback from some companies, sometimes with lawsuits to combat proposals demanding sustainability improvements, particularly regarding climate change and their readiness for net zero.

“The fundamental question that many shareholders seem to struggle with in the upcoming AGM season is not printed on the proxy card, yet it seems to be: What is your stance on ESG?” says Diana Trif, engagement specialist with Robeco’s Active Ownership team.

“The answer may seem straightforward, but it depends on one’s definition of sustainability. For Robeco, the answer is clear. ESG is about evaluating risks and opportunities to drive long-term value and help portfolio companies prepare for future challenges.”

“The assessment of a company’s commitment on ESG consideration often is an indication of forward-thinking management. Creating returns while managing material ESG issues is a priority for our clients, and is the starting point for our stewardship.”

“As 2024 has begun riddled with geopolitical tensions, cost-of-living pressures and the continuing climate crisis, the upcoming proxy season is likely to turn out to be the most challenging so far, both for investors and listed companies.”

Examples of the backlash came to the fore when the US oil giant Exxon Mobil sued its shareholders Follow This and Arjuna Capital to prevent their proposal calling for stronger climate targets from going to a vote. While the shareholders withdrew their proposal, Exxon still moved ahead with the lawsuit, arguing that “the current process to get proxy proposals excluded is flawed”.

“Stewardship responsibilities and shareholder rights are often introduced with the idea that they should be used to address risks and facilitate dialogue,” says Michiel van Esch, Head of Voting at Robeco.

“In that light, we view the shareholder proposal process as a key means of engagement between companies and their shareholders, allowing for a variety of ESG issues to reach the ballot and contribute to governance reform.”

And it’s not just climate. Some of the largest US companies have been threatened with legal action based on claims that their diversity, equality and inclusion (DE&I) policies constitute illegal discrimination. It creates a paradox, because at the same time, these same companies have faced calls from investors to advance their diversity efforts.

“We believe that the key to navigating these challenges is constructive dialogue between companies and their shareholders,” Van Esch says.

“Ongoing engagement both before and after the AGM can ensure that companies understand what the shareholder base expects from management, and that investors understand the challenges faced by their holdings.”

Meanwhile, a recent study that showed the world is way off track to meet the Paris Agreement, and that 2023 was the hottest year ever recorded. This will draw further attention to climate change during many AGMs, Trif says.

“Like with several other ESG topics, there seems to be a growing divide on the topic of climate change,” she says. “This was clear in earlier proxy seasons, yet evolving investor expectations on climate will have a resounding impact on the 2024 season.”

“On the one hand, we recently saw several major asset managers leave the Climate Action 100+ collaborative engagement initiative. On the other hand, we also saw several of their peers favoring divestment over engagement. This will make for an interesting proxy season where climate will be in the spotlight.”

In a similar vein of Say on Pay, there are now Say on Climate resolutions in which companies ask their investors to vote on their proposed transition plan. Having an inadequate one can lead to shareholders voting against the reappointment of board directors.

“For companies failing to start their transition planning and lacking targets and adequate governance structures in place to deal with climate risks, we have a responsibility to our investors to address that via our voting and provide companies with feedback,” Van Esch says.

This increased momentum on mitigating biodiversity loss is also set to appear on AGM agendas. Major US carmakers will face shareholder proposals asking them to either commit to a moratorium on sourcing minerals from deep-sea mining, or to publicly disclose their policies on it. Other companies will face proposals on single-use plastics.

“Generally, we support reasonable shareholder proposals requesting increased disclosures on biodiversity risk management and the mitigation of deforestation risks,” Van Esch says. “We expect companies with high exposure to deforestation risk commodities to address those risks within their operations and supply chains.”

Meanwhile, the old chestnut of executive pay is likely to rear its head again, following a landmark US ruling that invalidated a USD 55.8 billion payout by Tesla to its founder Elon Musk, after concluding that the "unfathomable sum" was unfair to shareholders.

“The cost-of-living crisis has led to a growing expectation that companies ensure that executive pay increases are established by considering the pay and overall conditions across the organization,” Trif says.

“In deciding our votes on remuneration proposals, we will continue considering a variety of factors across pay structure, transparency and pay quantum. We expect companies to create a strong link between pay and performance, and to have robust disclosure and strong processes to ensure that executives are rewarded in a fair manner.”