Institutional voting through the proxy process is a powerful tool for directing corporate governance policy and practices. An extensive research literature demonstrates the leverage that institutional investors have over governance choices, such as director elections, executive pay, and mergers and acquisitions.
In recent years, institutional investors have played an increasingly prominent role in determining the outcome of shareholder-sponsored ESG (environmental, social, and governance) proxy proposals. ESG proxy proposals generally seek to require a company to make investment or engage in activities for the benefit of stakeholders, with the cost of the activity funded by shareholders. Examples of ESG proposals include those that would require companies to reduce Scope 3 carbon emissions, report on gender pay gaps, report on the use of child labor in supply chains, and conduct racial equity audits. Whereas a decade ago, proposals such as these rarely received majority support, recent years have witnessed a surge in average support and number of proposals passing. According to data from ISS, average support for environmental and social shareholder-sponsored proxy proposals among S&P 500 companies increased from 18 percent in 2012 to 35 percent in 2021, while the number of proposals passed increased from 0 to 28. Large institutional investors have played a critical part in these outcomes because of the size of their ownership positions. A decade ago, major institutional investors rarely voted in favor of environmental and social proposals, but many have since adopted guidelines that are generally supportive of ESG.
The financial benefits of ESG, however, are not clearly established by the research literature. Various studies find that ESG increases, decreases, or has no discernable impact on corporate performance or stock-price returns. In aggregate they provide no clear direction to inform institutional investor voting. As a result, institutional investors make their own assessment in determining how to vote on proposals. To support an environmental or social proposal, they must determine that doing so is in the financial interest of their investor base or that their investor base supports ESG without a view to its financial impact.
Investor bases, however, are not homogenous in their views or objectives. They include individuals across age, wealth, and other demographic variables who might have different investment horizons, return objectives, and risk tolerances. While considerable research has documented that younger investors are significant drivers of ESG, less research has explored the views of older investors or those with little in terms of retirement savings.
In this Closer Look, we examine individual investor perception of ESG to gauge their concern for environmental and social issues, their view of whether fund managers should use their voting power to influence ESG practices, and their willingness to sacrifice return in the advancement of ESG objectives. We find that investors are not homogenous in their viewpoints and demonstrate significant divergence based on age and wealth, with the most vulnerable investors—those who are older and those with low levels of savings—largely opposed to ESG and unwilling to risk their assets to advance these objectives, in contrast to younger, wealthy investors who are much more supportive and willing to forfeit returns. Significant differences in perception of ESG also exist within and across fund companies. The results suggest that fund managers should consider the various viewpoints of their investor base and potentially split their votes on controversial proposals to reflect the divergent interests of beneficial owners.
Read the paper: ESG Investing: What Shareholders Do Fund Managers Represent?