? Proxy Voting by 50 U.S. Fund Families Growing support for ESG Resolutions, but the largest lag behind. Morningstar Equity Research Key Takeaways: 6 February 2020 × Asset-manager proxy voting support for ESG-related shareholder resolutions has increased considerably over the past five years, with average support across 50 large fund families rising to 46% from 27%. Contents × Funds offered by Allianz Global Investors, Blackstone, Eaton Vance, and PIMCO were the most likely to 1 Key Takeaways support shareholder-proposed ESG resolutions in 2019, voting for these resolutions more than 87% of 1 Introduction 3 The Proxy Process and Asset-Manager the time. Stewardship × Five of the 10 largest fund families—Vanguard, BlackRock, American Funds, T. Rowe Price, and DFA 6 Five Years of Asset-Manager Voting Funds offered by Dimensional Fund Advisors—voted against more than 88% of ESG-related shareholder on ESG Resolutions 12 A Close-Up Look at Asset-Manager resolutions. Voting in 2019 × Large fund groups voting against ESG-related shareholder resolutions kept many of these initiatives from 24 Conclusion achieving majority support. Nineteen of 23 resolutions earning more than 40% support would have 26 Appendix A 27 Appendix B passed if supported by just one of the largest two asset managers. 29 Appendix C Introduction Jackie Cook Investor concerns over sustainability issues have increased significantly in recent years, driven by the Director of Manager Research increasing risks of climate change, the need to better serve all relevant stakeholders in order to drive +1 778-227-8221 [email protected] long-term shareholder value, and the growing materiality of reputation, with swift and severe consequences for companies that violate their social license to operate. Jon Hale Director, Sustainability Research Global Manager Research One manifestation of investor concern over climate risk is the emergence of the Climate Action 100+ +1 312-696-6093 Initiative, or CA100+, a global coalition of investors representing $34 trillion in managed assets (as of the [email protected] end of 2019). Two years into its five-year action plan, this coalition has coordinated engagements with the world’s most significant emitters of greenhouse gases. Members of the coalition have filed Important Disclosure shareholder resolutions at some of the largest emitters, both U.S. and international, calling for improved The conduct of Morningstar’s analysts is climate disclosures in line with the Taskforce on Climate-related Financial Disclosure, or TCFD, governed by Code of Ethics/Code of Conduct Policy, Personal Security Trading Policy (or an recommendations and, in the case of some U.S. electric utility and oil and gas companies, calling for equivalent of), and Investment Research transparency on lobbying activities. Policy. For information regarding conflicts of interest, please visit: http://global.morningstar.com/equitydisclosures Recent European stewardship code revisions place a stronger obligation on fiduciaries to actively vote proxies and disclose their voting records. The new U.K. Stewardship Code 2020 requires that asset managers must explain why they voted against a shareholder resolution (where the standard has been to explain votes against management’s position on an issue). Page 2 of 31 Proxy Voting by 50 U.S. Fund Families Proxy voting has taken on a new level of importance for investors globally—as a tool for effecting governance changes and as a visible indicator of how investment fiduciaries are positioning themselves on increasingly urgent sustainability issues. In January 2020 two highly significant announcements from the world’s largest asset manager, BlackRock , catapulted both the CA100+ and proxy voting to the forefront of investor efforts to achieve a sustainable global economy. On Jan. 9th, BlackRock announced that it was joining the CA100+, and on Jan. 15th, BlackRock’s CEO, Larry Fink, shared the view that climate risk is changing the fundamentals of the financial system and that BlackRock would be aligning its investment approach with sustainability, including how it votes proxies. Morningstar’s proxy voting coverage shows that investor support for resolutions addressing the governance of environmental and social risks, which we refer to here as ESG, concerns, reached a record high in 2019.1 ESG-related shareholder resolutions were supported, on average, by 29 percent of investor shares voted. The previous record high was 25% in 2018. These numbers belie the large number of successful engagements preceding proxy votes, resulting in many resolutions that would have likely 2 garnered strong support not coming to a vote. In fact, far fewer climate-related resolutions appeared on 3 company ballots in 2019 than the number withdrawn. 1 ESG is the acronym for environmental, social and governance. As the term is applied, it is typically used to refer to the governance—via transparency, board oversight, incentives and policies—of risks related to the human capital, reputational capital, environmental stewardship, climate risk, and so on. We have not included in this analysis resolutions that address shareholder rights or corporate governance arrangements without reference to social and environmental risks, such as share class voting rights; rights to call special meetings or act by written consent; takeover defenses; independent board chair; board declassification; board independence; senior executive stock retention, and so on. All resolutions covered in this analysis reference social or environmental risks in recommending governance or transparency improvements. 2 Hale, J. and Cook, J. 2019. “Proxy Season Shows ESG Concerns on Shareholders’ Minds.” Morningstar’s Sustainability Matters Column, Aug. 22, 2019. https://www.morningstar.com/articles/943448/proxy-season-shows-esg-concerns-on-shareholders-minds 3 Welsh, H. & Passoff, M. (2019). Proxy Preview 2019. As You Sow, March 2019. https://www.proxypreview.org/?redirect_to=https://www.proxypreview.org/2019/report-cover Page 3 of 31 Proxy Voting by 50 U.S. Fund Families Exhibit 1 16-Year Trend in Average Support for Resolutions Addressing Environmental and Social Issues Source: Morningstar’s Proxy Voting Database. Data as of 07/21/2019. Open-end and exchange-traded mutual funds collectively own a sizable portion of the U.S. equity market. As shareholders, the funds have the right, via the proxy process, to address issues with company managements that may affect shareholder value. They can do this by voting on management and shareholder proposals at company annual meetings, by proposing or cosponsoring shareholder resolutions, and by engaging directly with management about issues of concern. Through these forms of active ownership, the asset managers offering these funds have considerable power to promote sustainable corporate business practices. This report takes an in-depth look at how these influential stewards of U.S. equity capital—the large asset managers offering mutual funds to U.S. investors—have voted on shareholder proposals focused on sustainability, or ESG, issues. The Proxy Process and Asset-Manager Stewardship Proxy voting, engaging with corporate management, and filing shareholder resolutions are aspects of the stewardship ecosystem that defines how shareholder democracy works in the U.S. equity market.4 The Proxy Process Underpins Active Ownership The proxy process encompasses interactions between shareholders and investee companies enabled by the formal voting rights attached to shares. Leveraging their ownership and voting rights, shareholders may actively engage corporate management of investee companies in a dialogue about ESG risks. Many of these engagements are initiated or given greater focus when shareholders file resolutions. 4 A term coined by Novick, B., Edkins, M., and Clark, T. 2018. “The Investment Stewardship Ecosystem.”Harvard Law School Forum on Corporate Governance and Financial Regulation. July 24, 2018. https://corpgov.law.harvard.edu/2018/07/24/the-investment-stewardship-ecosystem Page 4 of 31 Proxy Voting by 50 U.S. Fund Families Engagement and proxy voting are complementary activities. Shareholder influence in company engagements is enhanced by the willingn ess of shareholders to vote in favor of shareholder-initiated proposals that address ESG risks, as well as to vote against executive compensation arrangements or board nominees in certain situations. The public nature of proxy voting has a broader impact, as it communicates investor expectations to other companies facing similar ESG risks, thereby scaling the impact of each vote. Large Asset Managers as Stewards of Capital Markets As ESG risks take center stage, expectations of investment fiduciaries are evolving. Asset managers are increasingly expected to be active owners, with respect to not only investee companies but also to the stability and resilience of the financial system itself. This expectation is articulated in the U.K.’s recently revised, and highly influential, stewardship code: “… asset owners and asset managers play an important role as guardians of market integrity and in working to minimise systemic risks as well as being stewards of the investments in their portfolios.” 5 The ongoing shift to passive investing has important implications for the exercise of active ownership by large asset managers. 6 As long-term and diversified owners, large asset managers are well-positioned to capture the benefits of active ownership. This is especially true of asset managers