As more and more attention is placed on companies’ actions related to environmental, social and governance (ESG) issues, proxy voting is an important aspect to consider when choosing a fund manager.

Through proxy voting, asset managers can convey their views to companies when it comes to a company’s handling of material issues. As these investors often hold large investments in publicly traded companies, their votes can be quite influential and impact company actions directly. 

“Traditionally, most ballot items were focused on governance-related items, such as the re-election of directors and executive compensation,” Melanie Adams, Vice-President and Head, Corporate Governance and Responsible Investment, explains. “But over the past several years we have seen an increasing number of environmental and social-related shareholder proposals such as diversity practices and climate-related disclosures.”

The average vote in favour of environmental and social shareholder resolutions has been consistently increasing over the past 10 years¹, from 10% in 2005 to 29% in 2019.

Since proxy voting is resource intensive due to the need to analyze and research all ballot items, it can be challenging for many financial advisors or individual investors, as they may not have dedicated resources. However, for mutual fund investors, their asset managers do have these resources, and it is important to understand how they exercise their proxy voting power. The topic may come up as investors are taking a greater interest in ESG factors, and ESG discussions with their advisors are happening more frequently.

“Together, engagement and proxy voting can be effective stewardship tools for asset managers,” says Derek Butcher, Senior Manager, Corporate Governance and Responsible Investment. “Some managers prefer an engagement-led approach, always engaging with a board before escalating to voting action, while others may use proxy voting as a means to prompt engagement with a company.”

The best approach differs by manager, and even by fund, depending on factors ranging from position size in a portfolio company to the number of holdings owned in a fund.

Smaller firms may not have the resources to do a lot of direct engagement. However, they may have developed notable engagement programs, resulting in engagements with major companies despite their smaller size. They may also put forward shareholder ballot initiatives on issues of importance to their investors, or focus on collaborative engagements alongside like-minded investors to share their views with issuers.

For 2022’s Annual General Meeting (AGM) season, proxy voting will undoubtedly be climate change-focused, although executive compensation is likely to remain a popular topic, as it has been throughout the pandemic.

Investors who are interested in RI might appreciate how asset managers use engagement and proxy voting to incorporate ESG into their investment process. That’s just one approach. A challenge is finding the best approach to meeting your RI objectives.

For instance, some may want to invest in best-in-class ESG companies across all sectors. Others may seek more targeted thematic strategies, focused on clean technology, for example, while divesting from emissions-intensive industries such as oil and gas.

“Our view is to engage with a company first if we have concerns with its approach to a certain ESG topic before considering divestment,” Melanie adds. 

“We look at it as an opportunity to add value, because if a company has room to improve on a material issue, this could result in long-term financial performance for the portfolio.”

Melanie Adams, Vice-President and Head, Corporate Governance and Responsible Investment

RBC GAM strives to build relationships with company management and boards, impressing upon them why they should provide better ESG disclosure, such as carbon emissions reporting.

Engagement aside, proxy voting’s importance cannot be understated as it can send a message to management to follow through on issues deemed material by shareholders. That’s often seen with votes to re-elect board members and to support the approach to compensation. Asset managers can vote for or against these proposals, with their voting decision potentially impacted by progress, or lack thereof, they were seeking through engagement.

Together, engagement and proxy voting are a practical strategy for asset managers to hold companies to account on climate change, diversity and other issues that matter increasingly to investors – and to the performance of the portfolios they manage.