Q2 2024 Sustainable Investing Trends
A Different Kind of Ballot Season
With elections happening in at least 64 countries this year, the political landscape will surely shift and surprise us before year-end. However, we’re not delving into politics here. Instead, our discussion revolves around proxy season and the votes cast at this year’s annual general meetings (AGMs).
SEC Rule Change Brings More Shareholder Proposals
In 2022, the U.S. Securities and Exchange Commission (SEC) updated its approach to companies’ “No Action” filings, leading to a rise in shareholder proposals. However, having more proposals doesn’t necessarily equate to better outcomes. With this surge, backing for proposals focused on environmental and social issues has declined. We’re not surprised.
Instead of concentrating on disclosure, we see proxy proposals evolving to become more prescriptive, more values-based, lower in quality and increasingly inclined to seek commitments. As a result, the support for these proposals is declining. Companies have taken a more proactive approach in recent years by engaging with their investors before AGM season. This enables companies to address items on the ballot that may raise concerns collaboratively rather than relying solely on the proxy process.
Anti-ESG, Labor and AI Proposals Rising
We are likely to see more shareholder proposals this year, with a higher percentage of them going to a vote at annual shareholder meetings, but with weaker support for many of them. As companies and institutional investors confront both pro- and anti-ESG pressures through many of these proposals, there is an opportunity to engage in constructive discussions that can help to create real value.1 In addition to explicitly anti-ESG proposals, we are also seeing a growing focus on human capital, labor relations and artificial intelligence (AI).
Another trend we will watch closely this year is the potential implications of increased pass-through voting. In this process, asset managers give investors who hold shares in a fund a way to direct their proxy votes for the individual stocks held in the fund. Pass-through voting has historically been reserved for institutional investors. However, over the past two years, some investment managers have made this option available to individual investors who hold shares in a fund. We see the benefits and drawbacks of this practice. While pass-through voting isn’t universally available or adopted by individual investors thus far, it’s an area we will watch closely.
Social issues continue to take up a growing piece of the AGM agenda and currently outpace the number of shareholder proposals focused on climate change. However, the nature of these issues has shifted from previous years. We’re seeing less focus on diversity, equity and inclusion and more emphasis on human capital management and labor relations. We also note that in companies that have historically received shareholder proposals focused on cyber risk, the focus has shifted to AI.
Interestingly, on the climate side of proxy season, there has been a significant drop in proposals focused on “time-based” fossil fuel or carbon-emission reduction targets (e.g., Company X will reduce its fossil fuel use/carbon emissions by Y% by 2030.) Separately, we’re noticing a rise in proposals related to reducing the use of plastics.
Maximizing Shareholder Value: Our Approach to Investment Decisions and Proxy Voting
At American Century Investments, we make investment decisions and vote proxies consistent with our clients’ investment objectives and in a manner that our portfolio managers believe will maximize shareholder value. Our robust investment-led research framework guides our proxy voting approach by measuring a company’s practices versus industry peers. After proxy season 2024, we’ll share some thoughts on the proposals that received the most support, those that fell flat, and any surprises that emerged.
¹ The Conference Board, "Fasten Your Seatbelts for the 2024 Proxy Season," News Release, March 13, 2024.
Many of American Century’s investment strategies incorporate sustainability factors, using environmental, social, and/or governance (ESG) data, into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider sustainability-related factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh sustainability factors when making decisions for the portfolio. The incorporation of sustainability factors may limit the investment opportunities available to a portfolio, and the portfolio may or may not outperform those investment strategies that do not incorporate sustainability factors. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.
Sustainable Investing Definitions:
Integrated: An investment strategy that integrates sustainability-related factors aims to make investment decisions through the analysis of sustainability factors alongside other financial variables in an effort to make more informed investment decisions. A portfolio that incorporates sustainability factors may or may not outperform those investment strategies that do not incorporate sustainability factors. Portfolio managers have ultimate discretion in how sustainability factors may impact a portfolio’s holdings, and depending on their analysis, investment decisions may not be affected by sustainability factors.
Sustainability Focused: A sustainability-focused investment strategy seeks to invest, under normal market conditions, in securities that meet certain sustainability-related criteria or standards in an effort to promote sustainable characteristics, in addition to seeking superior, long-term, risk-adjusted returns. Alternatively, or in addition to traditional financial analysis, the investment strategy may filter its investment universe by excluding certain securities, industry, or sectors based on sustainability factors and/or business activities that do not meet specific values or norms. A sustainability focus may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have a sustainability investment focus. Sustainability-focused investment strategies include but are not limited to exclusionary, positive screening, best-in-class, best-in-progress, thematic, and impact approaches.
Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. There are many different approaches to Sustainability, with motives varying from positive societal impact, to wanting to achieve competitive financial results, or both. Methods of sustainable investing include active share ownership, integration of ESG factors, thematic investing, impact investing and exclusion among others.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.