Voting Principles in the ESG Era and Implications for Investors
Contents
Introduction
I.Why do we need voting principles?
II.What are the voting principles?
III. Suggestions
Introduction
The Principles for Responsible Investment (PRI) are investment principles co-initiated in 2006 by former Secretary General of the United Nations (UN) Kofi Annan, the UN Environment Programme Finance Initiative and the UN Global Compact. The voting principles as recommended by the PRI are a statement of where investors stand on environmental, social and governance (ESG) issues and how they can use their voting rights to highlight these. From 2017 to 2019, Australian pension funds and other investors forced boards of directors to reform by voting against remuneration reports. Since then, investors have begun to address ESG issues, such as climate change, when putting forward proposals and voting in shareholder meetings and more and more investors have adopted PRI voting principles.
This article aims to provide investors with guidance on ESG practices related to the exercise of voting rights by introducing PRI voting principles and their implementation.
I
Why do we need voting principles?
Based on the fundamental framework of modern corporate governance regarding the “separation of ownership and management,” most investors stay in a “passive” role after fulfilling their duties of capital contribution. In traditional corporate governance, the exercise of voting rights is an escalation strategy for investors, which has been adopted when investors fail in their engagement, or for expressing dissatisfaction with the company’s management. PRI, on the other hand, encourages investors to assume active ownership, using their rights and position as owners to influence the activities and behavior of corporations. Under this context, voting principles mentioned here should be understood as a broadly applicable complement to engagement, rather than a type of escalation strategy.
For investors, the importance of developing and announcing voting principles (in conjunction with the exercise of active ownership) includes but is not limited to:
1)Expressing views through voting: Investors can convey their views to directors, employees, other investors, customers and beneficiaries in advance, which allows all parties to make informed decisions and avoids possible future misunderstandings with management (for example, the support or opposition of a board resolution may be interpreted as a special arrangement against certain management personnel). As a result, investors are more likely to improve a company’s sustainability or ESG awareness.
2)Expressing affirmation through voting: Since voting outcomes are increasingly interpreted as evidence that investors are paying attention to ESG issues, good management requires affirmative votes in favor of resolutions which comply with voting principles. Such votes are helpful in assisting management to understand investors’ support for certain business strategies. Investors are therefore likely to influence a company’s internal priorities and resource allocation.
3)Expressing recommendations through voting: Investors may overlook certain issues when reviewing resolutions, so they should include all procedural or substantive issues which are critical to support the resolutions in the voting principles. Furthermore, investors are to specify whether they oppose certain proposals under a board’s review. By announcing the voting principles, investors will be able to support the development of well-constructed proposals and avoid wasting unnecessary resources.
II
What are the voting principles?
To help investors understand the voting principles, the PRI introduced some guiding examples. The examples include a statement regarding voting in favor of resolutions which comply with the goals of the Paris Agreement (we understand that companies may define the appropriate conditions in which they can practice the principles of the Paris Agreement), and a statement of voting in favor of resolutions in which companies disclose their ESG performance or release examples of their ESG reports.
III
Suggestions
It is advisable that investors develop voting principles that are consistent with active ownership when they have voting rights. Investors can develop their voting principles by referencing their investment philosophies, through understanding the preferences of beneficiaries (depending on the type of asset), and through analyzing risks of investments, as well as the impact caused by or connected to investments. Investors should also consider the nature of the target companies/assets and the industries involved, and the countries’ or regions’ local regulatory requirements. Before or at the beginning of an investment, investors should formulate and announce their voting principles with respect to the companies in which they invest, according to ESG principles and their own circumstances and implement such principles.
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Note
In drafting this article, we have referred to the official PRI website “Making Voting Count: How principle-based voting on shareholder resolutions can contribute to clear, effective and accountable stewardship.” (https://www.unpri.org/stewardship/making-voting-count-principle-based-voting-on-shareholder-resolutions/7311.article)
George Zhu
zhuh@junhe.com
Practice Area
Corporate and M&A
Infrastructure and Project Finance
Environmental, Health and Safety Compliance
Environmental, Social and Governance
Carey Ni
Partner
nitl@junhe.com
Practice Area
Environmental, Health and Safety Compliance
Environmental, Social and Governance
Corporate and M&A
Thanks to intern Xiang Hongyi for his valuable contribution to the drafting and translation of this article.
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