Experts say proxy voting is about to get greener. And when asset owners consider more environmental, social and governance (ESG) factors in their shareholder voting decisions, the guidelines they use to reach and support those decisions may require a shift to include ESG-focused analytics.

For plan advisers, this shift in thinking could open additional client service opportunities.

The ESG Pendulum Swings Back

U.S. government policy on including ESG factors in fiduciary investment management processes has swung back and forth in recent years. Bruce Simonetti and Michael Roebuck, partner and senior counsel, respectively, with the law firm Akin Gump Strauss Hauer & Feld LLP, summarized the Trump administration’s position on ESG investing by retirement plan fiduciaries in a recent report: “Although the existing regulations were effectively a formalization of the DOL [Department of Labor]’s prior pronouncements on ESG, the tone of the preamble made it clear that the Trump administration DOL was very skeptical that ESG should play any factor in an Employee Retirement Income Security Act (ERISA) fiduciary’s investment decision process or proxy voting decisions.”

But with a new administration came new guidance. On March 10, the DOL under President Joe Biden suspended enforcement of the Trump administration’s regulations, and, on October 13, the Employee Benefits Security Administration (EBSA) proposed new rules that put ESG factors firmly back into fiduciary investment analysis.

Reaction to the October proposal varied. The Wall Street Journal’s editorial board did not like what it saw, suggesting the rule will “coerce workers and businesses into supporting progressive policies.”

Other observers were more sanguine. Bradford Campbell, attorney and partner with Faegre Drinker Biddle & Reath LLP, says the new proposal allows fiduciaries to decide whether any factor they’re reviewing, including ESG factors, is material.

“The DOL is not going to tell you that there’s a special fiduciary process for ESG and just ESG,” he says. “Instead, what the current proposal does is revert back to what has been true throughout ERISA’s history, which is fiduciaries and investment professionals deciding what investments are appropriate for plans.”

Impact on Proxy Voting

The DOL’s proposed rules discuss both the selection of “a plan investment or investment course of action” and the “exercise of shareholder rights, including proxy voting.” Put simply, the proposal returns the proxy voting landscape to where it was prior to actions taken by the Trump administration—meaning plan fiduciaries can engage with the proxy voting process as part of their normal fiduciary duties.

Sources say this is as it should be, as larger investment managers and advisory organizations have made proxy voting an integral part of their businesses. John Hoeppner, head of stewardship and sustainable investments for Legal & General Investment Management America, oversees an 18-person team focused on stewardship activities. The organization, which manages $1.8 trillion globally, takes “very careful pains to have a highly bespoke custom strategy” in voting proxies, Hoeppner says.

It’s a similar situation at other firms—Hoeppner estimates that roughly 60% to 70% of the largest managers have custom proxy voting guidelines. However, these firms might also subscribe to proxy advisory services such as Glass-Lewis or Institutional Shareholder Services (ISS), the owner of PLANADVISER Magazine. While a fund may state that its in-house proxy team doesn’t default to a service’s voting recommendations, the services nonetheless often have considerable influence on voting patterns, he says.

Under the DOL’s proposal, funds or asset owners increasing their focus on ESG factors may require changes in their proxy voting disclosures and guidelines, according to Adam Shoffner, fund chief compliance officer at compliance and technology firm Foreside. For example, an asset owner that subscribes to a standard set of proxy advisory opinions may need to update the type of proxy advice it receives.

Gabriel Alsina, head of Americas, Continental Europe (ex-France) and global custom research at ISS, says ISS’s benchmark policy reviews environmental and social considerations when providing voting recommendations in some situations. ISS also offers specialty policies that focus on sustainability, socially responsible investing (SRI) and climate.

The DOL’s prior guidance hadn’t diminished the importance of ESG issues to institutional investors, says Alsina, who adds that demand for environmental and social research has increased. “E, S and G have become inseparable to most institutional investors, providing distinct avenues to assess risk and preserve long-term shareholder value,” he says. “Proxy voting guidelines have evolved to add more environmental and social criteria into consideration, not less.”

More Changes Coming?

Beyond the regulatory environment, the proxy market is evolving. One recent example came last month, when BlackRock Inc. announced that, starting on January 1, it would expand the proxy voting options available to its institutional clients invested in certain index strategies. Currently, BlackRock typically votes on behalf of its funds’ investors. According to a press release from the firm, approximately 40% of the $4.8 trillion index equity assets BlackRock manages for its clients will be eligible for these new voting options.

Per the announcement, clients will have a few options when voting: They will be able to vote proxies according to their own policies and transmit their votes using their own voting infrastructure; they can choose from a menu of third-party proxy voting policies; and they can vote directly on select resolutions or companies, among other capabilities. Those clients that wish to will be able to continue to rely on the BlackRock Investment Stewardship program, which votes proxies on behalf of client.

Separate from the DOL action, the Securities and Exchange Commission (SEC) has proposed amendments to Form N-PX, “Annual Report of Proxy Voting Record of Registered Management Investment Company.” According to a legal update from Stradley Ronon, the proposed amendments are designed to enhance disclosure by requiring funds to identify the subject matter of the reported proxy votes.

From an adviser’s perspective, the information on the revised Form N-PX would provide greater insight into how closely a fund’s voting patterns align with the plan sponsor’s values. For example, if BlackRock’s change causes more fund managers to allow split proxy voting, it could create new opportunities for plans to vote their values versus defaulting to the fund manager.

It could also result in the development of proxy advisory services that focus on specific themes. Hoeppner says the industry isn’t there yet, but he speculates that proxy advisory services that have pro-environment or pro-manufacturing perspectives, for instance, could emerge. Plan advisers could use these services to help their plan clients determine their votes.