In 2021, a regulatory shift by the United States Securities and Exchange Commission expanded shareholder proposals on environment and social issues from mere company reports to actual prescriptive proposals. Kenneth Khoo and Roberto Tallarita analyze the proposal trends under the new guidance, revealing that increased prescriptiveness has alienated financially focused investors while aligning with pro-social preferences.
In recent years, shareholder proposals on environmental, and social (E&S) issues have seen a dramatic rise in support. For instance, at its peak in 2021, support for environmental proposals stood at 40.24%, surpassing even that of governance proposals, which stood at 35.52%. This trend, however, took an unexpected turn in 2022 and 2023, when support for E&S proposals plunged. By 2024, support for these proposals appears to have fallen below pre-2016 levels, hovering around 16% and signaling a significant shift in shareholder sentiment. We do not examine governance proposals here because they have traditionally garnered strong shareholder support both before and after 2021—particularly proposals aimed at removing poison pills or staggered boards.
In our new paper, Expanding Shareholder Voice: The Impact of SEC Guidance on Environmental and Social Proposals, we explore whether the recent decline in support for E&S proposals is tied to a regulatory shift that expanded shareholders’ ability to submit these proposals. Historically, the United States Securities and Exchange Commission permitted corporate management to exclude E&S proposals if it found that they would stymie business operations under the “ordinary business exclusion” in Rule 14a-8(i)(7). This allowed management to ignore many of these proposals. . However, in November 2021, the SEC’s Division of Corporation Finance issued Staff Legal Bulletin No. 14L (the “2021 Guidance”), signaling a shift toward a more proponent-friendly approach. This new policy indicated that the SEC was more likely to allow “prescriptive” E&S proposals—those specifying particular goals, methods, and timelines for implementing E&S policies.
Prescriptive E&S proposals demonstrate a stronger commitment to E&S goals compared to their non-prescriptive counterparts. For instance, a prescriptive proposal might require management to adopt a specific policy aimed at achieving a quantified reduction in carbon emissions. In contrast, a non-prescriptive proposal might simply request a report on current carbon emission levels. “Prescriptiveness” thus involves a greater tradeoff between investors’ pecuniary and non-pecuniary preferences, as prescriptive proposals typically entail significantly higher implementation costs for the firm.
Consequently, we hypothesize that pro-social investors, driven by ideological commitments to E&S issues, are more likely to support prescriptive proposals, whereas financially oriented investors with weaker E&S preferences may be less inclined to favor such proposals. Based on these assumptions, the 2021 Guidance could have an ambiguous impact on voting support, depending on the composition of the investor voting base. For instance, if most investors are financially oriented, one would expect the 2021 Guidance to lead to a decline in voting support for E&S proposals as their prescriptive natures becomes more prominent.
Building on this premise, the impact of the 2021 Guidance on corporate voting support offers valuable insights into shareholder preferences. Our study makes two key contributions to the literature: one methodological and the other substantive. Methodologically, we address the inherently subjective nature of classifying proposals as “prescriptive” by leveraging supervised machine learning techniques in natural-language-processing. Given that the 2021 Guidance marked a shift in the SEC’s interpretation of Rule 14a-8(i)(7), we use the SEC’s own classification of contested proposals prior to the 2021 guidance as a training dataset. Specifically, we assigned a prescriptiveness indicator value of 1 to all proposals excluded under Rule 14a-8(i)(7) (favoring management) and a value of 0 to all proposals that proceeded to a vote under the same rule (favoring the proponent). Using this trained algorithm, we classified all remaining E&S proposals in our dataset as either prescriptive or non-prescriptive. Our analysis reveals that the 2021 Guidance resulted in a higher number of prescriptive proposals proceeding to a vote, as well as an overall increase in the prescriptiveness of proposals reaching the voting stage.
On the substantive front, a key finding of our study is that the increased prescriptiveness of E&S proposals following the 2021 Guidance has led to a significant decline in shareholder support across the board, even after controlling for a comprehensive set of firm, proponent, and investor characteristics, as well as a wide array of fixed effects. Our main results hold even under various alternative explanations, including those where the 2021 Guidance may have induced selection effects by proponents or entry by new proponents, which could explain the observed decline in support for prescriptive proposals.
Notably, our findings suggest that the decline in voting support post-2021 is consistent with the hypothesis that existing proponents have increased the degree of prescriptiveness in their proposals in response to the 2021 Guidance, rather than an increase in the proportion of prescriptive proposals by existing or new proponents. While there is a modest increase in the proportion of prescriptive proposals submitted after the 2021 Guidance, we find compelling evidence that existing proponents are modifying the textual content of their proposals to make them more prescriptive, reflecting their pro-social objectives.
Our results align with prior work, where one of us hypothesized that the ESG shareholder proposal market is dominated by a relatively small group of specialized actors (e.g., As You Sow) who serve as intermediaries connecting pro-social shareholders with corporate stakeholders, citizens, and social or policy activists. Indeed, nearly 80% of all proposals in our sample are submitted to the same firms throughout the sample period, likely because these firms are perceived to have substantial social impact.
More importantly, we find evidence that the decline in support for prescriptive proposals varies among institutional shareholders with differing ideological preferences on E&S issues. Building on prior scholarship, we construct an ideological spectrum for funds on E&S issues, ranging from “pro-social” funds on one end to “financially oriented” funds on the other. While support for prescriptive proposals has generally decreased across the majority of funds since 2021, funds with stronger pro-social preferences are more likely to support these proposals, whereas financially oriented funds are more likely to oppose them.
For instance, within the category of ESG funds, those affiliated with E&S-focused families (which lean pro-social) are more likely to support prescriptive proposals compared to the average fund. By contrast, ESG funds in non-E&S families (which lean financially oriented) show no significant difference from the average fund. Additionally, active mutual funds, which tend to be more financially oriented, are more likely to oppose prescriptive proposals. Conversely, the “Big Three” asset managers and other predominantly passive mutual funds, which are closer to the median voter on the E&S ideological spectrum, exhibit voting patterns indistinguishable from the average fund.
One of the prevailing narratives behind the decline in ESG voting and investment attributes it to political backlash, particularly stemming from Republican-led initiatives, which are thought to account for the observed drop in voting outcomes for E&S proposals. While political backlash is often linked to disinvestment in ESG funds, our findings show no contemporaneous decrease in flows to ESG funds. Additionally, we find no significant differences in voting behavior between ESG funds experiencing large negative outflows and those without.
Furthermore, we also analyze support for anti-ESG proposals, which advocate for firms to operate with minimal regard for their social and environmental impacts. Our results show no evidence that anti-ESG proposals are driving the decline in voting support post-2021 Guidance, challenging the validity of the “political backlash” hypothesis as an explanation for this trend.
To conclude, our findings provide tentative evidence that many institutional investors may not “walk the talk” when E&S issues conflict with pecuniary maximization objectives. While significant attention has been given to the role of pro-social preferences in addressing environmental and social externalities, our analysis suggests that for the majority of funds—including many ESG funds—the financial costs associated with prescriptive proposals often outweigh the strength of their E&S preferences.
Author Disclosure: the authors report no conflicts of interest. You can read our disclosure policy here.
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