Environmental, social and governance activism continues to adopt new approaches. One of the latest is from The Shareholder Commons, a non-profit organization founded by CEO Rick Alexander—you might recognize the name from B-Lab and Morris Nichols in Delaware—that uses “shareholder activism, thought leadership, and policy advocacy to catalyze systems-first investing and create a level playing field for sustainable competition.” In essence, TSC seeks to shift the focus from the impact of a company’s activities and conduct on its own financial performance to “systemic portfolio risk,” the impact of the company’s activities and conduct on society, the environment and the wider economy as a whole, which would affect most investment portfolios. In particular, the group has helped with submission of a number of shareholder proposals that address issues in its sweet spot—influencing corporate behavior regarding social and environmental systems that affect the economy as a whole. This season, the proposals have advocated conversion to public benefit corporations (see this PubCo post), disclosure of reports on the external public health costs created by the subject company’s retail food business, studies on the external costs resulting from underwriting of multi-class equity offerings, and reports on the external social costs (e.g., inequality) created by the company’s compensation policy. Earlier this year, TSC, working with a long-term shareholder, submitted a shareholder proposal to Yum! Brands, asking the company to disclose a study on “the external environmental and public health costs created by the use of antibiotics in the supply chain of [the] company… and the manner in which such costs affect the vast majority of its shareholders who rely on a healthy stock market.” TSC has just announced that it has withdrawn its proposal because Yum! has agreed to “provide comprehensive reporting on the systemic effects of the use of antibiotics in its supply chain by the end of 2021.”
What is “systems-first investing”? According to TSC, it is the concept that “investors should work to prohibit all companies from engaging in business strategies that have a negative impact on people and planet. Even if this behavior boosts financial performance at an individual company in an investor’s portfolio, it will damage society, the environment, and the economy, thus dragging down the overall performance of most investment portfolios. It will also reduce the quality of life for the people whom the portfolios are intended to benefit, along with the rest of humanity.” TSC distinguishes its approach from the typical approach to ESG, which, TSC contends, addresses important systemic issues like climate change and racial injustice largely “through the lens of increasing shareholder value at individual companies by promoting efficiency and innovation, enhancing reputation and, frankly, staving off regulation. While we can all celebrate the ability of corporations to ‘do well by doing good,’ it will not be nearly enough to address the systemic risks we face. Shareholders must also use their governance rights to ensure that companies stop ‘doing better by doing bad.’ But investors continue to resist asking individual companies to sacrifice long-term financial return for the good of the economy overall.”
The shareholder proposal submitted to Yum! observed that antimicrobial resistance from the overuse of antibiotics in livestock could lead to loss of life and increased poverty. Moreover, the proposal maintained, studies by the World Bank have shown that antimicrobial resistance could result in decreases in global GDP of 3% by 2030 and almost 4% by 2050, leading to economic losses of $54 trillion by 2050. These unreported external costs, the proposal contends, are essential information for shareholders, who are almost all broadly diversified and “are materially harmed when companies impose external costs that lower GDP, which can reduce equity value. While the Company may profit by ignoring externalized costs, diversified shareholders ultimately pay these costs, and they have a right to ask what they are.”
Under the agreement with TSC, Yum! will need to provide a fairly extensive analysis of the issue and its ramifications:
- “incorporate a study of the system-wide costs of antimicrobial resistance (AMR) into its public sustainability reporting.
- disclose its findings regarding how antibiotic use in animal husbandry threatens global health and well-being, as well as the global economy and diversified shareholder interests.
- discuss an optimal, global scenario for the food industry to eliminate or internalize AMR costs and address competitive concerns that would make progress more difficult without such an approach.
- describe how its policies and procedures—including those covering lobbying, political expenditures, and other forms of political influence—affect the realization of the global scenario.”
According to Alexander, the disclosure takes a big step beyond the usual: although, under the securities laws, companies must “disclose matters that are material to their own financial performance,” he said, “there is no requirement that companies report their impacts on the economy or shareholders who hold diversified portfolios that depend on broad economic performance…We are excited to see Yum! become the first public company to agree to disclose its impact on the broad economy and diversified shareholders.” Alexander also indicated that McDonald’s, which received a similar proposal from TSC, declined to prepare the requested AMR study.