Category: ESG
Corporate political spending and its potential consequences
Has all of the current political unrest and social upheaval had any impact on the drive for political spending disclosure? Apparently so, according to the nonpartisan Center for Political Accountability, which reports in its June newsletter that support for shareholder proposals in favor of political spending disclosure hit record highs this past proxy season. But one risk potentially arising out of political spending is reputational, which could fracture a company’s relationship with its employees, customers and shareholders. As companies and CEOs increasingly offer welcome statements on important social issues such as climate change, healthcare crises and racial injustice, the current heated political climate has heightened sensitivity to any dissonance or conflict between those public statements and the company’s political contributions. When a conflict between action in the form of political spending and publicly announced core values is brought to light, will companies be perceived to be merely virtue-signaling or even hypocritical? To borrow a phrase from asset manager BlackRock, if the public perceives that these companies are not actually doing “the right thing”—even as they may be saying the right thing—will they lose their “social license” to operate? (See this PubCo post.) CPA’s brand new report on Conflicted Consequences explores just such risks.
Will companies accede to calls for actions to improve racial and ethnic diversity in hiring and promotion? California considers a new mandate for racial/ethnic board diversity
In this excellent NYT article from early June, the author painfully explores the view of many African-American executives that, notwithstanding the public condemnations of racism by many public companies and the “multimillion-dollar pledges to anti-discrimination efforts and programs to support black businesses,” still, many of these companies “have contributed to systemic inequality, targeted the black community with unhealthy products and services, and failed to hire, promote and fairly compensate black men and women. ‘Corporate America has failed black America,” said [the African-American president of the Ford Foundation]. ‘Even after a generation of Ivy League educations and extraordinary talented African-Americans going into corporate America, we seem to have hit a wall.’” In the article, a number of Black executives offer recommendations for actions companies should take to begin to implement the needed systemic transformation. And now, third parties—from proxy advisors to institutional investors to legislators—are taking steps to induce companies to take some of these actions. Will they make a difference?
Petition requests SEC mandate disclosure to help assess climate risk
As you know, there has been a fairly sustained clamor for the SEC to impose a requirement for climate change and sustainability disclosure. For example, in May, the SEC’s Investor Advisory Committee recommended that the SEC “set the framework” for issuers to report on material environmental, social and governance information, concluding that “the time has come for the SEC to address this issue.” (See this PubCo post.) However, SEC Chair Jay Clayton and others at the SEC have been fairly vocal about their reluctance to impose a prescriptive sustainability disclosure requirement beyond principles-based materiality. But what about a narrower request? A mandate for just a single piece of information? This rulemaking petition filed by Impax Asset Management LLC, investment adviser to Pax World Funds, a “specialist asset manager investing in the transition to a more sustainable economy,” requests that the SEC “require that companies identify the specific locations of their significant assets, so that investors, analysts and financial markets can do a better job assessing the physical risks companies face related to climate change.”
Is it time for a reimagined compensation committee?
Perhaps during the shutdown, when you’re watching more TV than you might like to admit, you’ve seen some new commercials a bit like this: a happy face-masked employee on the line or in a lab displaying all the sanitizing and other pandemic-related safety precautions that the company is taking to protect the employee’s work environment. Cut to the employee at home with giggling youngsters, illustrating the importance of safety measures at work to protect family at home. Or a company emphasizing the value of its employees in keeping the country moving forward or its employees in lab coats that persevere to find a cure no matter what. Or a shot of employees performing the essential service of implementing safety measures for customers. What’s the point? To drive home that a company that recognizes the value of its employees and manifests such concern for their safety and welfare is a company worth buying from. This new emphasis on employee welfare as a corporate selling point may have been sparked by COVID-19 but, at another level, it may well reflect broader concerns that have been marinating for a while—about the essential value of previously overlooked elements of the workforce, about physical risk allocation, about economic inequity and, to some extent, even about social justice.
How to address some of these concerns related to the workforce—particularly economic inequity—is the subject of a new paper co-authored by former Delaware Chief Justice Leo Strine, “Toward Fair Gainsharing and a Quality Workplace for Employees: How a Reconceived Compensation Committee Might Help Make Corporations More Responsible Employers and Restore Faith in American Capitalism.” The goal is to reimagine the compensation committee so that it becomes the board committee “most deeply engaged in all aspects of the company’s relationship with its workforce,” from retaining and motivating the workforce to achieve the company’s business objectives, to overseeing that the company fulfills its obligations as a responsible employer and, most of all, to positioning the company to “restore fair gainsharing.”
Tips for sustainability reporting
In his annual letter to CEOs in January, CEO Laurence Fink announced that BlackRock was putting “sustainability at the center of [its] investment approach,” and made clear that companies needed to step up their games when it comes to sustainability disclosure. (See this PubCo post.) Even in the aftermath of the COVID-19 outbreak, both BlackRock and State Street have issued statements indicating their intention to continue to center their stewardship on the demand for additional disclosure on key ESG and sustainability issues such as climate change risk and human capital management. For those seeking to improve their ESG reporting, a managing director of consultant Protiviti offers a number of recommendations in this Forbes article.
Companies divided on impact of COVID-19 on sustainability efforts
What has been the impact of the COVID-19 pandemic on companies’ sustainability efforts? On the one hand, as discussed in this article from the WSJ, C-suite occupants have been “trying to figure out what they’re willing to throw overboard as the economic storm spawned by the pandemic is swamping their ships. Businesses that were planning to help save the world are now simply saving themselves….History suggests this new [sustainability] paradigm is probably on the back burner.” Even BlackRock, which had previously announced that it was putting “sustainability at the center of [its] investment approach,” acknowledged in April, that “certain non-financial projects like sustainability reports had been ‘de-prioritized’ due to COVID-19. ‘We recognize that in the near-term companies may need to reallocate resources to address immediate priorities in these uncertain times.’ BlackRock’s report stated. BlackRock said it would ‘expect a return to companies focusing on material sustainability management and reporting in due course.’”
On the other hand, however, as this article from Financial Executives International observed, the COVID-19 pandemic has highlighted “the very issues that have been driving ESG concerns—managing resources, sustainability, community impact and employee well-being.” While it might have been “easy to assume the current crisis may permanently shift attention away from environmental, social and governance (ESG) concerns as management teams grapple with existential issues,” it turned out that “the very actions companies are taking will likely bring them closer to the multi-stakeholder, long-term value principles that lie at the heart of ESG.” How are companies viewing the effects?
How do the largest fund families vote on shareholder proposals related to ESG?
In 2019, investor support for shareholder proposals related to environmental, social and governance matters reached a record average high of 29%, according to Morningstar. And that doesn’t take into account the number of climate-related proposals that were withdrawn after successful negotiation—a number that exceeded the number of climate proposals that actually went to a vote. In this report, Morningstar analyzes the level of proxy voting support by 52 of the largest fund families for ESG-related shareholder proposals in 2019 and over the five years from 2015 to 2019. Although Morningstar finds substantial increases in average support over the last five years, five of the largest fund families, including BlackRock, voted against over 88% of ESG-related proposals, enough to prevent many of these proposals from achieving majority support. But, in 2020, with BlackRock having joined Climate Action 100+— reportedly “the world’s largest group of investors by assets pressuring companies to act on climate change”—and having announced that it was putting “sustainability at the center of [BlackRock’s] investment approach,” the question is whether that voting strategy is about to change?
SSGA offers roadmap for board oversight of ESG; may vote against directors of ESG “laggards”
It’s not just BlackRock’s CEO that has words for companies. Cyrus Taraporevala, the CEO of State Street Global Advisers, another large asset manager, has recently sent his own letter to company boards cautioning that SSGA’s engagement on sustainability this year will also include the possibility of a proxy vote against directors “to press companies that are falling behind and failing to engage.” While directors can play a vital role in catalyzing action on ESG matters, SSGA recognizes that, in many ways, our understanding of ESG is still in its early stages, making board oversight of ESG something of a challenge. To help demystify sustainability for directors, SSGA has developed a framework intended to provide a roadmap for boards—where to begin—in conducting oversight of sustainability as a strategic and operational issue.
SEC debate on climate disclosure regulation gets heated
On Thursday, January 30, the SEC proposed amendments designed to simplify and modernize MD&A and the other financial disclosure requirements of Reg S-K. (See this PubCo post.) Although the SEC did not hold an open meeting to consider the proposal, several of the Commissioners issued statements that addressed, for the most part, not what was in the proposal, but rather, what wasn’t—standardized disclosure requirements related to climate change. These statements allow us a peek into an apparently heated debate among the Commissioners on the issue of climate disclosure.
World Economic Forum and Big Four propose new sustainability reporting framework
Last week, the NYT, reporting from Davos, said that the “business titans” at the annual World Economic Forum seemed to show a “newfound enthusiasm” for the cause of climate change, rallying “around a consensus that accelerating global temperatures pose a significant risk to society—and to business. Missing, though, was a clear answer to the question of what exactly they would do about it and how quickly. ‘It’s an increase in rhetoric, absolutely,’ said one commentator, ‘Will we see a walking of the talking? The jury is out.’” One way that a group of some of the largest businesses at Davos, together with the Big Four accounting firms, have been trying to “walk the talking” is through an effort “to develop a core set of common metrics to track environmental and social responsibility.” Is it just virtue-signaling or will the effort toward creation of new metrics make a difference?
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