Doubling Down On ESG: Proxy Season With A Social Conscience

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Board diversity, climate change, the opioid epidemic and gun violence will top the agenda in corporate boardrooms in 2019—with directors called upon to ensure that sophisticated policies are in place to address them.

Small wonder many interviewees anticipate that broader representation of women in both leadership and governance ranks will guide much of the proxy discussions in 2019. At present, the U.S. ranks 14th among global markets in gender diversity in the boardroom, according to a 2018 U.S. Board Study reviewing diversity in the boardroom by ISS.

That may be changing, now that U.S. boards are compelled to voluntarily disclose more information about each director, such as their “skill matrices” across age, tenure, varied experiences, expertise and outside commitments. “It’s important for investors and shareholders to have more transparency about who sits on the board and whether that person’s diverse background, experiences and skill sets are aligned with the long-term strategic needs of the enterprise,” says Friso van der Oord, director of research at the National Association of Corporate Directors (NACD).

“Board members have to pick the best candidate—period,” says Stephen Kasnet, vice chair and lead director at both Granite Point Mortgage Trust and Two Harbors Investment Corporation. “If they’re required to pick one or more women, the challenge is to pick not the most capable women, but the most capable directors.”

Changing Climate

Also on the ESG agenda is climate change. EY’s survey of investors indicates that nearly eight in ten (79 percent) believe climate change is a significant risk, with 48 percent stating that enhanced reporting of these risks is a priority.

ISS has long supported shareholder proposals requesting companies to disclose information on their climate change risks. The subject reached a turning point in 2017 when Exxon, Occidental and PPL Corp. passed landmark resolutions to disclose the risks that climate change posed to their businesses. Goldstein projects that similar resolutions will be in the offing this year, “as investors succeed in achieving heightened disclosures of climate change risks on a company-by-company basis,” he says.

ISS recently aligned its policy with recommendations by the Task Force on Climate-Related Financial Disclosures. Chaired by Michael Bloomberg, the Task Force’s guidelines call for greater transparency and board oversight of climate change exposures. The effort paid off. “During the 2018 proxy season, more than 65 resolutions regarding climate change were submitted by U.S. investors, of which 17 involved risk assessments based on the so-called two-degree scenario,” Goldstein notes.

Two-degree scenario proposals are an outgrowth of the Intergovernmental Panel on Climate Change’s determination that two degrees Celsius above pre-industrial levels is the uppermost limit in global temperatures tolerable to the environment.

The proposals generally call for greater disclosure of companies’ preparedness for climate change and efforts to account for climate-related risks and opportunities. Despite rising investor interest, proactive measures by companies led to the withdrawal of the majority of two-degree scenario resolutions in 2018, says Keatinge. “We had awaited an onslaught of such resolutions, but they were withdrawn or negotiated away,” she says. “Ultimately, only five went to a vote, and of those five only two received majority support.”

That’s because many companies had already committed to enhancing disclosure. “This is heartening, and the credit is due the investors,” Keatinge adds.

Ron Schneider, director of corporate governance services at DFIN, agrees, noting that this represents a seismic shift in investor perspective. “When we saw shareholder proposals on climate change in the past, they didn’t get the support of the largest indexed investors,” Schneider says. “While these investors recognized that the climate was changing, they had difficulty connecting the impact to long-term financial performance and shareholder value. That has now changed.”

Sheehan from PJT Partners cites the value of water conservation to a soft drink manufacturer. “If a company is a water-intensive business, conserving water through processes that allow for the reuse of water, for instance, will have positive bottom line impact,” she explains. “That’s also good from an ESG standpoint. For a soft drink maker, these are not two separate silos.”

Social Sensibility

The opioid crisis, firearms and pay equity are also on investors’ ESG agenda. For example, following the February 2018 mass shootings in Parkland, Florida, multiple shareholder proposals asked that retail companies stop selling guns or part ways with the National Rifle Association. In response, Walmart and Dick’s Sporting Goods placed new restrictions on gun sales, while others like MetLife, Delta Airlines and FedEx voted to cut ties with or discontinue preferential treatment of the NRA.

“For some companies, gun violence is an issue of material importance,” says Keatinge. “An example is Sturm Ruger, whose shareholders at the 2018 annual meeting approved a proposal for the company to detail its plans to track violence associated with its firearms, disclose its research on ‘smart’ gun technology, and assess the risks that gun violence poses to its reputation and long-term financial performance.” Sturm Ruger has until February to produce a report addressing the shareholder’ concerns.

In 2018, a number of first-time shareholder proposals involved the opioid crisis. Keatinge and others anticipate more of the same this go-round. “Shareholders at Depomed (a distributor of opioid painkiller Nucynta now known as Assertio Therapeutics) voted in the majority to approve policies enhancing the board’s governance of the impact on the bottom line of continuing to distribute opioids,” Keatinge says.

These varied actions demonstrate the potential for investors and shareholders to, at a minimum, raise the level of dialogue around ESG issues—and possibly effect change.

Read more: Top 10 ESG Strategies For 2019


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