484 E & S Proposals Submitted by Investors to U.S. Companies (Newsletter 4/9)

Investor Updates

ESG Funds Outperform S&P 500

From March 5, 2020 – March 5, 2021, 19 ESG-focused funds outperformed the S&P 500. The top-performing fund was the Parnassus Endeavor Fund. Billy Hwan who manages the fund spoke to his active approach, saying he looks at data from third-party providers, reads stock reports from TheStreet, and speaks with management teams, competitors, and customers. He specifically searches for companies with a sustainable competitive advantage, led by capable capital allocators, and that have a product risk service unique to the market. Nuveen, Brown Advisory, Calvert, and Vanguard also had funds that beat the S&P 500 during the same period (S&P Global).

Close Eye on Executive Pay Amid COVID-19

This year investors submitted 484 E&S proposals to U.S. companies ahead of annual meetings, compared to 446 last year (ISS). Investors are seeking more transparency on issues pertaining to COVID-related efforts, and are paying attention to executive compensation and bonuses awarded to executives during the pandemic. Companies such as Wynn Resorts and Norfolk Southern made changes to the bonus plans in order for executives to achieve targets while the businesses were heavily impacted by COVID-19.

Company Spotlight

Pushback on Racial Audit Requests

As financial institutions ask corporate issuers for more ESG-related data, they too will be expected to report on similar criteria. A number of big banks, including Goldman Sachs, Citigroup, and Wells Fargo, have received shareholder proposals requesting racial audits, while JP Morgan and Citigroup went as far as asking regulators to block the proposals, but the requests were denied. Blackrock was more compliant, agreeing to an independent third-party audit following a shareholder request.

Additionally, the SEC blocked Amazon’s request to stop investors from voting on a proposal for a racial equity audit at the e-commerce company. The proposal was filed by New York State Comptroller Thomas DiNapoli for the New York State Common Retirement Fund, asking for an independent audit on the company’s policies and practices related to how Amazon is addressing racial injustice in the workplace. A few weeks ago, the SEC rejected a similar ask from Johnson & Johnson, making it clear that the agency will not grant companies’ requests to stop investors from voting on racial equity audits.

Ford Commits to 2035 Emissions Targets

Ford gave mid-term targets in its pursuit to be carbon neutral by 2050. The company set a lofty goal of reducing 76% of its global emissions from its 2017 baseline and reducing emissions from its vehicles 50% by 2035 from its 2019 baseline. As part of the plan to achieve those goals, it will use 100% locally sourced and renewable electricity at all plants by 2035 and stop all waste going to landfills from plants. The auto company issued a new Integrated Sustainability and Financial Report 2021 alongside a 5-page summary of the report. The summary compiles the highlights sharing sustainability goals, alignment with the UN Sustainable Development Goals and TCFD, CDP and Science Based Targets logos, recall data, and workforce by gender data.

Featured CSR: Armada Hoffler Properties

Armada Hoffler Properties, a small-cap REIT, published a strong beginner-level 2020 Sustainability Report. The report starts off with a CEO letter containing E, S, and G priorities, and is then followed by human capital management data and insight from employee benefits and training to workforce demographics. The report also discloses emissions data for 2020 and 2019, giving readers a performance benchmark. As for governance, the company says it engages with shareholders on a variety of issues including environmental, social, and governance matters, and created a Sustainability Committee that reports to the CEO quarterly and the Board annually.

Companies Purchase Fake Carbon Offsets

Bloomberg reports carbon offsets purchased by BlackRock, JP Morgan, and Walt Disney may have been used to protect trees that did not need to be protected, making the “offset” meaningless. In recent years, companies have turned to carbon offsets as one way of reducing their carbon footprint. Last year, companies purchased more than 93 million carbon credits, a 33% increase over 2019 (Bloomberg NEF). Moving forward, companies aiming to achieve net zero emissions or sizable emissions reductions may need to pay closer attention to what their offsets are protecting.

2021 KPMG US CEO Outlook

KPMG’s 2021 Outlook contains insights from 500 CEOs of companies globally with $500 million or more in annual revenue, 140 of which are in the U.S. This year’s survey highlighted CEOs’ focus on ESG:

96% of respondents said scrutiny of their organizations’ diversity performance will continue to increase over the next three years
94% of respondents said they would shift their ESG programs to focus on social concerns in years to come
91% of respondents said the U.S. re-entering the Paris Agreement will cause their company to have more stringent ESG practices

Regulatory News

State of California Launches Advisory Group on Climate Risk Disclosure

The State of California announced the launch of its Climate-Related Risk Disclosure Advisory Group, led by the Governor’s Office of Planning and Research and in partnership with Stanford University’s Sustainable Finance Initiative. The group was established to support California in developing a climate risk disclosure standard that aligns with federal and international best practices. The release mentions the State of California is ready to support federal efforts, including the SEC’s focus on climate-related disclosures in public company filings.

New York Proposes Climate Risk Guidance for Insurance Companies

The New York State Department of Financial Services released proposed guidance on managing climate-related risk for New York insurers. A few highlights from the requests for insurers are as follows:

Include climate risks in the company’s board responsibilities and the adoption by the board of a risk policy, regardless of whether the insurer determines climate risks are material to the business or not
Consider climate-related factors when making strategic business decisions
Add climate risks to the company’s existing financial risk management
Consider physical and transitional risks in the current scenario analysis practices
Publicly disclose climate risks and how the risks are integrated into corporate governance and the process used to determine material risks

Ratings & Frameworks

ESG Impacts Are Deeply Rooted in the Supply Chain

In Sustainalytics’ 2021 supply chain guide, Future Proofing Supply Chains, the ratings agency found 90% of a company’s sustainability impacts begin in their supply chain. Companies such as Nike, Marks & Spencer, and Hershey’s have experienced both reputational damage and financial loss caused by ESG-related issues within their supply chains. As companies face increased pressure for greater transparency from key stakeholders, monitoring sustainability and social issues in the supply chain, and aligning supplier ESG commitments with corporate commitments should be a near-term priority.

News Bites