Is your company discussing ESG in this year’s proxy statement? Investors will be looking for it.
- In his annual letter to CEOs, BlackRock CEO Larry Fink stated that the firm will be “increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
- Vanguard recently expanded its environmental and social voting policies with a detailed section on workforce diversity/inclusion proposals and bolstered language on evaluating E&S proposals based on merit and materiality.
- State Street Global Advisors (SSGA) introduced the “responsibility factor” scoring system that measures companies on ESG performance metrics, and recently updated its proxy voting guidelines with a commitment to material environmental and social issues.
As investors continue to integrate ESG performance into proxy voting and capital allocation strategies, and ESG ETFs continue to attract high inflows (and deliver strong performance)—all companies should integrate ESG oversight into business operations and reference these developments in the proxy this year.
Whether it be in the CEO/Chair letter to stockholders, business highlights section, governance overview, or discussed under a specific ballot item, be sure to include a reference to ESG oversight or integration somewhere in the proxy.
While each industry and investor base are different, below are a few key ESG factorsto ensure are disclosed on the company’s website, annual CSR report, or a public filing. Be sure to summarize and reference these initiatives in the proxy.
Investors are interested in seeing your board’s commitment to maintaining a high-functioning, diverse board. A board diversity statement can be as simple confirming the company’s commitment to diversity on the board. Where possible, include diversity demographics and/or quantifiable targets that extend beyond gender. Note that starting February 1, 2020, ISS will recommend against all nominating governance chairs at Russell 3000 or S&P 1500 companies with no women on the board.
Example: WEX Inc’s.
To credibly demonstrate climate and social risk resilience, investors want companies to disclose where ESG risk oversight sits on the board. Whether ESG issues are overseen by a permanent standing committee or a separate ESG-focused committee, make sure it is clear in the proxy that an ESG oversight mandate exists somewhere on the board.
Example: Kilroy Reality Corp.
Disclose your company’s climate change policy, listing industry-specific challenges and your strategy to meet them. Best in class disclosure includes quantifiable targets and impact scenarios. As you can see, lululemon outlines an enterprise-level environmental policy including specific reference to supply chain risks, animal welfare, and their carbon footprint.
Greenhouse Gas Emissions
As soon as possible, start collecting and disclosing your company’s total scope 1 and scope 2 GHG emissions. Robust disclosure will include scope 3 GHG emissions, GHG reduction targets, 2-degree scenario strategies and targets, renewable energy sources, or reference to the ISO 14064 standard. Note that rating agencies have begun to estimate GHG emissions for non-disclosing companies, which may work to your company’s detriment.
Example: IDEXX Laboratories, Inc. (IDXX)
Employee Health and Safety
Your company’s employee health and safety policy should include a commitment to protect the environment, health, and safety of all employees and a commitment to adopt standards and protection mechanisms where applicable laws and regulations do not provide adequate controls. For robust disclosure, explicitly state that the enterprise health and safety policy extends to suppliers, or include quantitative metrics on occupational health and safety performance (e.g., priority non-conformance rates, work-related injuries, work-related fatalities, or reduction targets).
Example: Republic Services Inc. (RSG)
Under the UN Guiding Principles on Business and Human Rights, companies should respect human standards, avoid infringing on the human rights of others, and address adverse violations. A well-developed human rights policy should include reference to the company’s position on specific human rights issues, a commitment to conduct business in a way that demonstrates accountability for human rights, a commitment to adhere to an international standard, and clear establishment of expected employee protocol or conduct.
Example: Best Buy Co.
Diversity and inclusion can generate significant benefits for companies including access to a larger and more diverse set of potential workers. Investors are looking for diversity and equality statements that commit to hiring a workforce representative of the communities in which it operates and applies diversity strategies to various levels of the workforce. For robust disclosure, include demographics data, diversity targets, and/or diversity statements that explicitly apply to senior management levels.
Example: Fair Isaac Corporation (FICO)
Human Capital Management
The “S” in ESG has become increasingly important to investors. While every company has employees, not every company faces the same human capital challenges. Key talent management disclosures discuss worker productivity, employee health and safety, employee training, and talent recruitment and retention.
Example: US Foods Holding Corp. (USFD)
By reporting the total volume of water withdrawn and consumed, you can show your investors the scale of risks associated with long term water scarcity. Be sure to disclose total water usage, commonly disclosed in cubic meters (m3) or U.S. gallons (gal). Robust disclosure includes information on water withdrawal sources and strategies to mitigate scarcity risks.
Example: Kilroy Reality Corp.