Reporting

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NEW REPORT BENCHMARKS INTEGRATED & SUSTAINABILITY REPORTING FOR THE S&P 500


Heidi Welsh
Executive Director, Sustainable Investments Institute (Si2)

Requests for sustainability reports are evergreen in proxy season; investors have filed more than 300 proposals since 2010. These requests for companies to provide quantified, comparable metrics about their performance on key environmental and social impacts earn substantial, sustained support from investors, with eight majority votes this decade. Most companies are responding in some fashion, providing the metrics mainstream Wall Street analysts want to assess performance.

Although sustainability reporting resolutions in 2018 varied quite a bit, in 2019 proponents have stuck to very similar scripts, with two main variants—one that asks about material or “the most important” sustainability metrics, and another that in addition seeks information on climate change data. To date, companies do not appear to have lodged any SEC challenges on these resolutions.

But companies are challenging new proposals that make requests specifically invoking the standards put forth by the Sustainability Accounting Standards Board, as noted below. Other non-standard reporting proposals also seem unlikely to pass muster at the SEC.

Standard reporting requests: The Illinois State Treasurer starting filing shareholder resolutions on behalf of his state’s $30 billion investment portfolio last year, and has expanded these efforts in 2019, including five proposals that ask companies to “issue an annual sustainability report describing the company’s policies, strategies, performance, and improvement targets on material environmental, social, and governance (ESG) issues,” to be issued “within a reasonable timeframe.” The proposal is pending at Activision Blizzard, Intuitive Surgical and O’Reilly Automotive for the first time. The Treasurer withdrew following commitments from Crown Castle International, where it was filed for the first time, and Host Hotels & Resorts, where a more detailed resolution last year earned 31.1 percent support.

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SHAREHOLDERS, WORKING IN CONCERT, CHANGE KINDER MORGAN’S TUNE ON SUSTAINABILITY


Luan Jenifer
Chief Operating Officer, Miller/Howard Investments

Think back to 2014: At the 20th annual United Nations Climate Change Conference of the Parties (COP 20) in Lima, Peru, political action seemed more achievable than, perhaps, it does today. And think back to last October: Despite the COP 21 global agreement reached in Paris in 2015, the United States had declared its intention to withdraw and political action on the climate front seemed stalled. However, also in those years and around those times, other parties were at the table, advocating for responsible stewardship and disclosure:

NYSCRF resubmitted a resolution to American Financial Group that earned 48.4 percent in 2018. It asks the company to issue by December “an annual sustainability report describing the company’s analysis of, and short- and long-term responses to the ESG-related issues that are most important to the company.” The fund has filed this proposal at Papa John’s International, as well, noting that the company does not issue a sustainability report and has little ESG information on its website, in contrast to competitors.

Trillium Asset Management has taken up the baton at Tesla Motors, where NYSCRF last year withdrew a somewhat more detailed proposal seeking sustainability information after the company agreed to report. This year, Trillium is asking the company to “issue an annual corporate sustainability report describing the Company’s Environmental, Social, and Governance (ESG) policies, management strategies, quantitative performance metrics, and improvement targets.” The proposal suggests Tesla should consider reporting using frameworks and standards articulated by the Global Reporting Initiative, CDP, the Sustainability Accounting Standards Board and the Taskforce on Climate-related Financial Disclosure, on a wide range of issues. It notes the company has faced criticism for its health and safety performance while providing little disclosure.

Climate change: A mix of investors have filed the same resolution at six companies, asking them to annually “issue a report describing the company’s environmental, social, and governance (ESG) policies, quantitative performance metrics, and improvement targets, including a discussion of greenhouse gas (GHG) emissions management strategies and metrics.” The proposal is new and still pending at Charter Communications, Mid- America Apartment Communities and SBA Communications, but withdrawn at Quanta Services after the company agreed to publish a report covering its policies, practices, metrics and targets on key ESG issues. The proposal was a resubmission at Acuity Brands, where a reporting request received 49.8 percent support in 2018— which appears to have brought the company to the table this year and prompted a withdrawal. Another resubmission is at Middleby, where the vote last year was 57.2 percent, up from 44.6 percent in 2017.

Other ESG reporting: Additional proposals raise several different issues but few votes seem likely:

  • Domini Social Investments is asking Amazon . com for annual reports on the company’s “analysis of the community impacts of Amazon’s operations, considering near- and long-term local economic and social outcomes, including risks, and the mitigation of those risks, and opportunities arising from its presence in communities.”

The company says the proposal is ordinary business since it relates to the location of company facilities and the SEC has yet to respond to the challenge. (The resolution discusses the company’s search for new headquarters locations and social inequities that may result from the new facilities.) Last year, Amazon.com persuaded the SEC that a wide- ranging proposal from the AFL-CIO that asked about “risks arising from the public debate over Amazon’s growth and societal impact and how Amazon is managing or mitigating those risks” dealt with ordinary business and SEC staff agreed, saying it related to public relations and the ways in which the company sells its products.

  • At Berkshire Hathaway, a proposal was tailored to the company’s structure as a holding company and asked only for more publicity about subsidiary company sustainability efforts. The proponent withdrew when the company agreed to present the requested information, with links, on its website.

  • A resolution at DTE Energy that asked for a report on “the impact of its environmental performance challenges on the company’s reputation and financial performance” has been omitted because it was filed too late. A similar proposal to the company last year was omitted on ordinary business grounds.

  • Another proposal was from the Sisters of St. Francis of Philadelphia, asking Walgreens Boots Alliance to report on its work to support the UN Sustainable Development Goals (SDGs), expressing concern about tobacco sales in the company’s drugstores. Walgreens prevailed at the SEC in its contention that the proposal was moot. It was a resubmission that last year was omitted on ordinary business grounds.

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SASB ADDRESSES GROWING DEMAND FOR SUSTAINABILITY DISCLOSURE


Paul Rissman
Co-founder, Rights CoLab

U.S. public companies spend less time communicating with investors about ESG issues than their global peers. They also disclose less. U.S. investors, in turn, fall below the global average when incorporating ESG factors into their strategies, and have less influence over responsible business behavior. This aversion to transparency isn’t surprising, due to the treatment of “materiality” within U.S. securities law.

SASB: Five new proposals specifically invoke the new reporting framework issued last fall by SASB after multi-stakeholder consultation:

  • The resolution asks Advance Auto Parts, CarMax and Dollar Tree for a report within 180 days of the annual meeting “prepared in consideration of the SASB Multiline and Specialty Retailers & Distributors standard, describing the company’s policies, performance, and improvement targets related to material sustainability risks and opportunities.”

  • At Essex Property Trust, it seeks the same sort of report “in consideration of the SASB Real Estate standard... summarizing the company’s strategies and practices to mitigate risks, stemming from climate change, to the availability of adequate water resources.”

  • Finally, at PACCAR, it asked that the report be “prepared in consideration of the SASB Industrial Machinery and Goods standard.

SEC action and withdrawal—Advance Auto has lodged a challenge at the SEC, although the specifics of the challenge are not yet available. As You Sow withdrew at PACCAR, since the company had begun to use SASB standards in a new report and will consider expanding its future disclosures consistent with those standards. PACCAR also had lodged an SEC challenge, arguing the proposal was moot given this new report.

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The field of resolutions seeking links between sustainability issues and executive compensation continues to be broad, but is dominated by drug pricing. This year, nine proposals address the risk of drug price increases and another the opioid crisis; three address senior executive diversity and two are about cybersecurity; further issues, with one proposal each, are risky banking practices, greenhouse gas emissions goals and human rights. Last year, six different proposals sought links to several specific environmental or social issues, as well.

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THE LINK BETWEEN HIGHER DRUG PRICES AND EXECUTIVE PAY


Cathy Rowan
Director Of Socially Responsible Investing, Trinity Health

Prescription drug expenditures make up nearly 20 percent of all health care costs, and spending for prescription drugs is growing faster than any other part of the health care dollar. A Kaiser Health Tracking Poll in early 2018 found that one out of four patients have a difficult time affording their medicines. December 2018 POLITICO poll showed the public’s top priority for the 116th Congress is taking action to lower prescription drug prices.

Drug pricing: Proponents are doubling down on an approach they tried last year to address concerns about expensive pharmaceutical drug prices and the long-term risks high prices may pose to companies. Last year, investors gave these resolutions fairly strong support, with most votes in the 20-percent range. The resolution has the same resolved clause at each company, with supporting statements articulating concerns about specific drugs; it asks for an annual report

on the extent to which risks related to public concern over drug pricing strategies are integrated into [the company’s] incentive compensation policies, plans and programs...for senior executives. The report should include, but need not be limited to, discussion of whether incentive compensation arrangements reward, or not penalize, senior executives for (i) adopting pricing strategies, or making and honoring commitments about pricing, that incorporate public concern regarding the level or rate of increase in prescription drug prices; and (ii) considering risks related to drug pricing when setting financial targets for incentive compensation.

Last year the resolution was close to this wording, but the final point was “considering risks related to drug pricing when allocating capital.” It is a resubmission at four companies—AbbVie (21.8 percent in 2018), Biogen (28.2 percent), Bristol-Myers Squibb (22.7 percent) and Eli Lilly (17.8 percent), and new to five more—Celgene, Johnson & Johnson, Merck, Pfizer and Vertex Pharmaceuticals.

SEC action—Two companies have lodged SEC challenges. Bristol-Myers Squibb contends it relates to ordinary business by dint of micromanagement, invoking the 2018 SEC legal bulletin. Last year, SEC staff disagreed that a similar proposal was ordinary business and also did not think it was moot, as the company argued. Pfizer is making another try at the ordinary business rule, as well, saying it raises executive compensation issues that are applicable to the general workforce, which would make the proposal ordinary business; it also says the resolution seeks to micromanage compensation arrangements.

Executive diversity: Last year, Zevin Asset Management asked several tech companies to report about how they might integrate senior executive diversity metrics into CEO incentive pay. There were three withdrawals after agreements and two omissions; the highest vote was 13.3 percent at United Parcel Service.

This year, Zevin is back with a similar request at Alphabet, where it earned 8.8 percent last year, Amazon.com (last year it withdrew after the company noted its CEO receives no incentives) and Anthem, a new target. The tech company proposal asks for a report

assessing the feasibility of integrating sustainability metrics, including metrics regarding diversity among senior executives, into performance measures or vesting conditions that may apply to senior executives under the Company’s compensation plans or arrangements. For the purposes of this proposal, “sustainability” is defined as how environmental and social considerations, and related financial impacts, are integrated into long-term corporate strategy, and “diversity” refers to gender, racial, and ethnic diversity.

At Anthem, the request is shorter and asks only for a report by October “assessing the feasibility of integrating sustainability metrics into the performance quotas of senior executives of Anthem Inc. compensation plans.”

SEC action—Anthem has told the SEC the resolution should be omitted because Zevin has not provided proof of its stock ownership.

Cybersecurity: At Verizon Communications, Trillium Asset Management asks for a report “assessing the feasibility of integrating cyber security and data privacy performance measures into the Verizon executive compensation program.” This resolution earned 11.6 percent support in 2018, after an unsuccessful company challenge—in which the SEC rejected the company’s contention that this concerned ordinary business. In 2019, the company again makes this argument, reasoning that the compensation program referenced, in the proxy statement, extends to non-executive employees and therefore is a matter of ordinary business.

This resolution, filed by James McRitchie, goes to a vote on March 8 at Walt Disney.

Climate goals: As You Sow has withdrawn a proposal that asked Pinnacle West Capital for a report on the “feasibility of linking executive compensation metrics to the accomplishment of Paris-aligned greenhouse gas emission reduction objectives.” As You Sow withdrew after the company agreed to report. The proposal said the company’s carbon intensity GHG target is inconsistent with its financing of natural gas infrastructure and “artificial caps on renewables” in bidding. It also raised concerns about the company’s spending “to block renewable energy policy in Arizona.” The proposal was new in 2019.

Sustainability metrics: SustainInvest wants Dunkin’ Brands to report by October, “assessing the feasibility of integrating sustainability metrics into the performance quotas of senior executives of Dunkin Brands Group Inc. compensation plans.” The proposal suggests metrics such as workplace and executive level diversity, greenhouse gas reduction goals or “using recycled and/or compostable supply chain inputs.”

SEC action—The company has lodged an SEC challenge, arguing the proposal is moot since Dunkin’ already links the replacement of foam cups to compensation for some executives and increasing diversity for others, and concerns ordinary business since it addresses matters applicable to the workforce as a whole, not just executive compensation.

Risky banking: NYSCRF has resubmitted a resolution to Wells Fargo that earned 21.9 percent last year. The text for this year’s resolution is not yet available but last year it sought a report on:

  1. whether the Company has identified employees or positions, individually or as part of a group, who are eligible to receive incentive- based compensation that is tied to metrics that could have the ability to expose Wells Fargo to possible material losses, as determined in accordance with generally accepted accounting principles;

  2. if the Company has not made such an identification, an explanation of why it has not done so; and

  3. if the Company has made such an identification, the:

    • methodology and criteria used to make such identification;

    • number of those employees/positions, broken down by division;

    • aggregate percentage of compensation, broken down by division, paid to those employees/positions that constitutes incentive-based compensation; and

    • aggregate percentage of such incentive-based compensation that is dependent on (i) short-term, and (ii) long-term performance metrics, in each case as may be defined by Wells Fargo and with an explanation of such metrics.

The requested report would provide shareholders with important information concerning incentive-based compensation that could lead employees to take inappropriate risks that could result in material financial loss to our company.

Opioid legal costs: The Philadelphia Public Employees’ Retirement System has a proposal that earned 11.1 percent at AmerisourceBergen on March 1. It also has been filed at AbbVie and asks that each

adopt a policy that no financial performance metric shall be adjusted to exclude Legal or Compliance Costs when evaluating performance for purposes of determining the amount or vesting of any senior executive Incentive Compensation award. “Legal or Compliance Costs” are expenses or charges associated with any investigation, litigation or enforcement action related to drug manufacturing, sales, marketing or distribution, including legal fees; amounts paid in fines, penalties or damages; and amounts paid in connection with monitoring required by any settlement or judgment of claims of the kind described above....

The proponents want the company not to exclude litigation and compliance costs from future performance metrics for executive incentive compensation because of the company’s exposure to a myriad of lawsuits from multiple jurisdictions. The company contends it needs flexibility and discretion to design and administer its compensation programs. It also believes that the exclusion of non-recurring or one-time events provide a more accurate picture of company performance.

Human rights: The SEIU Master Trust is taking up human rights and wants CoreCivic “to incorporate respect for inmate and detainee human rights into incentive compensation arrangements for senior executives.” The proposal expresses concern about lawsuits filed against the company regarding human rights violation allegations, involving both inmates and immigrant detainees—and argues this risk should be addressed in executive compensation arrangements.

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