Creating Impact Through Client Portfolios

Impact Reflection

Ten years ago, the landscape of shareholder resolutions was very different than it is today. At that time there was an emphasis on governance issues such as eliminating requirements for super-majority votes or converting board elections to be staggered over multiple years. Over the last decade, social and environmental issues have joined governance as top issues on annual shareholder ballots, reflecting both investor and popular concerns.

In the early years of shareholder advocacy, social and environmental proposals often achieved only a very small number of positive votes, with percentages in the single digits. Proxy advisory services leader Glass Lewis observes that 20% is the threshold that commonly prompts action from company management¹ So, while recent vote levels between 15% and 35% may also seem low, those votes reflect better traction in conversation with management. There isn’t always agreement on the way various issues impact companies’ risk profiles and financial bottom lines, but these votes presage substantially more action that we believe will create momentum toward a fairer, more sustainable economy for all stakeholders.

Below we summarize a few ways in which investors are catalyzing conversations with corporate management in the areas of climate change and social justice specifically.

The need to understand, measure, and reduce greenhouse gas (GHG) emissions is no longer up for debate. Instead, the discussion focuses on details and timing of policy implementation. Activist investors have pressured companies for years to measure their emissions, to create goals for reduction, and to develop detailed plans about how they will manage the transition. The latter effort is intended to hold companies accountable for making their plans actionable rather than just aspirational.

• Bank of America signed on as a member of the Net Zero Banking Alliance, and has committed to intensity reduction targets for its financed emissions by 2030, yet they have no specific transition plan to accomplish those targets. In the 2023 shareholder vote, 28% of shareholders voted to require the bank to write a specific transition plan.

• Goldman Sachs and JP Morgan are in the same boat as Bank of America: they have signed on as members of the Net Zero Banking Alliance and set 2030 intensity reduction targets, but have not developed specific transition plans. Their 2023 shareholder votes in favor of doing so came in at 35% and 30% respectively.

These votes are not yet majority votes that would mandate company action, but they are significant enough to substantively engage corporate management to make progress to develop the needed detail.

Insurance that protects against environmental externalities is another element of finance that can impede or accelerate the conversion to more sustainable power generation. Recognizing externalities means higher expenses, particularly for legacy fossil fuel production facilities or at-risk properties. Shareholders want companies to charge for the true level of risk – or alternatively, underwrite more cautiously and defund activities such as emissions-intensive manufacturing, or stop providing homeowners insurance to properties in flood and fire zones.

• Berkshire Hathaway is a large, diversified company with a significant emphasis on insurance underwriting and re-insurance. Insurance makes up 26% of Berkshire’s total business, and while their global peers are beginning to address GHG emissions associated with underwriting and investment activities, Berkshire has not. In 2023, investors continued to press Berkshire to measure and disclose the emissions associated with their operations, and to establish targets aligned with the Paris Climate Agreement’s goals. The result: 23% of shareholders voted in favor (which represented 44% of independent shareholders).

• Travelers is another company that has fallen short in developing specific targets or plans to achieve them. In their 2023 shareholder vote, 15% voted in favor of a request that management measure and disclose how they will reduce emissions impact in their underwriting portfolio.

Efforts have been underway for many years to encourage companies to go beyond the minimum requirements of EEO-1 reporting and measure and disclose gender and racial equity data in hiring, promotion, and compensation. Many of these conversations don’t go to a shareholder vote, as companies are increasingly willing to engage outside of the shareholder meeting context. Some companies that have been particularly resistant are now getting a clearer message from the shareholders.

• Mohawk Industries, a large flooring manufacturer, provides virtually no data on workforce demographics for hiring and promotion. In their 2023 resolution, 21% of shareholders voted in favor of the company taking steps to develop measurements.

• United Parcel Service (UPS) also lags when it comes to tracking gender and racial factors in hiring through data collection and reporting on promotions and retention, despite having faced allegations of race, age, and gender discrimination. In 2023, 25% of shareholders voted in favor of the resolution for more and better measurement.

Diversified portfolios are designed to create financial resiliency for investors. They can also simultaneously be structured to recognize that underlying investments have an impact on the broader world, giving fund managers an opportunity to engage with company management to pursue positive environmental, social, and governance changes. Accomplishing these dual goals isn’t simple, but it is a worthwhile effort that can benefit a portfolio financially over the long-term.

Resources

¹ Harvard Law School Forum on Corporate Governance, ”Pay Equity-Related Shareholder Proposals in 2023,” September 5, 2023.