The 2019 proxy season: How investors are stepping up on ESG

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Investors have been stepping up efforts to prod companies to advance their commitments to environmental, social and governance (ESG) activities. While 2018 was a record year for investor support of environmental and social shareholder proposals, 2019 promises to become the year environmental and social issues take center stage.

Investors themselves rapidly have changed their own policies to put ESG factors more into focus. The Edelman Trust Barometer Special Report on Institutional Investors, which surveyed 500 institutional investors globally, found that 90 percent of respondents said their firm has changed its voting and/or engagement policy to be more attentive to ESG risks, and two-thirds said this change had taken place in the past year.

A glimpse of recent shareholder proposals submitted to U.S. companies highlights the topics investors are most focused on.

1. Climate risks are at the forefront of investor pressure

Climate-related shareholder proposals are rising in numbers and receiving growing support from investors, an analysis by sustainability nonprofit Ceres shows. Such proposals recently have focused on many facets of sustainability including reporting on climate-related risks; setting measurable goals for renewable energy sourcing and reduction of greenhouse gas emissions; and disclosing the impact of supply chains on deforestation.

A coalition of 80 investors representing $6.5 trillion in assets under management challenged several fast food giants to set bigger targets to reduce the greenhouse gas emissions and water usage of their meat and dairy suppliers. BP shareholders recently voted in favor of a climate proposal requesting greater disclosure from the company around its alignment with the Paris climate agreement. Amazon received a shareholder proposal seeking to compel it to report on the environmental and social impact of food waste generated from its operations. In response to investor pressure, Tesla published its first sustainability report (PDF) describing its ESG policies, management strategies, quantitative performance metrics and improvement targets.

2. The fight against plastic erupts

The fight against plastic erupted in 2018 and continues to be a major focus this year with a number of shareholder proposals challenging companies to be accountable and report on their impact on plastic waste. Investors are pressuring top plastic producers to issue annual reports on plastic pollution, outlining their policies and actions to reduce the volume of their materials contaminating the environment. Following investor pressure led by As You Sow, a nonprofit organization promoting environmental and social corporate responsibility, several major energy companies agreed recently to start reporting publicly on plastic pellet spills.

3. The drug price debate rages on

With prices on hundreds of drugs increasing by 6.3 percent on average at the beginning of the year, the drug-pricing debate remains a key focus for ESG investors. Such faith-based organizations as the Interfaith Center on Corporate Responsibility have filed a total of nine shareholder resolutions asking several major pharma companies to report on how they integrate risks related to public concerns about drug pricing in their executive compensation programs.

4. Positive halo for companies that take a leadership stance

Following input from investors, many companies are taking the opportunity to adopt a leadership stance on important commitments to sustainability. Yum! recently was lauded for taking a leadership stance on commitments to reduce greenhouse gas emissions and explore purchasing renewable energy for its restaurants. The company committed to setting science-based targets to reduce its GHG emissions in its operations and agricultural supply chain and to explore relying on renewable energy to power its global chain of restaurants.

UPS similarly was praised for its recent commitment to buy the largest amount of renewable natural gas purchased in U.S. history to power its truck fleet. This comes two years after UPS committed to reducing its environmental impact and set aggressive sustainability goals by 2025. UPS received a shareholder proposal in 2017 asking the company to release a report evaluating the climate benefits and feasibility of adopting measurable targets for increasing its renewable energy sourcing; the proposal subsequently was withdrawn illustrating the company’s proactive actions on these issues.

What steps should companies take?

Companies must take genuine action on ESG to get ahead of investor pressure:

Focus on materiality: Looking past superficial philanthropy, investors are zeroing in on the ESG issues that have a real impact on a company’s long-term prospects and valuations. Companies must identify which ESG strategies are financially material. The backbone of this is a "materiality analysis," a formal exercise to engage internal and external stakeholders in determining the ESG issues most relevant for the business that have the greatest impact on its future. A useful resource to identify and classify such issues is the Sustainability Accounting Standards Board’s (SASB) Materiality Map.

Set priorities for more and better ESG disclosure: All corporate stakeholders — from investors to consumers to regulators — are increasingly focused on a company’s ESG practices, so it’s mission-critical for companies to proactively self-report. A company’s ESG story should be disbursed widely on its communications platforms including annual reports, proxy statements and earnings calls, as well as the corporate website and other owned channels. Companies also must engage in regular dialogue with key investors and stakeholders on ESG performance.

Make real commitments: Investors will see through ESG actions that do not drive genuine improvement for the business or its stakeholders. In addition, recent research found that investors want companies to take a stand on social issues that are important to maintaining a healthy operating environment. Companies must take meaningful action to make a positive difference within their industry and communities. Only by making genuine commitments backed by substantive action can companies win credit from their investor base and avoid unnecessary shareholder pressure.