“Because that is all our frazzled brains can take right now
On the 50th Anniversary of Earth Day, a history of the environmental movement in 5 cartoons. (With 2 bonus cartoons for those blessed with unusual powers of concentration at this strange time!)”
“This report serves to inform investors about the evolving risks associated with the use of natural gas within the power sector. At a time when investors are paying increasing attention to power utilities' exposure and contribution to climate change impacts, natural gas infrastructure build-out is expanding rapidly in the United States. As coal's inevitable decline within the energy system continues, natural gas, which is largely replacing it, is a growing source of climate concern. In isolation, risks to future cash flow for individual projects may seem minimal, but examination in aggregate reveals a different picture - that investment in new natural gas infrastructure is incompatible with long-term shareholder and societal well-being.
Initially, natural gas was considered a 'bridge' fossil fuel to a clean energy future, given findings that it has approximately half the climate impact of coal. Supporters pointed to natural gas-based technologies as a means to ensure reliable electricity service as the world adopted more variable clean energy technologies such as wind and solar. However, natural gas is still a fossil fuel whose use generates large climate warming emissions. To achieve a safe level of climate stabilization and protect investor portfolio exposure to global climate change, the bridge for natural gas and its associated emissions must have a clear end.
And yet, billions of dollars are poised for investment to build natural gas infrastructure throughout the United States. This investment drive, which includes power plants and pipelines with multi-decadal lifespans, is incompatible with maintaining a safe climate and avoiding disastrous and costly economy-wide impacts.”
“The practice of investing in companies or funds that aim to achieve market-rate financial returns, while considering positive social or environmental impact, is gaining more popularity than ever before among institutional investors, according to a new report from Morgan Stanley, jointly issued by its Institute for Sustainable Investing and its Investment Management division.
Among asset owners surveyed, 80% said that they actively integrated sustainable investing in 2019, up 10 percentage points from Morgan Stanley’s last biennial survey in 2017. Factors driving this increase include constituent demand, perceived potential for attractive financial performance and evolving regulations that are driving greater disclosure on environmental, social and governance (ESG) factors, the survey says.
“These results provide an additional proof point that sustainable investing has become table stakes,” says Audrey Choi, Chief Sustainability Officer and CEO of the Institute for Sustainable Investing at Morgan Stanley. “This year’s survey found more asset owners identifying return potential as a key driver for sustainability integration, and accordingly many envision a future where they will limit their allocations to managers with formalized sustainability approaches.”
“As part of the effort to research long-term value creation across the investment value chain, FCLTGlobal has reached a significant and surprising finding: board gender diversity is as important as revenue growth in predicting a company’s long-term success.
This finding could bring about a paradigm shift within global boardrooms and C-suites, where tremendous resources are devoted to generating revenue growth. Meanwhile, FCLTGlobal found that increasing board gender diversity—an action well within corporate leaders’ control—could generate similar results in terms of long-term value creation.”
“While New York Governor Andrew Cuomo’s order for non-essential workers to stay home last Friday was critical to flatten the coronavirus curve, it is also damaging businesses and costing jobs. An estimated 750,000 jobs and $1.5 to 2 billion in monthly wages have already been lost in the New York City alone, according to James Parrott of the New School’s Center for New York City Affairs—a New York-based investor group is leading an initiative to help.
Investor Statement on Coronavirus Response
Domini Impact Investments, Interfaith Center for Corporate Responsibility (ICCR), and Office of the New York City Comptroller Scott M. Stringer are leading a group of 195 institutional investors and investor networks with over $4.7 trillion of assets under management to urge the business community to consider five steps to limit the damage that coronavirus is causing to the global economy. Domini CEO Carole Laible explains: ‘We knew we had to do something, and clearly investors around the world felt the same way. The number of firms that contributed to the statement and signed on in less than a week speaks to the urgency.’”
“May has been a busy month for environmental, social, and governance (ESG) ratings and disclosure at the US asset management industry’s top regulator, the Securities and Exchange Commission (SEC) between Chairman Jay Clayton's warning yesterday on ESG ratings and a recommendation earlier this month for ESG disclosures. This is due in part to the growth in sustainable investing.
Sustainably invested assets in the US have grown 18-fold since 1995, according to US SIF Foundation. Globally, investors with $80 trillion in assets under management signed the UN-supported Principles for Responsible Investment, committing to incorporate sustainability issues into their investment analysis and decision-making. There has also been a groundswell of interest in sustainability frameworks and metrics: 600 ESG frameworks in use today; and as of 2016, there were more than 125 ESG data providers.
The SEC Chair Cautions Against Relying on Simple ESG Ratings
Yesterday, the FT reported that SEC Chairman Jay Clayton cautioned against integrating separate ESG metrics into a single ESG rating: “I have not seen circumstances where combining an analysis of E, S and G together, across a broad range of companies, for example with a ‘rating’ or ‘score’, particularly a single rating or score, would facilitate meaningful investment analysis that was not significantly over-inclusive and imprecise.”
EOS at Federated Hermes is pleased to release its latest Public Engagement Report which highlights some of the stewardship activities we have undertaken on behalf of our clients over Q1 2020.
The chatbot will see you now – How the financial services industry is embracing AI
Miners need to dig deep to allay investor concerns – Engagement with the mining sector on health and safety in the wake of Brumadinho
What makes a great board? – Ways to assess the effectiveness of a board’s culture, dynamics and behaviour
Shareholder engagement and its effects on target companies – An award-winning study shows that companies successfully engaged by EOS exhibit a lower risk profile, particularly when environmental issues are tackled”
“This research report is about impact investing activities in listed equity investments, a particularly new area of impact investing that has expanded rapidly in recent years.
Impact investing is an investment activity that seeks financial return, while at the same time creating impacts towards improving global environmental problems and socioeconomic systems. While there is a conceptual overlap with so-called responsible investment or ESG investment, there is a clear difference in the fact that impact investments are made with a clear "intention" to create impacts, and that investors themselves "measure" and "report" on the impacts they have created to clients and the public. Originally, private equity and other private markets were the focus of activity, but impact investing activity in listed equity has grown rapidly, with some data showing that as of the end of 2019, around 60 investment managers globally offered more than 120 impact investment funds.”
“The megatrend of 2019 was sustainability. Led by climate activist Greta Thunberg, youth across the world demanded politicians and business owners engage in immediate action on climate and sustainability. Investors followed in droves: According to research by Morningstar, estimated net flows into open-end and exchange-traded sustainable funds that are available to US investors totaled $20.6bn for 2019. This was nearly four times the previous annual record set in 2018.
The megatrend of 2020 so far is coronavirus, and with it a tendency to doubt that sustainability will remain a priority. Locked up in their homes and out of their schools, the youth climate movement has come to a near standstill. ‘Sustainability pays off only in economically rosy times’, we now hear critics say. ‘As soon as a crisis hits, priority shifts elsewhere.’”
“UK charity fund manager CCLA will send a letter on Monday to the largest London-listed companies, encouraging them to take steps to help mitigate the mental health impacts of the Corona pandemic on employees.
Investors representing close to £2trn in assets – including London-based investment manager Schroders – are expected to throw their weight behind the letter to the FTSE100 firms, which include the likes of HSBC, BP and Rio Tinto.
Amy Browne, Stewardship Lead at CCLA, told RI that the letter will encourage companies to take practical steps like introducing training for managers to help them spot warning signs in workers, increasing flexibility in performance appraisals and signposting resources on mental health.”
“I. Background 1. The Council of Experts on Japan’s Stewardship Code established Japan’s Stewardship Code on February 26, 2014, and approximately three years have passed since the Stewardship Code was revised by the Council of Experts on Japan’s Stewardship Code on May 29, 2017. Since the Code’s establishment, over 280 institutional investors have signified their commitment to the Stewardship Code, and the Corporate Governance Code was also revised in June 2018. While progress has been made in corporate governance reform to a certain extent under these Codes, it has also been pointed out that their effectiveness should be further enhanced.
2. Under these circumstances, on April 24, 2019, the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code (convened by the Financial Services Agency and Tokyo Stock Exchange; hereafter, “the Follow-up Council”) published an opinion statement entitled “Recommended Directions for Further Promotion of Corporate Governance Reform” (hereafter, “the Opinion Statement”). The Opinion Statement called for further revision of the Stewardship Code in order to enhance the effectiveness of corporate governance reform, referring to the importance of enhancing the quality of engagement between investors and companies, and encouraging proxy advisors and investment consultants for pensions to provide support and advice to institutional investors to enhance the functions of the entire investment chain.
3. Following up on the Opinion Statement, the Council of Experts on the Stewardship Code (FY2019), convened by the Financial Services Agency (collectively with the “Council of Experts on Japan’s Stewardship Code” and the “Council of Experts on the Stewardship Code,” hereafter, “the Councils”), met three times from October 2019 onward to discuss the second revision of the Code. Based on these discussions, the Council has generated and published a Stewardship Code revision draft to request comments from the public. With taking the comments into account, the Council has revised and published second revision of the Stewardship Code (hereafter, “the Revision Code”).”
“Initiatives in FY2019 l Working groups on stewardship activities and ESG investment and finance were set up to contribute to equity market reinvigoration and achieving a sustainable society. Continued to publish the LIAJ recommendations (this report) and implement collective engagement in FY2019.
Implemented measures to refine and raise the sophistication of activities at each LIAJ member firm in FY2019. Key measures included holding joint working group (WG) seminars based on the common theme of “Addressing climate change” as an institutional investor.
LIAJ believes that when companies and shareholders engage in a constructive dialogue and share a mutual awareness of issues, companies will be encouraged to take steps to increase shareholder value over the medium and long terms. Based on this belief, LIAJ hopes that this report will help to increase shareholder value over the medium and long terms, leading to the reinvigoration of the stock market as a whole.”
“In 2018, sustainable investing worldwide eclipsed $30 trillion in assets under management, according to the Global Sustainable Investment Alliance, with $12 trillion originating in the United States.
In the recent market downturn Morningstar’s Jon Hale says that mutual funds that integrate environmental, social or governance (ESG) factors registered record growth in the first quarter of 2020, beating the previous record in Q4 2019.
Clearly, sustainable investing is no longer on the margins, it’s gone mainstream in a big way.
With this in mind it is important to look at the research that is behind the investments, and the funds, and the different approaches taken to analysing data.
The battle between man and machine, that has played out in various arenas – such as Garry Kasporov versus IBM’s Big Blue, and when IBM’s supercomputer Watson out-dueled Jeopardy champions Ken Jennings and Brian Rutter – is now taking place in sustainability research.”
“When leading money managers embrace the need for corporations to be socially responsible and the Business Roundtable (BRT) declares that the purpose of a corporation is “to create value for all stakeholders,” it is safe to say that purpose has gone mainstream in the corporate narrative. A consensus is emerging that society and diversified investors are best served by companies that focus on sustainable value creation and respect the legitimate interests of all stakeholders, not just stockholders. But how can these high ideals be put into practice? That corporate employees and host communities have borne the brunt of the economic effects of the current pandemic only underscores the deepening sense that our corporate governance system’s empowerment of the stock market has undermined the fairness of our economy.
If companies and institutional investors are serious about responsible, sustainable wealth creation in a manner fair to all corporate stakeholders, then they must match high-minded rhetoric about purpose with accountability. This will require a new governance form that makes a company’s obligations to fulfill its purpose enforceable.”
“I’ve read so many 10-Ks, proxy statements, S-1s and other SEC filings during my lifetime that all of them became a blur of lookalike reports. That changed on March 26, 2020, when I read the Philip Morris International, Inc. (PMI) 2020 Proxy Statement. The PMI Proxy Statement differs from others in one critical respect. On pages 3-5 is a “Letter From The Board of Directors,” the text of which was unlike anything I had read in the past. The letter reaffirmed the board’s commitment to PMI’s corporate purpose, “to deliver a smoke-free future by focusing its resources to develop… smoke-free products that are less harmful than smoking.”
To the best of my knowledge, this is the first time a board of directors of a US publicly-held company has articulated a statement of corporate purpose, signed by every member of the board, in a document filed with the SEC. This act challenges conventional wisdom about the type of information that should or should not be included in SEC filings.”
“As an opener, RI asked first what governance development he most wanted and least expected when he first started Lens: “Any kind of public description of the compensation of the top executives,” was his immediate reply. Referring only to the least expected, he added: ‘Also, the horrible reality of the SEC being a co-optable and co-opted agency, which has gotten worse, and that’s too bad.’
Asked what he meant about the SEC, Monks replied: ‘We’ve been filing a resolution at Exxon to separate the chairman and CEO for about 30 years now, and 40% is about the level we get to, at which point they discover they have to cheat so we never get any more than that. But 40%’s quite a lot. When we began it was every other year that the SEC would throw the resolution out. The same words, precisely the same words [in the resolution]; and they would get more and more expensive lawyers until we finally got one skillful enough that they haven’t thrown us off since. That was the pattern. The SEC was a real obstructer in those days, now it’s subtler.’”
“Returning to CEO pay, Monks reminded RI of the rationale for founding ISS.
‘When we started ISS,” he said, ‘it was not a red-hot product and we were doing it because we thought it was the right thing and we weren’t going to make any progress on making corporations more accountable until you could empower shareholders and give them a meaningful voice.’
But he did not feel that they had made much progress on, potentially, the most important issue of accountability.
‘Nobody has enough of an economic interest in changing the way CEOs are paid. You need someone with a principled objection. And since most fiduciaries have got their lawyers to tell them that making such an objection would be a breach of their fiduciary duty because if a company actually lost a vote on pay there wouldn’t be any benefit to the beneficiaries. And, as [Vanguard founder] Jack Bogle always said, money managers have enormous conflicts of interest when they vote proxies in portfolio companies they want to get or keep as clients. If none of the people at Harvard, at the Ford Foundation, the Gates Foundation can be induced to take on a leadership role, who is going to do it?’”
The novel coronavirus (COVID-19) pandemic is creating a humanitarian and economic crisis. More than half a million people have been infected and over 20,000 have lost their lives, and the numbers are rising sharply. The risks are real for everyone and the impacts across all aspects of life will be profound and long-lasting for every segment of society but especially for those who are most vulnerable: the elderly and those suffering from underlying health conditions, those with poor access to affordable health services, insurance or savings and those in low-income and insecure jobs.
Business and COVID-19 Response
We have launched an urgent process to distill global best practice to guide business and business’ stakeholders immediate decision making and accelerate local action.”
“Many people will want to reach for the pitchforks as they watch fee-charging, space-squeezing airlines get a chunk of taxpayer money as part of the COVID-19 stimulus package, with few strings attached. Particularly so after a decade of airlines implementing huge share buyback programs.
As a result, the debate on buybacks may focus on the airline industry — but hopefully the very concept of the buyback will get a closer look.
In our work, we spend quite a bit of time thinking about long-term value creation; the concern being that incentives and short-term time horizons produce poor long-term outcomes — for corporates, investors, and citizens. Buybacks aren’t intrinsically short term or inherently suspect (and they can be an efficient means of recycling capital), but current practice and rationale seem laden with problems.”
“Companies’ activities have an impact on the world around them in ways that Date 03/03/2020 may not be priced into their market value. Their operations may in turn be affected by changes in their surroundings, either physical or social. How companies manage their use of natural and social resources can have a bearing on their ability to create value. As a long-term, global investor, we benefit from information on companies’ exposure to sustainability risks, how these are managed, and relevant performance metrics.
Corporate sustainability reporting is growing, but needs further standardisation to ensure relevance and comparability. A good next step would be reporting requirements based on a core set of globally accepted, financially material and standardised sustainability metrics. Over time, a coherent standard responding to the needs of both investors and other stakeholders is needed.
Sustainability disclosures should be subjected to similar internal governance procedures as financial disclosures, with a final sign-off from the board. As a starting point, companies can look to the industry-specific standards developed by SASB, and base broader social and environmental disclosures on the GRI Standards. Our public expectations of companies on selected sustainability topics provide further guidance.”
“The coronavirus is destroying American lives and livelihoods. Over 780 thousand Americans are confirmed to be sick. Covid-19 has overtaken heart disease as the leading cause of death in the US, and over 22 million Americans have filed unemployment claims over the past four weeks. Researchers from the University of Virginia estimate the private cost of an individual infection to be around $80k and the true social cost—including externalities—to be more than three times higher. What are the long-term implications for stakeholder capitalism and sustainable investing?
Stakeholder capitalism is a system in which companies are oriented to serve the interests of all stakeholders, including customers, suppliers, employees, and local communities, and shareholders. Stakeholder capitalism made a foray into mainstream corporate thinking last August when the Business Roundtable released a new Statement on the Purpose of a Corporation signed by 181 CEOs who committed to lead their companies for the benefit of all stakeholders. Nine months later, these commitments are being tested as companies make difficult tradeoffs during the coronavirus-inspired public health and economic crisis. This article will focus on one of the key stakeholders: employees.”
“We are living in the midst of the world’s largest test of corporate purpose. The COVID-19 virus has been a wake-up call that reveals the consequences of our constant pursuit of ever-cheaper products and services, global just-in-time supply chains, share buybacks and cutting CAPEX to reward short-term shareholder dividends that are deemed to be added-value.
Suddenly we see the blind spots. Our very lean global supply chains fail when all the supply comes from one region under lockdown. We witness how changing the configuration and software of an airplane for short-term profit sacrifices redundancy and safety. Then we notice when that same company is first in line for corporate bailouts. Trust is a bank account that is filled up by long-term trustworthiness. Our limited focus on shareholder value has drained our loyalty account with other stakeholders, just at the moment we most need their trust.”
“For close to 50 years, the SEC has periodically contemplated whether ESG1 disclosures are material and should be incorporated into its integrated disclosure regime for SEC registered Issuers. 2 This recommendation asserts that the time has come for the SEC to address this issue. Addressing ESG disclosure now will (a) provide investors with the material, comparable, consistent information they need to make investment and voting decisions, (b) provide Issuers with a framework to disclose material, decision-useful, comparable and consistent information in respect of their own businesses, rather than the current situation where investors largely rely on third party ESG data providers, which may not always be reliable, consistent, or necessarily material,(c) level the playing field among all US Issuers regardless of market cap size or capital resources, (d) ensure the continued flow of capital to US Issuers, and (e) enable the SEC to take control of ESG disclosure for the US capital markets before other jurisdictions impose disclosure regimes on US Issuers and investors alike.”
“Once the core part of the COVID-19 crisis is behind us, leading market participants will continue to engage with the long-term imperative. Major asset owners have asserted their long-term view and the stakeholder approach seems likely to accelerate given the shape and impact of this current crisis.
In practice, especially in a time of uncertainty and disruption, we know that the “long-term” is a place that’s often easy to talk about but harder to operationalise in capital markets that can seem hooked on right now and the next quarter.
The SEC’s guidance this week recognises that forward-looking information can be hard, but is highly valued, particularly during this crisis. But what is true during this crisis is surely true the rest of the time. To understand a company’s value proposition requires a real sense of its ability to innovate and be a source of disruption (not its victim). That requires a rounded view of the forward story and an assessment of key ESG issues and mega-trends.
We think there are a few simple principles to help shape disclosure towards decision-relevant information on long-term strategy that avoids the worst examples of impression management, virtue signaling and boilerplate. CEOs and their teams can engage with these as they experiment with the emerging practice of talking in greater detail about long-term strategy to the capital markets – an imperative now more than ever.”
“We build our economies with arbitrary metrics, while the Earth keeps track of the real score.
Summary
EBITDAC! Brilliant, really. One of a million memes launched by the coronavirus pandemic. Companies will now be tempted to report earnings before interest, taxes, depreciation, amortization and coronavirus costs!
The humour of EBITDAC offers a portal to recognize that companies have all along been operating in a GDPBESDA economy — Gross Domestic Product before ecological and social depreciation and amortization. Same pattern, larger scale.
We build our economies upon layers of arbitrary metrics — narrower and narrower measures of ‘wealth’ creation further and further disembedded from the underlying reality. Yet, underneath the delusion, and impossible to suppress indefinitely, human bodies and Planet Earth maintain the real score.”
“In the last few years, more and more investors have begun taking into account ESG (Environmental, Social, Governance) factors when evaluating a company's mid- to long-term corporate value. Listed companies have also been acting to step up their ESG-related activities and information disclosure.
With this background, JPX and TSE are publishing a Handbook to support listed companies who are choosing to work on ESG disclosure, linking their company's mid- to long-term corporate value improvement to its sustainable growth. Importantly:
1. Rather than listing specific data points, the Handbook brings together the issues that listed companies come across when looking into ESG disclosure and splits them into four steps that companies can follow, each including related processes and other points to think about. These are: 1. ESG issues and ESG investment; 2. Connecting ESG issues to strategy; 3. Oversight and implementation; and 4. Information disclosure and engagement.
2. By including real-life examples of disclosure and referring to existing disclosure frameworks and standards, the Handbook provides a practical guide which will enable companies to begin concrete work on ESG disclosure.”
“In this paper, we begin by discussing concerns that existing reporting practices, including those used on quarterly earnings calls, underweight ESG disclosures and amplify short-term pressures on corporate management. We survey the broad market trends that are encouraging greater focus on ESG and long-term strategy disclosures.
Building on extensive interactions with market participants, including sell-side analysts, we set out practical recommendations and a framework for how issuers can embed disclosures on ESG and long-term strategy into the content of the quarterly earnings call. These recommendations can be readily operationalized to meet the increased demand for ESG and long-term strategy information across the reporting ecosystem.
“The growing view that corporations should take into account environmental, social and governance (ESG) issues in running their businesses, and resistance from those who believe that companies should be managed solely to maximize share price, has intensified the focus on the more fundamental question of corporate governance: what is the purpose of the corporation?
The question has elicited an immense range of proposed answers. The British Academy’s Future of the Corporation Project, led by Colin Mayer, suggests that the purpose of the corporation is to provide profitable solutions to problems of people and planet, while not causing harm. The Business Roundtable has articulated a fundamental commitment of corporations to deliver value to all stakeholders, each of whom is essential to the corporation’s success. Each of the major US-based index funds has also expressed their views about the purpose of the corporations in which they invest, which, considered collectively, can be summarized as the pursuit of sustainable business strategies that take into account ESG factors in order to drive long-term value creation. On the other hand, the Council of Institutional Investors, some leading economists and law professors, and some activist hedge funds and other active investors continue to advocate a narrow scope of corporate purpose that is focused exclusively on maximizing shareholder value. The Covid-19 pandemic has brought into sharp focus the inequality in our society that, in considerable measure, is attributable to maximizing shareholder value at the expense of employees and communities.
For our part, we have supported stakeholder governance for over 40 years—first, to empower boards of directors to reject opportunistic takeover bids by corporate raiders, and later to combat short-termism and ensure that directors maintain the flexibility to invest for long-term growth and innovation. We continue to advise corporations and their boards that they may exercise their business judgment to manage for the benefit of all stakeholders over the long term.
“Amid the ongoing push for standardized, comparable and decision-useful ESG disclosures, regulators in the United Kingdom and the European Union have proposed additional disclosures and benchmarks to promote sustainable economic activity. The United Kingdom’s Financial Conduct Authority (FCA) has published a consultation paper proposing that certain U.K. issuers make climate change disclosures consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) or explain why they have not. The European Commission’s Technical Expert Group on Sustainable Finance has published its final Taxonomy report for screening environmentally sustainable activities.”
“In the face of the COVID-19 pandemic, many companies will confront unexpected and acute financial challenges, including liquidity shortages, potential debt defaults, and precipitous revenue declines. Although the cause of today’s financial distress is unprecedented, directors may continue to rely on familiar, well-established legal principles for guidance on their duties in these difficult circumstances. Those principles teach that financial distress—including the prospect of insolvency—does not: • weaken the protections of the business judgment rule; • prevent directors from seeking to preserve and maximize long-term value; or • increase the risk of liability for well-informed, non-conflicted decisions. As directors deal with the emergent challenges of the current crisis, we expect these principles, and the protections offered to directors, to be reaffirmed and amplified.”
“On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) became law. Eligible businesses that receive assistance under the CARES Act will be required to limit the compensation of highly compensated employees, and in some instances maintain specific workforce levels, for the duration of the assistance received and a specified period thereafter. Companies wishing to participate in CARES Act programs should give careful consideration to these limitations and requirements, which are based on broad principles that are subject to interpretation and require substantial guidance. Under the CARES Act, the Department of Treasury is required to publish procedures for application and minimum requirements of the programs no later than April 6, 2020 (i.e., 10 days after enactment of the CARES Act). We are optimistic that the Treasury will issue clear guidance on these topics to ensure that businesses receive urgently needed assistance with as little friction as possible, maximizing the positive impact of the stimulus for all Americans.”
“The pandemic has created massive business disruption, and weeks or months of further market dislocation and volatility seem certain. Equally certain is that stockholder lawsuits will appear as (or perhaps even before) the disruption begins to resolve. Delaware’s Caremark doctrine—which requires directors to monitor the corporation’s compliance with the law and to address indications of noncompliance—has become a preferred vehicle for stockholder plaintiffs seeking to bring representative litigation in response to corporate trauma. We accordingly expect an increase in Caremark litigation this year, with plaintiffs blaming a failure of board oversight for corporate losses resulting from the pandemic.”
“This evening, in an unusual and groundbreaking statement, the Chairman of the Securities and Exchange Commission and the Director of the SEC’s Division of Corporation Finance proactively addressed a challenging question that every U.S. publicly traded company is wrestling with: how to handle the upcoming earnings call now that the unprecedented global, human and economic impacts of COVID-19 are apparent? Their statement answering that question is a must-read for directors and senior executives, and it is attached in full.”
“Key ESG Considerations in the Crisis” by David M. Silk, David A. , David B. Anders, David E. Kahan, Sabastian V. Niles ,Lauren M. Kofke, Carmen X. W. Lu, and Ram Sachs. The opening paragraph:
“The social and economic turmoil unleashed by the global spread of COVID-19 and the collapse in the price of crude oil has brought to the fore a number of critical incident and systemic risk management concerns, including traditional ESG concerns such as human capital issues, business model and supply chain resilience, and consumer welfare and social impact. As governments across the globe implement assistance packages for affected companies and industries and their employees, attention has also turned to certain governance matters, notably, executive compensation, dividend payouts and stock buybacks. At the same time, while crisis management remains the first priority, influential institutional investors have signaled their continued focus on environmental matters and ESG disclosures.”
“The 2020 proxy season has been anything but routine, with the COVID-19 pandemic and the resulting state shelter-in-place orders requiring many companies to make the shift from physical to virtual annual meetings, and state corporate laws being amended to allow these virtual meetings to occur. Yet we had not seen a virtual annual meeting used in a proxy contest until April 30, 2020, when shareholders of TEGNA Inc. participated in the first election contest conducted at a virtual, rather than physical, annual meeting (all of the company’s twelve nominees were re-elected).
While the concept and technology have existed for several years, virtual annual meetings were slow to become widespread. The trickle that began after Delaware amended its business corporation laws to permit such meetings in 2000 gained steam after 2009, when Intel Corporation hosted the first virtual annual meeting using technology pioneered by Broadridge Financial Solutions. According to Broadridge, the number of virtual annual meetings more than doubled from 93 meetings in 2014 to 187 meetings in 2016, and there have been over 200 virtual annual meetings every year since 2017. This year, in light of the COVID-19 pandemic and lockdown requirements, most public companies are using virtual annual meetings, with a large majority doing so for the first time. Yet companies have been reluctant to use virtual meetings for contested situations, due to the extra complexity of such meetings and the unavailability of a commercial platform to do so.”
“This memorandum identifies and discusses key considerations relating to the management of human resources during the COVID-19 pandemic. While the current environment presents challenges across all sectors of the economy, it is essential to recognize that business conditions vary widely among different industries and even within specific categories of business. What makes sense for a company hit hard by the crisis may not be appropriate for a financially secure enterprise. Each company must continue to design and implement the compensation programs that will most effectively preserve its human capital.”
“Reopening to a New Normal: Considerations for Boards” by Andrew R. Brownstein, Steven A. Rosenblum, David M. Silk, William Savitt, David B. Anders, Andrea K. Wahlquist, Sabastian V. Niles, and Carmen X. W. Lu. The opening paragraph:
“As coronavirus infections begin to decline, a number of states have started to ease restrictions on public activity and permit businesses to resume normal operations. However, COVID-19 remains a threat that will likely persist into the remainder of the year and perhaps longer. Going forward, companies not only face an altered economic landscape but also heightened scrutiny on leadership, risk management and relationships with employees, customers and other stakeholders. While the development and execution of a “reopening plan” is a management function, boards of directors should be familiar with the major elements of that plan for their companies. Set forth below are some considerations for boards in preparation for a return to a ‘new normal’:”
“The recent release by the proxy advisor Glass-Lewis of an informal survey and report on the use of environmental and social goals in the incentive plans of S&P 500 companies in selected industries represents the latest reminder of the increasing significance of environmental, social and governance (“ESG”) goals in public company incentive compensation plan design. Consistent with other surveys and our experience, the Glass-Lewis report, titled E&S Metrics in Executive Compensation, observes that recent years have witnessed companies “increasingly adopting nonfinancial metrics, particularly those relevant to environmental and social factors,” as part of a broader “trend … reflective of a rising focus on sustainability among diverse stakeholder groups, including prominent shareholders.”1
The report, however, also notes that the use of these metrics is often of relatively modest weight, and in many cases subsumed within qualitative or individual performance components of the programs. Indeed, the principal challenge in implementing ESG incentive goals is devising objective criteria for measurement that will stand the test of time and shareholder receptivity, especially in the event that achievement of ESG metrics results in payouts when stockholders may not be reaping similar rewards under traditional financial measures. In our view, these challenges are not insurmountable, and the Glass-Lewis report offers a balanced investor group perspective on them. While acknowledging some wariness that environmental and social goals will prove too qualitative and discretionary, Glass-Lewis recognizes the importance of setting and achieving such goals as integral to the long-term value creation of a company, so long as the company can demonstrate and articulate in its proxy statement an appropriate rationale connecting the environmental and social goals to that long-term vision. Ultimately, ESG-related incentive goals may not fall squarely within current Institutional Shareholder Services and other proxy advisor frameworks for evaluating incentive compensation programs, but resisting the urge to run with the herd may be a necessary part of a larger movement to refocus what it means to be a successful company.”
“On April 27, 2020, France’s financial markets regulator, the Autorité des marchés financiers (‘AMF’), released a report containing certain proposals and observations regarding shareholder activism. The report was issued following the AMF’s review of recent activism matters in France, including its recent €20m fine levied against Elliott Management for obstructing an investigation into a takeover bid and failing to adequately disclose its positions in connection with the 2015 tender offer by XPO Logistics for Norbert Dentressangle.”
“S&P Global, Northern Trust and T. Rowe Price recently announced the expansion of their ESG analytics offerings: S&P Global has launched its proprietary S&P Global ESG Scores which covers more than 7,300 companies; Northern Trust has launched its ESG Analytics Summary which provides investors with snapshots of their portfolio’s ESG performance; and T. Rowe Price moved forward with deep integration of their proprietary “Responsible Investing Indicator Model” (RIIM) into buy-side investment professional analyses of individual companies and overall portfolio holdings and plans to implement portfolio-level ESG reporting into certain product offerings. The S&P Global ESG Scores use data from the SAM Corporate Sustainability Assessment (CSA), an annual evaluation of companies’ sustainability practices which was acquired by S&P Global from RobecoSAM last year. Northern Trust has partnered with ratings agency IdealRatings to provide data for its ESG Analytics Summary. T. Rowe Price’s RIIM builds an environmental, social and ethical profile for companies and the overall portfolio, and the UN Sustainable Development Goals are represented across the range of RIIM-measured factors.”
“The U.S. Securities and Exchange Commission’s (SEC) Investor Advisory Committee (IAC) has recommended that the SEC begin an “earnest” effort to update reporting requirements to include “material, decision-useful, ESG factors.” The IAC recommendation was high level and modest: it neither endorsed any particular disclosure framework nor made any specific prescriptions. Rather, recognizing the growing demand from investors and other market participants for standardized, comparable and reliable ESG data, and concluding that the SEC is best positioned to set a framework, the IAC recommendation calls on the SEC to begin outreach to investors, issuers and other market participants to develop “well-constructed, principles-based reporting.” The IAC reasoned that if the SEC does not take the lead with this type of disclosure, it is highly likely that U.S. issuers will be bound to follow standards imposed by other jurisdictions.
The IAC’s proposal highlights the SEC’s internal debate concerning these types of disclosures. As discussed in our prior memorandum, the SEC has long focused on traditional materiality formulations as the benchmark for disclosures and even recently has declined to drill down to require specific ESG-related disclosures.”
“The COVID-19 pandemic has caused a societal crisis of far-reaching implications. For the moment, employee, environmental, social and governance (EESG) concerns may appear to have taken a back seat to economic survival, but in the longer term, a robust corporate response will require firms to re-evaluate their priorities. Once the economic recovery has begun in earnest, there is likely to be heightened investor interest in, and public scrutiny of, key areas of EESG, particularly as they relate to firm performance, human capital and enterprise resilience. The COVID-19 pandemic has shown that the nexus between corporate performance and societal wellbeing has never been stronger. The potential role of major corporations in perpetuating global inequities and exacerbating the disparate effects of large-scale crises, and their capacity to ameliorate human suffering through private sector action in support of government initiatives, are indisputable. For better or worse, the pandemic and future crises are likely to increase the extent to which the public perceives large corporations as entities that can and should bear a heavy burden of corporate social responsibility.”
“When leading money managers embrace the need for corporations to be socially responsible and the Business Roundtable (BRT) declares that the purpose of a corporation is “to create value for all stakeholders,” it is safe to say that purpose has gone mainstream in the corporate narrative. A consensus is emerging that society and diversified investors are best served by companies that focus on sustainable value creation and respect the legitimate interests of all stakeholders, not just stockholders. But how can these high ideals be put into practice? That corporate employees and host communities have borne the brunt of the economic effects of the current pandemic only underscores the deepening sense that our corporate governance system’s empowerment of the stock market has undermined the fairness of our economy.
If companies and institutional investors are serious about responsible, sustainable wealth creation in a manner fair to all corporate stakeholders, then they must match high-minded rhetoric about purpose with accountability. This will require a new governance form that makes a company’s obligations to fulfill its purpose enforceable.”
“What do climate change, deforestation, biodiversity loss, ecosystem degradation, population growth, eating habits, and communicable diseases have in common? They are all related to each other and our interconnected global world is accelerating and magnifying the negative feedback loops between them. There is strong scientific evidence behind this claim but I didn’t learn this from reading a scientific journal. I learned about it in a recent report, “Pandemic: The inextricable link between human, animal and ecosystem health and the emergence of communicable disease” by Anita D. McBain, Head of Responsible Investment and ESG at M&G Investments, a London-based active asset manager with $364 billion in assets under management as of December 31, 2019.
“This paper investigates the role of the intensity and relevance of ESG materiality in equity returns. Adopting the classifications of materiality provided by the Sustainability Accounting Standards Board (SASB), the paper introduces the concept of the financial relevance and financial intensity of ESG materiality in order to estimate how it explains equity returns. The results of the analysis, based on a large sample of U.S. companies included in the Russell 3000 from January 2008 to July 2019 show that not only do ESG rating change (ESG momentum) have a consistent impact on equity performance, but also that the market seems to reward more those companies operating in industries with a high level of ESG materiality concentration. The implication is that the equity premium of listed companies is better explained by the concentration of material is-sues (i.e., the Gini index) than by the ESG momentum.
Keywords: SASB, Nonfinancial Information, ESG Materiality, Financial Relevance of ESG Materiality, Financial Intensity of ESG Materiality, Fama-French, CAPM”
“How much taxes companies pay and the transparency of tax reporting have been contentious issues for decades. Governments around the world have failed to create standards for transparent tax reporting, particularly on a country-by-country basis. Many large and highly profitable multinational companies have taken advantage of this for years to pay little to no taxes. As is often the case when governments fail, it is up to the NGO community to represent civil society. In this case it is the sustainability standard-setting organization Global Reporting Initiative (GRI).
On December 5, 2019 GRI announced the first global standard for tax transparency—GRI 207: Tax 2019. It was approved by the Global Sustainability Standards Board (GSSB) in September 2019. ‘The GRI Tax Standard is the first global standard for comprehensive tax disclosure at the country-by-country level. It supports public reporting of a company’s business activities and payments within tax jurisdictions, as well as their approach to tax strategy and governance.’ Here is a video of the official launch event held in London on January 20, 2020.”
“Three months ago, in what seems like another age, I wrote about the concept of dynamic materiality. It was developed by Thomas Kuh, Andre Shepley, Greg Bala, and Michael Flowers of Truvalue Labs (TVL), a San Francisco-based technology company (to whom I’m an advisor) which uses AI and big data to develop signals on a variety of intangible risk factors. The basic idea of dynamic materiality is that what investors consider to be the material environmental, social, and governance (ESG) issues changes over time. This can happen slowly, as with climate change and gender diversity, or most quickly, as with plastics in the oceans.
I was not aware of the work TVL was doing until late last year. At that time, and in a completely separate initiative, the Boston Consulting Group (Doug Beal, Veronica Chau, Vinay Shandal, Leonore Tauber, Wendy Woods, and David Young) was collaborating with the World Economic Forum (Katherine Brown and Maha Eltobgy) on a project that resulted in the White Paper “Embracing the New Age of Materiality: Harnessing the Pace of Change in ESG” that was published last month. I am also an advisor to BCG and was involved in this project but I was the only one who knew both projects were going on and kept a “Chinese Wall” between them.
This is an unusual report to be written by an asset manager. When asked what motivated her to do this research, McBain explained: “Long term active asset managers like M&G need to be aware of all risks that may affect our customers’ investments – both financial and non-financial. The current pandemic has brought into sharp focus the unintended consequences of unsustainable behaviours and serves as a stark reminder that everything comes from somewhere.”
