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Dear Fellow Supporters of Sustainability,
 
The topics of my Spring 2021 newsletter are:

  • Climate Change
  • Sustainable Investing
  • Shareholder Stewardship and Engagement
  • Corporate Purpose
  • Corporate Governance
  • Corporate Reporting
  • Human Rights
  • Oxford Rethinking Performance Initiative
  • The Shareholder Commons
  • Memos from Wachtell Lipton
  • 20 Pieces from Me

Climate Change

Video of Gail Bradbrook on CNN about protesters at G7 Summit in Cornwall


’We need climate competent board members,’ says ShareAction chief executive.” An interview with Catherine Howarth.


COP26: Bridging the gap of climate ambition No time to wait” by Guilllaume Emin and Patrick Herbert.
 
Overview
 
Following recent revisions of commitments during the UN “Climate Ambition Summit” in December 2020 and the US-led “Leaders Summit on Climate” in April 2021, we estimate that the resulting global trajectory will lead to a 2.9°C warming ‒ a level that still falls short from the “well below 2°C” Paris target.
 
To bridge the gap, the collective efforts to reduce GHG emissions would need to improve significantly in the next months and during COP26 to include:
 
• a strong reinforcement of policy interventions to limit GHG emissions;
• some profound economic transformations in the fossil fuel consuming sectors (power generation, transport, manufacturing activities, buildings, etc.);
• a massive asset reallocation, with key implications for investors globally in relation to risk management, asset prices and investment strategies.
 
The impetus to do so is both desirable (given its economic and social benefits compared to the severe impact of global warming), and increasingly possible due to positive policy and technological developments.
 
This paper examines (i) the “ambition” gap between countries’ official commitments to limit greenhouse gas (GHG) emissions and their requirements to reach the Paris Agreement objective, and (ii) key levers available to meet that goal and some likely trends to anticipate in this context.


Fast Forward: MIT's Climate Action Plan for the Decade” The opening paragraphs:
 
Letter to the Community
 
To the members of the MIT community:
 
In the fall of 2015, we announced MIT's first climate action plan. Today, building on that five-year vision, we share a new plan that mobilizes MIT’s strengths to address this accelerating crisis: Fast Forward: MIT’s Climate Action Plan for the Decade.
 
You can find the highlights on MIT News.
 
The plan is guiding our actions already. At the same time, it is a living document, and we welcome your thoughts. Please email fastforwardclimate@mit.edu.”


The bigger short: carbon” by John Mulliken. The opening paragraphs:
 
“Since the movie based on Michael Lewis’ The Big Short came out, many people outside finance now know what a “short” is — a bet that something else is going to lose value. In the film, the bet was that mortgage backed securities were going to decline in value - which turned out to be a very good bet for those who made it, as the financial system froze up and the price of those mortgage bonds dropped precipitously. Those guys in the movie made a lot of money on a good bet. I’m suggesting that we (the world, investors, everyone) have made a really bad bet and we don’t even know it.
This even bigger short that we all hold is pervasive, and unfortunately it doesn’t look good. It’s an enormous financial risk effectively equal to the financial cost of climate risk. We are all, whether we realize it or not, collectively and individually engaging in commodities trading on carbon futures. Very few companies are doing the math1 on the exposure.”


Sustainable Investing

The Ethical Investor: Universities and Corporate Responsibility” by John G. Simon, Charles W. Powers, and Jon P. Gunnemann. A book published by Yale University Press in 1972.


ESG Rules and Regulatory Trends” webinar with Robert Eccles, Ken Rivlin, and Andra Troy and moderated by Ana Luci Grizzi.


100 Days Later, Is Sustainable Investing Any Easier?” by Bhakti Mirchandani. The opening paragraphs:
 
“Who the president is matters to sustainable investing.
 
One hundred days into Joe Biden’s presidency, his administration’s executive orders and agency actions have reinstated and advanced an environment that empowers sustainable investing. President Biden has also assembled a strong climate-change team and bestowed significant authority on it, including establishing a new White House Office of Domestic Climate Policy, headed by Gina McCarthy, and appointing former Secretary of State John Kerry to the U.S. National Security Council as special presidential envoy for climate.
 
All of this sets our children and grandchildren and wildlife up for a more secure future — but threats to sustainable investing remain.”


ESG scores and beyond Part 2: Contribution of themes to ESG Ratings: a statistical assessment” by Kevin Ratsimiveh and Ruben Haalebos. The Introduction:

“A FTSE Russell ESG rating is the culmination of a rigorous process that combines various aspects of an issuer's total Environmental, Social or Governance exposure and performance, into a single score. Whereas the process synthetizes ESG information objectively, a company’s exposure to the Environmental, Social or Governance themes is ultimately driven by its activity.  However, while some themes are important to all issuers, and will participate in most of the FTSE Russell’s ESG rating, others will contribute less.
 
With the attention of investors being increasingly focused on sustainability issues, awareness of these ESG ratings characteristics is essential, as it allows the user to have a better overview of their meaning.
 
This paper answers the question “What themes matter most in ESG ratings?”, by explaining the information underpinning FTSE Russell’s ESG rating and identifying the themes which provide the highest contribution to an overall score. It
 
• Provides an overview of the FTSE Russell’s ESG dataset and rating methodology
• Measures the ESG themes’ individual contributions to the overall ESG performance
• Distinguishes the most contributing themes by industry group
• Proposes approaches on how best to use the various themes’ identified contributions”


CalPERS CEO on the ALM challenge” by Amanda White. The opening paragraphs:
 
“The CEO of CalPERS Marcie Frost has a big year ahead. Not only is the fund still searching for a CIO, but it will also conduct its four-yearly asset liability study this year. Frost speaks to Amanda White about the challenges of the top job at the largest fund in the US and how she works to make sure the “real story” of CalPERS gets told.
 
Marcie Frost is grounded in her own upbringing in the mission of CalPERS – to provide financial security for the fund’s two million members. She witnessed her grandparents’ retirement savings dwindle due to unexpected events and their struggle to live on social security.
 
‘They were savers, they had no debt but they struggled. It was very difficult to watch. As ageing people they didn’t the have financial options to access medical and healthcare. The impact that had on them, seeing them stressed about finances was tough, and I think that is what pushed me into this retirement side and what can I do to make sure that people as they age have that dignity to pay bills. That is the most important part of the job,’ she says.
 
She focuses on ensuring members trust the fund will provide financial security in retirement, adding that the average retirement balance at CalPERS is only just over $30,000.”


How CalSTRS’ CEO achieved funded status” by Amanda White. The opening paragraphs:
 
“Jack Ehnes has been chief executive of CalSTRS for nearly 20 years, and while there have been many achievements in his long tenure none speaks higher than the work he did to manage the various competing stakeholders in order to get the fund back into the black. It now has a clear long-term strategy for a fully funded status and be able to achieve its mission of securing the financial future of California’s educators. He talks to Amanda White.
 
The $291 billion US fund, CalSTRS is a mission-directed organisation, having the same mission statement since 2002 – which is to secure the financial future of educators in California.
 
‘It doesn’t matter where you work at CalSTRS – whether you’re in a technical role in investments or in the call centre – all of our employees would know the statement,’ the fund’s long-standing chief, Jack Ehnes told Top1000funds.com in an interview. ‘I don’t want to minimise this.’
 
‘I personally conduct inductions for new employees every month and I always ask them the mission statement of the last place they worked, and no-one can ever answer it.’
 
But for CalSTRS the ability to achieve that mission has been threatened over the past decade or so, with the 2008-09 financial crisis not just resulting in a couple of years of bad returns, but a pervasive and long-lasting impact on the funded status.”


The Division of Examinations’ Review of ESG Investing*” Risk Alert by SEC Division of Examinations. The opening paragraph:
 
“Investor demand for investment products and financial services that incorporate environmental, social, and governance (“ESG”)1 factors has increased in recent years. In response to this demand, a range of investment advisers have offered several ESG investment options, including registered investment companies and pooled investment vehicles, e.g., private funds (collectively, “funds”), and separately managed accounts. Today we are issuing this Risk Alert to highlight observations from recent exams of investment advisers, registered investment companies, and private funds offering ESG products and services (collectively, “firms”).


ESG 2.0: Measuring & Managing Investor Risks Beyond the Enterprise-level” by Delilah Rothenberg, Raphaele Chappe, and Amanda Feldman. The Abstract:
 
“Do environmental, social, and governance (ESG) and impact investing practices in their current forms provide investors with sufficient tools to play a meaningful role in “Building Back Better” following the COVID-19 crisis? Many of our existing ESG and impact investing frameworks focus on issues at the portfolio company level, but they do not take into account potential negative impacts from capital structures and investors’ influence in shaping them. In this paper, the Predistribution Initiative (PDI) explores how the growth of institutional investors (asset owners and allocators) and certain asset allocation strategies can be in conflict with ESG objectives. The conflict materializes in various interconnected ways, particularly from institutional investors’ role in increasing global debt levels and fund manager and corporate consolidation, which in turn can create barriers for diverse fund managers and entrepreneurs, jeopardize quality jobs, erode the quality and affordability of goods and services, increase asset class correlations, reduce diversification opportunities, and ultimately fuel economic inequality and market instability. For long-term, diversified institutional investors, or “Universal Owners” of the market, these dynamics eventually translate into lower financial returns. For workers and communities, these dynamics translate into greater precarity and inequality.

This paper encourages such investors to consider how their activities may contribute to these issues and how they can improve their own practices to better manage systemic and systematic risks. We review the issues and then propose several preliminary paths toward solutions that we intend to workshop and fine-tune with investors and other stakeholders. Potential solutions focus on diversifying asset allocation to more regenerative investment structures and asset classes, building an enabling environment through adjustments to team incentive structures, performance reviews, benchmarking and valuation methodologies, and field-building.
 
Keywords: Non-bank Financial Institutions, Institutional Investors, Universal Ownership, Universal Owners, ESG, Impact Investing, Corporate Governance, Private Equity, Private Debt, Leveraged Loans, High Yield Bonds, CLOs, Asset Allocation, Systemic Risk, Systematic Risk”


Focus on SI data trends #2: materiality in sustainable investment is in the eye of the beholder” by David Harris. The opening paragraphs:

“Materiality is central to sustainable finance. But what appears to be a straightforward concept is proving slippery in practice—and is triggering disagreements that could have significant implications for how companies disclose environmental and social indicators, and how regulators construct the market infrastructure on which sustainable finance depends.
 
Put simply, materiality is a measure of the importance of a piece of information when making a decision.
But when this concept is used to assess the sustainability performance of a company, it becomes more complicated.
 
There are literally thousands of raw environmental, social and governance (ESG) indicators that can provide insights into the performance of companies. For any one theme—health and safety, or biodiversity, say—there is a wide variety of potential measures. Across FTSE Russell and Refinitiv, we hunt down data across hundreds of indicators based on the main global sustainability reporting frameworks.
 
Clearly, some indicators are far more relevant for certain industries than others: the environmental and social impacts of lithium mining will be highly relevant for an electric car company; less so for a clothing group. Geography is also important. Water usage is more important to a company in a drought-prone region than its peers in wetter climes.”v


Natural Capital and Biodiversity: Reinforcing Nature as an Asset” by Maurice Bryson, Michael Wilkins, and Marion Amiot. The opening paragraphs:
 
“Biodiversity loss is a global phenomenon. The recent intergovernmental report on biodiversity and ecosystem services estimates that of the eight million plant and animal species on earth (75% of which are insects), around one million are threatened with extinction. In the U.S. and Canada, bird numbers have declined by a third since 1970, with even the most abundant species, like starlings, seeing a 49% decline over the same period. The Yangtze River dolphin, last seen in the early 2000s, is thought to be the first dolphin species to be driven to extinction by humans. Australia’s regent honeyeater is also facing extinction because declining numbers are inhibiting the males’ ability to learn their courting song.

What can governments and corporations do to reverse these alarming trends? The first step is to acknowledge the implications of the destruction of nature. Increasingly, biodiversity loss driven by habitat degradation and climate change, as well as by the introduction of invasive species and other anthropogenically-induced factors, is being recognized as a systemic risk with far-reaching consequences. The World Economic Forum estimates that more than half the world’s GDP, or $44 trillion, is moderately or highly dependent on nature and its services. With such a dependence on nature, why are we systematically destroying it? The question is perhaps best answered with another: what is driving the biodiversity decline?

The answer, on land at least, is relatively simple. Terrestrial biodiversity loss is tied to three consumer staples: palm oil, beef, and soy. These soft commodities are responsible for around 70% of the 10 million hectares of natural habitat that the UN Food and Agriculture Organization estimates is lost to deforestation globally each year. Marine biodiversity is also suffering, with shark and ray populations declining by 71% since 1970, driven by an 18-fold increase in fishing pressure, meaning that extinction is now a near-term risk. Such is the complexity of nature that the loss of a top-level predator from our oceans could have other far-reaching and unforeseen effects.”

Is There a Biologic Basis to Short-termism? If So, What Can We Do About It?” by John Lukomnik and James P. Hawley. The opening paragraph:
 
“Everyone has an opinion about short-termism. It has been blamed for underinvestment in infrastructure, basic science, human capital, and research and development. As the CFA Institute, the professional body for portfolio managers and analysts notes: ‘Short-termism refers to an excessive focus on short-term results at the expense of long-term interests…Corporations too often respond to these pressures by reducing their expenditures on research and development and/or foregoing investment opportunities with positive long-term potential. These decisions can weigh against companies’ development of sustainable products or investment in measures that deliver operational efficiencies, develop their human capital, or effectively manage the social and environmental risks to their business.’”


Equitable Growth, Finance & Institutions Insight: Demystifying Sovereign ESG” by Ekaterina M. Gratcheva, Teal Emery, and Dieter Wang, The opening paragraphs from the Executive Summary:
 
“The evolution of sustainable finance to mainstream finance has been motivated by a growing demand for the financial sector to play a greater role in the transformation of the current economic model into a more sustainable one (Boitreaud et al. 2020). The introduction of the United Nation’s (UN) Sustainable Development Goals (SDG) and the Paris Agreement on climate change in 2015 have helped galvanize a societal shift to ensure a sustainable future and to fight climate change in particular. As a result, the pace of environmental, social, and governance (ESG) integration, which has become the most prevalent form of sustainable finance, has accelerated in recent years.
 
Market participants continue to grapple with adapting the ESG framework to the sovereign context, despite significant progress of ESG integration in the corporate bond and equity asset class. This challenge is due to the multifaceted nature of ESG-related issues facing governments in relation to corporate entities, as well as a more complex transmission mechanism of the sovereign debt asset class to sustainable outcomes in the real economy.”


Impact investments: a call for (re)orientation” by Timo Busch, Peter Bruce-Clark, Jeroen Derwall, Robert Eccles, Tessa Hebb, Andreas Hoepner, Christian Klein, Philipp Krueger, Falko Paetzold, Bert Scholtens & Olaf Weber. The Abstract:

Practitioners and academics have been using different terms to describe investments in the sustainability context. The latest inflationary term is impact investments—investments that focus on real-world changes in terms of solving social challenges and/or mitigating ecological degradation. At the core of this definition is an emphasis on transformational changes. However, the term impact investment is often used interchangeably for any investment that incorporates environmental, social, and governance (ESG) aspects. In the latter instance, achieving transformational change is not the main purpose of such investments, which therefore carries the risk of impact washing (akin to “green washing”). To offer (re-)orientation from an academic perspective, we derive a new typology of sustainable investments. This typology delivers a precise definition of what impact investments are and what they should cover. As one central contribution, we propose distinguishing between impact-aligned investments and impact-generating investments. Based on these insights, we hope to lay the foundation for future research and debates in the field of impact investing by practitioners, policymakers, and academics alike.


Financial world greenwashing the public with deadly distraction in sustainable investing practices” by Tariq Fancy. The opening paragraphs:
 
“The financial services industry is duping the American public with its pro-environment, sustainable investing practices. This multitrillion dollar arena of socially conscious investing is being presented as something it's not. In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it.
 
As the former chief investment officer of Sustainable Investing at BlackRock, the largest asset manager in the world with $8.7 trillion in assets, I led the charge to incorporate environmental, social and governance (ESG) into our global investments. In fact, our messaging helped mainstream the concept that pursuing social good was also good for the bottom line. Sadly, that's all it is, a hopeful idea. In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.”


Shareeholder Stewarship and Engagement

Not Your Father’s Proxy Season” a podcast with Ric Marshall and Tim Youmans.
 
“From Berkshire Hathaway to ExxonMobil, shareholder proposals for transparency and action on climate change and diversity have subsumed 2021’s annual meetings. It may feel sudden, but it’s actually one link in a long chain of changed approaches on the part of investors, regulators and companies. Listen in on a conversation between Tim Youmans, Head of North America Engagement for EOS at Federated Hermes, and MSCI’s Ric Marshall, Executive Director, ESG Research.
 
Learn More: https://www.msci.com/perspectives-pod...


What You Need To Know About The 2021 Proxy Season,” by Bhakti Mirchandani. The opening paragraphs:
 
“Myriad shareholder proposals advanced sustainability and inclusion across corporate America this past proxy season as strategic engagement between investors and investees on sustainability continues to grow. According to US SIF Foundation, $9.8 trillion of sustainably invested assets use corporate engagement and shareholder action to influence corporate sustainability, including via strategic engagement, filing shareholder proposals, and proxy voting. The 2021 proxy season set new records with at least 467 shareholder resolutions on environmental, social and governance (ESG) issues.  
 
Trends from the 2021 Proxy Season
 
The 2021 proxy season reflected the increasing importance of sustainability and inclusion to investors. According to Harvard Law School research, relative to 2020, environmental and social hot topics remain unchanged—climate change, diversity, political activity—but shareholder support has greatly increased, most notably at large institutions. Despite new regulatory impediments, smaller investors continue to use their voices, including through the Interfaith Center on Corporate Responsibility (ICCR), which since pioneering the use of shareholder advocacy to press companies on ESG issues 50 years ago, Interfaith Center on Corporate Responsibility (ICCR) has provided its members—now 300 strong with over $4 trillion in AUM—with a collaborative venue to use their collective investments to catalyze social and environmental change in executive suites and boardrooms.” 


A response to ‘Four strategies for effective engagement’: Why the nature of investor-corporate discussion is key for successful outcomes” by Andrew Behar. The opening paragraphs:
 
“The June 14, 2021 Responsible Investor article Four strategies for effective engagement: Why the nature of investor-corporate discussion is key for successful outcomes by Robert Eccles, Stephanie Mooij and Judith Stroehle purports to describe the nature of shareholder-corporate engagement. However, it observes only half of the ecosystem and therefore misses critical dynamics, tensions, players and strategic possibilities. This clarification is intended to fill in the other half so that the two sides may work together in a more strategic, synergistic, and comprehensive way for positive change.
 
The article is based on ‘70 in-depth interviews with asset owners, asset managers, and listed companies in developed markets globally’. This is like looking at the planet from above the North Pole and not acknowledging that the Southern hemisphere exists. What the companies and large money managers did not mention is the entire ‘shareholder advocacy’ community of professionals. This includes faith-based, impact, and socially responsible investors, as well as non-profit shareholder advocates like As You Sow, the organisation of which I am CEO. 
 
For 50 years, this community of advocates has been helping companies shift their policies and practices to avoid material risk through practical solutions. This is a goal shared by the entire ecosystem; however, up until this year, it was rarely supported at the Annual General Meeting (AGM) ballot box.”


How can investors help prevent corporate policy capture?” by Preventable Surprises.
 
“ This report presents key findings from the 2020-21 Corporate Lobbying Alignment Project (CLAP), as well as a report card assessing the world’s top 50 global asset managers on their approach to corporate policy capture. The report card is designed to engage the global asset management community and its stakeholders in a constructive dialogue on the changes required to better address negative lobbying and policy capture risk across sectors and geographies.”


Race to the top: A leading practice guide to responsible investment” by Isobel Mitchell. The opening paragraphs:
 
“Money makes our world go round. Right now, it is fueling climate change, and doing little to tackle other systemic issues such as human rights abuses and biodiveristy loss. But it has the power to transform society for the better. 
 
That’s why, in 2020, we analysed the responsible investment practices of the world’s largest 75 asset managers across four topics: responsible investment governance, climate change, human and labour rights and biodiversity. 
 
Not a single asset manager achieved a AAA or AA rating by demonstrating leading practice across all assessment topics. This is concerning given that the asset managers we examined manage more money than the GDP of the US, China and the European Union combined.” 


Early Say on Pay Trends Show Tide Turning Toward More Shareholder Dissent” by Dan Marcec. The opening paragraphs:
 
“Marking its 10th anniversary this year, Say on Pay has been trumpeted as a critical voice for shareholders to rein in rising, outsized levels of executive compensation. Yet since the provision was enacted in 2011, median CEO pay has increased nearly every year while the percentage of companies that receive overwhelming approval on this measure has been consistently high. There's been a question as to whether this non-binding vote actually works toward its intended purpose, and perhaps that it even has additional unintended consequences.
 
Looking at the Equilar 500 over the past five years, high Say on Pay approval ratings — over 90% — are widely common. However, starting in 2016, five years into the provision’s lifespan, the “rubber stamp” started to weaken, and “yes” votes in the 90%-94% approval range started to become much more common than those above 95%. While nearly half (48.4%) of all companies in the Equilar 500 received approval in the highest range in 2016, just 29.1% did in 2020. Meanwhile, the percentage of companies receiving approval in the 90%-94% range increased more than 15 percentage points in that time frame.”


Exit vs. Voice” by Eleonora Broccardo, Oliver Hart, and Luigi Zingales. The Abstract:
 
“We study the relative effectiveness of exit (divestment and boycott) and voice (engagement) strategies in promoting socially desirable outcomes in companies. We show that in a competitive world exit is less effective than voice in pushing firms to act in a socially responsible manner. Furthermore, we demonstrate that individual incentives to join an exit strategy are not necessarily aligned with social incentives, whereas they are when well-diversified investors are allowed to express their voice. We discuss what social and legal considerations might sometimes make exit preferable to voice.”


Corporate Governance

The Myth of the CEO Hero”  by Mary Johnstone-Louis and Charmian Love. The summary:
 
“The recent removal of Danone’s CEO and chairman, Emmanuel Faber, has been seen by many as a clash between activist investors and stakeholder capitalism. But the actual implications aren’t that simple. Danone’s circumstances offer a much more important lesson: In the quest to design a corporate ecosystem that reliably — and profitably — meets the needs of people and the planet, there can be no singular heroes. Addressing the interconnected emergencies facing our societies and planet will demand systems change, and no CEO can deliver this change on their own. CEOs and policy makers must engage deeply with the question of how to ensure business is an enduring force for good. The authors present four systems-change principles for businesses deciding how to navigate the growing call to focus on stakeholders, not just shareholders.”


From win-win to net zero: would the real sustainability please stand up?” by Duncan Austin. The opening paragraphs:
 
“Four decades after sustainability first emerged as a concept, we are witnessing a critical ‘net zero moment’. First gradually, and now suddenly, companies are making ‘net zero’ pledges to reduce carbon emissions in line with the Paris Agreement. This represents a substantial and welcome upgrade of ambition regarding climate change, but poses the obvious challenge. In March, a survey by Standard Chartered found that 64 percent of senior corporate executives do not believe that net zero commitments are commercially viable, contradicting the longstanding ESG narrative that ecological sustainability is a ‘win-win’ – good for profit and planet.
 
The contradiction finally reveals that there have all along been two fundamentally different interpretations of ‘sustainability’. The win-win claim of sustainable business has always tacitly depended on the ecological ‘win’ being defined as ‘more sustainable than before’. In contrast, the net zero imperative emanates from the very different perspective that we need to achieve ‘enough sustainability before it is too late’. 
 
I believe much of the ongoing confusion within the sustainability debate arises from individuals and organisations – and even individuals within the same organisation – working to conflicting interpretations of sustainability, without fully realising. Some regard sustainability as a relative concept by which it is sufficient merely to make progress – to ‘become more sustainable’ – while others view sustainability as an absolute concept that demands we be ‘sustainable enough in time’.” 


Prosocial Antitrust” by Amelia Miazad. The Abstract:
 
“Antitrust law is at the center of today’s public debate. It has even emerged as a rare unifying force, with bipartisan promises to combat the concentration of economic power, starting with breaking up Big Tech.

Meanwhile, the business and investment community is grappling with mounting systematic risks arising from the pandemic, climate change, income inequality, and racial injustice. Unexpectedly, the largest asset managers in the world find themselves on the front lines of these battles. Due to the rise of index investing, these “universal owners” manage portfolios that are so large and diversified, their holdings mirror the entire economy. Their diversification protects them against idiosyncratic risk, but greatly exposes them to these systematic risks.

The universal owners are keenly aware of their exposure to these systematic risks. They are turning to their portfolio companies and increasing demands on directors and managers to “serve a social purpose” and reduce their negative externalities. Public-regarding pronouncements from CEOs of Wall Street’s biggest firms ring hollow to many shareholder primacy loyalists. But the skeptics are missing the economic logic underlying this paradigm shift—diversified shareholders do not want companies to externalize their negative impacts onto the rest of the investors’ portfolios.

Many companies are rising to the challenge and making bold commitments. However, many are recognizing that, to satisfy pervasive social and environmental challenges, they must collaborate with their competitors. This Article reveals that current antitrust law is a barrier to this collaboration and offers a policy proposal for aligning antitrust law with the demands upon the prosocial corporation.

The COVID-19 pandemic has taught us that we are all interconnected. Climate change will continue to deepen that understanding. The problems we face are difficult, but they are not insurmountable. To solve them, we must value collaboration at least as much as we value competition.
 
Keywords: Antitrust, Corporate Purpose, ESG, Corporate Governance, Systematic Risk, Corporate Sustainability”


Sustainable Brands Pursues Broad-Based Business Transformation.” The opening paragraphs:
 
SB announces PMI as the first graduate of its Voyager program — established to support the transformation of brands that face significant challenges related to ESG performance and reputation.
 
Since 2006, Sustainable Brands™ (SB) has envisioned a future where people and the planet are healthy and flourishing, thanks to a transformed economy. This shift will see all parts of the value network — from innovators and legacy businesses to their suppliers, investors and customers — working together to create the regenerative economy of tomorrow.”


The Complicity of Corporate Sustainability” by Auden Schendler. The opening paragraphs:

“In the early ’90s I worked on corporate sustainability with a group of young, smart, optimistic colleagues, paid virtually nothing, working out of an office closet next to the bathroom at Rocky Mountain Institute, a sustainability think tank. Beneath towering stacks of energy reports and to-be-read copies of The New York Times, we drafted brochures and consulting papers arguing that corporations were the only entities large enough, nimble enough, and motivated (by profit) to solve the climate problem. We were surrounded, in-person and intellectually, by the originators of the movement: energy efficiency guru Amory Lovins, Ecology of Commerce author Paul Hawken, Ray Anderson—whose environmental epiphany transformed Interface, Inc.—and visionary engineers like Eng Lock Lee, who treated systems design like Chinese cooking, where you use everything, even the chicken feet.
 
We believed that the salvation of the world, the cure for climate change, and the end of pollution and waste, all of it, would be driven through business profits and strategic motivation. Doing good by the environment—cutting energy use with better light bulbs and boilers, reducing inefficiency through design and engineering, and adding renewable energy supply—was not only environmentally responsible, it was good for the bottom line. Win-win: green both ways.”


The Corporate Racial Equity Tracker” by JUST Capital. The opening paragraphs:

“Following last summer’s reckoning with racial injustice, prompted by the brutal killings of Black Americans and the devastating economic and health impacts of COVID-19 to communities of color, corporate leaders began to publicly acknowledge the ways in which systemic racism impacts their workforces, their communities, and society.
 
These events also shifted the public’s perceptions of corporate responsibility. In our recent survey research with The Harris Poll, we learned that 95% of Black Americans believe it’s important for companies to promote racial equity – defined by our program partner PolicyLink as “just and fair inclusion into a society in which all people can participate, prosper, and reach their full potential” – and 80% believe they can do more.
 
In this unprecedented moment, workers, customers, communities, and investors are calling on corporate America to drive change, but it continues to be challenging to assess how companies are taking concrete action to advance racial equity in America today.
 
JUST Capital has launched this Corporate Racial Equity Tracker to fill that gap and incentivize companies to take meaningful steps to advance racial equity. The first iteration offers an in-depth accounting of the state of disclosure by the 100 largest U.S. employers, through 23 data points across six specific dimensions of racial equity:

  • Anti-Discrimination Policies
  • Pay Equity
  • Racial/Ethnic Diversity Data
  • Education and Training Programs
  • Response to Mass Incarceration
  • Community Investments”

Corporate Governance

5th Colloquium Memorandum Enterprise Value Creation” by The Good Governance Academy. The opening of:
 
“Message from the patron Professor Mervyn King SC
 
Corporate Reporting
 
In the last half of the 19th Century and right through the 20th Century, the dictates of the governance and direction of companies was the primacy of the shareholder.
 
It was during this period that we had unsustainable development - we were using and continue to use natural assets faster than nature is regenerating them while, at the same time, population is increasing. By 1983 members of the United Nations (UN) recognized that Planet Earth was suffering from environmental degradation.
 
A world commission was established (1983 – 1987) to look at development and the environment under the chairmanship of the former Norwegian Prime Minister, Brundtland. The commission highlighted that, in development, three dimensions were to be considered: the economy, society and the environment and that these dimensions were integrated. The commission’s now famous conclusion was that the needs of the present must be addressed in a manner that does not compromise the ability of future generations to meet their needs.”


Revisions of Japan's Corporate Governance Code and Guidelines for Investor and Company Engagement” The opening paragraphs:
 
“The Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code (Chairperson: Hideki Kanda, Professor of Gakushuin University Law School) has now published an important proposal for the revisions of Japan's Corporate Governance Code and Guidelines for Investor and Company Engagement.
 
Japan's Corporate Governance Code (the "Code") was compiled in 2015 and revised in 2018, and the Guidelines for Investor and Company Engagement (the "Guidelines") were compiled in 2018. The Council's proposal this time is intended to bring about the second revision of the Code and the first revision of the Guidelines.
 
The main points of the proposed revisions of the Code and the Guidelines are as follows*.
*Please refer to Appendix 1 and Appendix 2 below for details.”


Corporate Reporting

The Effects of Mandatory ESG Disclosure Around the World” by Philipp Krueger, Zacharias Sautner, Dragon Yongjun Tang, and Rui Zhong. The Abstract:
 
“We examine the effects of mandatory ESG disclosure around the world using a novel dataset. Mandatory ESG disclosure increases the availability and quality of ESG reporting, especially among firms with low ESG performance. Mandatory ESG reporting has in turn beneficial effects on firm’s information environment: analysts’ earnings forecasts become more accurate and less dispersed after ESG disclosure becomes mandatory. On the real side, negative ESG incidents become less likely, and stock price crash risk declines, after mandatory ESG disclosure is enacted. These findings suggest that mandatory ESG disclosure has beneficial informational and real effects.
 
Keywords: Sustainability reports, ESG reporting, Nonfinancial information, ESG incidents”


ESG & Long-Term Disclosures: The State of Play in Biopharma” by Anuj A. Shah, Brian Tomlinson, Michael Rosen, Emilie Kehl, and Lukas Rossi. The Abstract:
 
“How much forward-looking information do public companies disclose, including on ESG themes? Do they provide targets and KPIs on themes key to long-term value creation? In this paper, we analyze the accessibility, quantity, and time frame of forward-looking information disclosed by the 25 constituents in the S&P 500 Pharmaceuticals, Biotechnology & Life Sciences GICS industry classifications.

Using an updated version of CECP’s Long-Term Plan (“LTP”) Framework, we assess four key disclosure channels (annual reports/10-K, stand-alone sustainability reports, proxy statements, and investor day transcripts) and find that forward-looking information is dispersed, and locating it is complex and time-consuming. In addition, the amount of forward-looking disclosure varies across the LTP Framework’s nine themes, with the most found across the themes of Competitive Positioning and Trends. We find that near-term disclosures are most common.

We conclude with a practical set of executive-ready recommendations for corporate managers focused on setting targets, increasing transparency, refreshing materiality, and providing commentary on ESG disclosures.
 
Keywords: Biopharma, ESG, Long-Term, Disclosures, Forward-Looking”


Overselling Sustainability Reporting” by Kenneth P. Pucker. The Summary:
 
“For two decades progressive thinkers have argued that a more sustainable form of capitalism would arise if companies regularly measured and reported on their environmental, social, and governance (ESG) performance. But although such reporting has become widespread, and some firms are deriving benefits from it, environmental damage and social inequality are still growing.
 
This article, by Timberland’s former COO, outlines the problems with both sustainability reporting and sustainable investing. The author discusses nonstandard metrics, insufficient auditing, unreliable ESG ratings, and more. But real progress, he says, requires not just better measurement and reporting practices but also changes in regulations, investment incentives, and mindsets.”


COVID-19 Canceled Quarterly Guidance – This Bad Habit Shouldn’t Come Back” by Sarah Keohane Williamson. The opening paragraphs:
 
“There is ample evidence that quarterly earnings-per-share guidance – the issuance of future estimated earnings by companies – does more harm than good. Firms with greater emphasis on the short term experience lower return on equity over the following two years. Companies that provide more frequent and regular guidance often experience higher volatility during earnings season, as short-term investors speculate on forthcoming results. And there is no valuation premium for quarterly guidance – an analysis of S&P 500 members from 2010–2016 found guidance policy had no effect on valuation whatsoever.
 
Companies’ focus on short-term metrics often leads them to prioritize decisions that will yield the most attractive results on a quarterly basis and neglect their long-term strategies. Like most bad habits, quarterly guidance causes damage, but is also alluring and hard to break.”


How to Bring ESG Into the Quarterly Earnings Call” by Brian Tomlinson, Tensie Whelan, and Kevin Eckerle. The opening paragraphs:
 
“Quarterly earnings calls need an overhaul. Management expends great effort preparing for them, investor relations officers view them as crucial venues for sharing the equity story — the strategic vision that provides a rationale for investing in the company’s stock — and quarterly results still move markets. So why should these calls emphasize short-term profit-taking over long-term investments in employees, research and development, and sustainability, given that environmental, social, and governance (ESG) issues have direct, material effects on how well companies succeed in the long run.
We believe that companies must integrate ESG wholly into their business strategies rather than relegating them to a sidebar. But we also recognize that it’s challenging for corporations to include more ESG information in quarterly earnings calls for a variety of reasons.”
 
“Integrated and innovated: What's next for the sustainability report?” by Sarah George. The opening paragraphs:
 
“Against a backdrop of changing environmental science and disclosure legislation, compounded by changing public sentiment, the corporate sustainability conversation is evolving rapidly. After strings of new social and environmental targets were set over the past 12 months, many firms are also evolving ways of reporting progress.
 
When edie launched in the 1990s, sustainability or CSR departments at businesses were often siloed and tasked only with delivering ‘add-on’ projects – usually centring around philanthropy in communities and supply chains rather than managing issues like energy and waste in-house.
Fast-forward to today and businesses are increasingly realising that environmental issues are business-critical in the short and medium-term. Of course, there are still laggards – and the world is, ultimately, still off-track to deliver the Paris Agreement. But the environmental profession and conversation is growing, and many working in this space say the board is now coming to them rather than them having to fight to gain buy-in.”


The future of sustainability reporting standards The policy evolution and the actions companies can take today” by  Stina Warnstam Drolet, Mark Elsner, Dr. Isabella D. Bunn, and Reza Hasmath. From the Foreword by Carmine Di Sibio and Ruchi Bhowmik:
 
“Public health, climate change, social inequality, diversity and inclusiveness are challenges that need global attention and innovative, collaborative solutions. We also need a common language to measure and report on society’s progress and for the global economy to price externalities such as greenhouse gas emissions and environmental damage, allocate capital and make better decisions.
 
Over the last 18 months, significant progress has been made toward establishing global sustainability reporting standards. The future of sustainability reporting standards analyzes this progress across both developed and developing markets and recommends actions companies can take now to navigate and prepare for emerging sustainability reporting mandates.
 
The most promising development is the expected launch of the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standard Board (ISSB) at COP26 in November. As the body that sets accounting standards in much of the world, the IFRS Foundation is well positioned to introduce the discipline that exists in financial reporting into sustainability reporting, building on the linkage between the various standards while respecting their different perspectives.
 
We strongly support the IFRS Foundation’s proposed creation of the ISSB and the development of robust, globally consistent sustainability reporting standards.”


IFRS For ESG-Continued Acceleration in Planetary Alignment Toward International Standards for Reporting on Sustainability” by Alan Willis. The opening paragraphs:
 
“At a pre-COVID conference at the Rotman Business School in Toronto early in 2020, Michael Jantzi, CEO of world-renowned Sustainalytics, publicly declared “We need IFRS for ESG!”.
 
As a long-time pioneer of research on sustainability integration into portfolio decisions within the global investment community, Jantzi was again pointing out the confusion caused by the current “alphabet soup” of standards, frameworks and recommendations for corporate ESG, sustainability and climate-related disclosures. The investment community does not need wall-to-wall sustainability reporting about all of a company’s impacts on the planet and society – important as these may be to many stakeholders from a corporate accountability and transparency perspective.
 
What investors do seek to accompany financial statements, along with MD&A and governance disclosures, is reliable, comparable disclosures about ESG-related performance factors and risks that materially affect – or may in future materially affect – a company’s financial performance and value.”

 


Time to Declare a Planetary Accounting Emergency” by Mark McElroy and Martin P. Thomas. The opening paragraphs:
 
“The acclaimed systems thinker and sustainability guru, Donella Meadows, once wrote, ‘People can’t respond to information they don’t have. They can’t react effectively to information that is inadequate … or achieve goals or targets of which they are not aware.’ ‘Missing information", she explained, ‘is one of the most common causes of system malfunction.’”
 
At a time when some non-financial impacts of organizations outweigh the importance of their financial performance, it seems fair to expect that management accounting, too, would keep up with the trends. Why, then, does financial accounting, to the exclusion of all else, still predominate so heavily in most organizations? Are their social and environmental impacts immaterial?”


Human Rights

Building Bridges for Impact” a podcast series from Shift.
 
A podcast series on the role that business should play in building a sustainable and equitable future, based on respect for people’s dignity and fundamental rights.

  • A Conversation with John Ruggie
  • Episode 1: Stakeholder Capitalism (Bob Eccles)
  • Episode 2: Sustainable Development (Jane Nelson)
  • Episode 3: Human and Social Capital (Mark Gough)
  • Episode 4: The ‘S’ in ESG (Geeta Aiyer)
  • Episode 5: Social Inequality (Peter Bakker)

Oxford Initiative on Rethinking Performance
 
June Newsletter


The Shareholder Commons

The Shareholder Commons (TSC) is now publishing a monthly newsletter which features ideas and initiatives centered around the sensible idea that diversified investors can best satisfy their duties by stewarding the social and environmental systems that support a growing and stable economy, and ensuring that individual company financial performance is not pursued to the detriment of those systems.

  • The July issue includes the novel idea of a joint tender by institutional investors seeking advice “that would help diversified shareholders understand the effects that votes have on the social and environmental systems that support all the companies in a portfolio.”
  • The June issue includes an essay spelling out TSC’s organizational theory of change. TSC believes that leveraging the unique perspective of diversified shareholders is essential to addressing systemic concerns, from climate change to growing inequality. The essay challenges the “doing well by doing good” fallacy that undergirds ESG-integration efforts.
  • The April newsletter includes the story of the U.S. Securities and Exchange Commission’s (SEC) exclusion of shareholder proposals at JPMorgan Chase and Goldman Sachs. The proposals would have called the banks to account for continuing to underwrite dual-class shares. These exclusions are part of a larger policy question of whether companies should be able to prioritize profit over the health of the social and economic systems upon which they rely. TSC has written a separate letter to the SEC asking that it recognize the importance of this question in considering company requests to exclude shareholder proposals. 
  • The March issue provides an informative primer on systems-first investment.

 
You can subscribe to TSC’s newsletter here.


Memos by Wachtell Lipton

Corporate Governance Update: Materiality’ in America and Abroad” by David A. Katz and Laura A. McIntosh. The opening paragraphs:
 
“The concept of materiality is a bedrock feature of American securities law and regulation. It informs the way investors think, talk, and transact, the way lawyers advise their clients, and the way legislators and regulators draft and enforce federal mandates. The working definition of materiality in the United States, which has served corporate America well for nearly nine decades, now finds itself facing significant pressures from a variety of sources. The European Union, the World Economic Forum, and other stakeholder- and EESG-oriented organizations are advocating for a broader definition and developing concepts of expanded materiality that go far beyond the traditional American approach in ways that threaten to undermine the usefulness of materiality as a guiding principle for disclosure.
 
In the current debate over materiality, two issues should remain distinct: the importance of stakeholder governance and EESG on the one hand, and the question of redefining the standard of materiality from a securities law and market perspective on the other. Institutional investors in the United States are increasingly focused on stakeholder governance and EESG issues, and corporate disclosure on these topics can and should be addressed within the American framework of materiality. If disclosure of immaterial information is required for non-financial reasons, it should be acknowledged as such and not swept into the concept of materiality. There are examples of such requirements under U.S. law, but though these disclosures are mandated, the information provided is not considered “material.” In an article forthcoming in May, we will address the issues that would arise in connection with SEC-mandated EESG disclosures.”


Lessons from TEGNA’s Second Straight Proxy Fight Win” by Igor Kirman, Sabastian V. Niles, and Natalie S.Y. Wong. The opening paragraphs:
 
“On May 7, 2021, at TEGNA Inc.’s contested annual meeting, shareholders demonstrated their strong confidence in the company by re-electing all twelve of the incumbent nominees and none of the three nominees proposed by hedge fund Standard General, which owned 7% of TEGNA’s shares. The dissident hedge fund had run a short slate of four candidates the previous year, in what was then the first ever contested virtual proxy contest, when it also failed to win a single seat. This year’s proxy contest also proved to be the first of its kind, as noted below.
 
With the company’s share price at an all-time high, indicative of its financial and operational outperformance in a challenging year, and subscription revenues exceeding even pre-Covid guidance, Standard General’s operational attacks found no traction. Instead, Standard General pivoted to a different line of attack, claiming diversity, equity and inclusion (“DE&I”) issues at TEGNA, initially based on an incident cited by a nominee who withdrew midway through the campaign for conflict reasons, but later extending to wider DE&I attack themes to a level not seen in prior contests.”


Corporate Governance Update: SEC Regulation of ESG Disclosures” by David A. Katz and Laura A. McIntosh. The opening paragraph:
 
“The U.S. Securities and Exchange Commission has indicated that ESG disclosure regulation will be a central focus of recently confirmed SEC Chair Gary Gensler’s tenure. At the top of the agenda is climate change disclosure, and the Commission is taking steps toward broader reform. Then-Acting Chair Allison Herren Lee announced in March that the SEC will be “working toward a comprehensive ESG disclosure framework” and pursuing initiatives such as “offering guidance on human capital disclosure to encourage the reporting of specific metrics like workforce diversity, and considering more specific guidance or rule making on board diversity.” Acting Chair Lee also appointed Satyam Khanna as senior policy advisor for climate and ESG to oversee and coordinate the SEC’s efforts: “Having a dedicated advisor on these issues will allow us to look broadly at how they intersect with our regulatory framework across our offices and divisions.” And earlier this month, Bloomberg reported that John Coates, the SEC’s Acting Director of the Division of Corporation Finance, indicated that new disclosure requirements would focus on three areas: diversity, equity and inclusion; climate change; and human capital management. The SEC appears to view its invitation for public input on climate change disclosure, which remains open until the middle of June, as the beginning of a potentially significant reconfiguration of corporate reporting on ESG matters in the near future.”


Carbon, Caremark, and Corporate Governance” by William Savitt, Sabastian V. Niles, and Sarah K. Eddy. The opening paragraphs:

“Developments this week highlight the urgent imperative for boards and management teams to address climate-related challenges as part of their regular risk assessment practices:
 
· A Dutch court held Royal Dutch Shell partially responsible for global warming and ordered the company to reduce its carbon emissions.
 
· Engine No. 1, an activist investor laser-focused on climate change, won at least two seats on ExxonMobil’s 12-person board in a proxy fight.
 
· Likewise bucking management’s recommendation, Chevron stockholders approved an investor-backed resolution calling for cuts in carbon emissions, focusing on the challenging area of “Scope 3” emissions.
 
These developments come on the heels of a federal executive order and related statement from the Secretary of the Treasury announcing that “financial regulators, financial institutions and investors need to have the best information and data to measure climate related financial risk” and declaring a policy to “act to mitigate [climate] risk and its drivers” (emphasis added) and support “science-based [carbon] reduction targets.”


SEC Update: Commissioner Lee Speaks on Materiality” by David A. Katz and Laura A. McIntosh. The opening paragraphs:
 
“Late last month, SEC Commissioner Allison Herren Lee gave a keynote address at the 2021 ESG Disclosure Priorities Event (sponsored by several independent accounting and standard-setting organizations) in which she discussed four “myths” regarding materiality in SEC-required disclosure. Her speech laid further groundwork for potential action by the SEC to require ESG disclosure that is not qualified by materiality. Materiality and SEC regulation of ESG disclosures appear to be very high on the list of SEC priorities. In her remarks, Commissioner Lee challenged each of the following assertions:
 
• “ESG matters (indeed all matters) material to investors are already required to be disclosed under the securities laws.”
 
• “Where there is a duty to disclose climate and ESG matters, we can rest assured that such disclosures are being made.”
             
• “SEC disclosure requirements must be strictly limited to material information.”
 
• “Climate and ESG are matters of social or ‘political’ concern, and not material to investment or voting decisions.”


Some Thoughts for Boards of Directors: Key Corporate Governance Issues at Mid-Year 2021” by Martin Lipton, Steven A. Rosenblum, and Karessa L. Cain. The opening paragraph;
 
“Last year, we did a mid-year edition of our annual Thoughts for Boards of Directors to highlight key issues and considerations in managing the challenging business environment and profound upheaval caused by the pandemic. Many of these issues are still top-of-mind as the “new normal” continues to evolve, and will continue to be prominent themes in boardroom discussions. As we emerge from the pandemic, boards and management teams should continue to assess their corporate purpose, strategy, risk management procedures, and board committee structures to optimize their ability to deal with the ever-proliferating number and complexity of business risks and opportunities they must navigate, including the following:”


20 Pieces From Me

Do Standards for Sustainability Reporting Need to be Mandated?

Moving Beyond Modern Portfolio Theory: It’s About Time!
 
Dear ExxonMobil: I See A Bad Moon Rising (For You)
 
Aesop’s Fables And ExxonMobil’s May 26, 2021 Annual Shareholder Meeting Weather Report
 
’The Vote’ (A Play In Three Acts By ExxonMobil Productions
 
Organizational and Political Issues Concerning the Establishment of the Sustainability Standards Board
 
Here Comes The Sun For ExxonMobil’s Shareholders
 
Support for sustainable standards
 
Four strategies for effective engagement” with Stephanie Mooij and Judith Stroehle
 
Letter in Response to ‘Public Input Welcomed on Climate Change Disclosures’” with Richard Barker
 
Dear Mr. Buffett: How Does It Feel Like To Be A Rolling Stone?
 
The Curious Case Of Elliott Advisors And GSK: Are Activist Investors What They Used To Be?
 
Comment letter on constitution amendments ED” with Richard Barker
 
The International Sustainability Standards Board As An Ideological Rorschach Test
 
What the Shell Judgment Means for US Directors” with Cynthia A. Williams, Ellie Mulholland, Sarah Barker, and Alex Cooper
 
A Dutch Court Fires A Warning Shot Across The Bow Of U.S. Enterprise
 
SEC Commissioner Hester M. Peirce’s Chocolate-Covered Ideological Screed
 
Five Elements of Activist Stewardship: Lessons from Two Letters
 
Would A $100 Per Ton Carbon Tax Get ExxonMobil To Right Its Errant Ways?
 
The Difference Between Purpose and Sustainability (aka ESG)” with Colin Mayer and Judith Stroehle



Kind regards,

Bob






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Saïd Business School · Park End Street · Oxford, Greater London OX1 1HP · United Kingdom