SUMMER 2020 TODAY’S GENER AL COUNSEL
Compliance
Investors Pushing Environmental and Social Proposals By Hannah Orowitz
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nvironmental and social (E&S) considerations have dominated the shareholder proposal landscape for several years. Historically, many of the largest asset managers declined to vote in support of such proposals, preferring instead to attempt to influence corporations’ actions by engaging shareholders and the board through ongoing dialogue. Now, an increasing number of institutional investors have begun to include E&S considerations within their established risk-return analysis framework. Additionally, evolving expectations placed upon the more than 2,600 investors that are signatory to the UN Principles for Responsible Investment, and pressure from asset owners such as pension funds and special interest groups, looks to be reshaping this landscape. In January of this year, pledges by two of the three largest U.S. asset managers, State Street Global Advisors (SSGA) and BlackRock, indicate that these firms have reached an inflection point. These two funds may diversify
owners’ broader voting decisions surrounding director elections. That, too, now appears to be ripe for change. We expect investors will likely articulate their concerns much more often by voting against specific directors, committee members or entire boards. Concerns surrounding the evolving Covid-19 pandemic that have developed subsequent to investors’ articulation of expectations and priorities may mean that some investors are more likely to be more lenient on E&S topics this season. Glass Lewis, one of the two leading proxy advisors in the United States, recently noted this possibility in a statement to its clients regarding the current corporate governance environment. However, to the extent this leniency occurs in 2020, companies would be well advised to understand that any reprieve is temporary and unlikely to carry into 2021. Covid-19 has also brought to the forefront certain E&S topics such as human capital and supply chain management, and has illustrated the all-encompassing and immediate shocks that systemic risks, albeit from a black swan event, can have on asset valuations. Ultimately, the global pandemic may increase investors’ sense of conviction about the urgent need for companies to address risks like climate change. Vanguard, which manages the second greatest volume of assets in the United States, has generally been less vocal on E&S topics, but on April 1 it released an update on the 2020 Proxy Season, recognizing the impact of Covid-19 on corporate decision making. At the same time, it reminded companies to keep long-term shareholder interests in mind, noting in
Covid-19 has brought to the forefront certain E&S topics such as human capital and supply chain management. their practices of using assessment and engagement as the primary tools to influence portfolio companies, and focus more efforts towards taking voting action in favor of shareholder proposals that address material E&S issues. In all but the most egregious cases in the past few years, E&S considerations — even if they did lead an investor to vote in favor of a shareholder proposal — did not factor into most asset managers’ and
particular that “climate change presents a pressing and concerning risk to long-term shareholder value.” Vanguard’s statement does not specify any policy change, but it articulates an intention to continue to address climate risk through voting and engagement, and states that Vanguard “will raise [its] expectations for the companies that our funds invest in.” Accordingly, to avoid adverse voting activity in the future, companies should view 2020 as a year of preparation and an opportunity to engage with investors regarding their expectations. Companies can be positioned to act on feedback received to improve E&S disclosures and practices. SUSTAINABILITY-RELATED DISCLOSURE
In January 2020, BlackRock CEO Larry Fink released his annual letter to portfolio companies’ CEOs, predicting a near-term reallocation of capital as investors broadly incorporate the impact of sustainability on investment returns. In conjunction with those expectations, BlackRock published updates to its global and U.S. proxy voting guidelines in February. They significantly expand the E&S section to call upon companies to improve their sustainability-related disclosures in compliance with industryspecific Sustainability Accounting Standards Board (SASB) standards applicable to companies, and the Task Force for Climate-Related Financial Disclosure’s (TCFD) recommendations. To the extent that companies do not effectively disclose and manage material sustainability matters, BlackRock warns that it will be “increasingly disposed to vote against management and board directors” and in favor of sustainabilityrelated proposals. The guidelines also say that even if BlackRock declines to support a given climate-focused proposal, if it believes that a portfo-
