Environmental, Social and Governance Focus

The trend of increasing investor focus on ESG issues continued in 2017.  Shareholder proposals on the full range of ESG topics—from climate change reports to board diversity to employment discrimination—have continued to gain momentum.  In addition, a number of these institutional investors—most notably BlackRock, State Street and Vanguard—have issued statements or guidelines highlighting ESG issues:

• In 2017, BlackRock released its “Investment Stewardship” priorities with climate risk disclosure as one of the five areas of focus, as well as a series of ESG-related white papers.  BlackRock has indicated that it expects the whole board to have “demonstrable fluency” in how climate risk affects the business and how management mitigates risk.
• In its 2017 annual letter to investors, State Street stated its belief that ESG issues can have a material impact on a company’s ability to generate returns in the long term, and it continued to tie corporate scandals to poor management of ESG risks.  State Street has also indicated that it expects companies to disclose information on relevant management tools and material environmental and social performance metrics.
• Vanguard, in a significant shift in spring 2017, changed its voting guidelines with respect to ESG shareholder proposals and now considers proposals on a case-by-case basis, supporting those where there is a “logically demonstrable linkage between the specific proposal and the long-term shareholder value of the company.”

Although these proposals are generally still not yet receiving majority support, three proposals seeking environmental reports from oil and gas or utility companies did pass with support from some of the leading institutional investors, making this an area to watch in 2018. 

A number of institutional investors have urged companies to participate in the Sustainability Accounting Standards Board (SASB) standard-setting process.  In October 2017, SASB released for public comment its latest round of draft industry-specific standards, with the hope of developing a more standardized approach to ESG disclosure.

On the other side of the scale, however, is the November 2017 SEC guidance on excluding shareholder proposals from a company’s proxy statement (Staff Legal Bulletin No. 14I).  This new guidance suggests increased deference to companies on the part of the SEC and may allow companies to exclude more proposals from the proxy statement, particularly in the ESG area, although how liberally it will be applied remains to be seen (particularly because the first company to rely on it did not receive no-action relief). 

In particular, the guidance highlights the board’s assessment of the significance of the policy issue underlying the shareholder proposal.  As a result, boards will likely be asked to assess some of the shareholder proposals companies receive, a change from previous common practice of informing the board or the nominating and governance committee of proposals but not generally seeking direct board action on them.

In light of these developments, some actions we recommend for companies and boards for the coming year in the area of ESG include:

• Review ESG disclosure in SEC filings and outside of SEC filings to consider whether there are areas that could or should be aligned (e.g., what risks are being portrayed as “material” across communications);
• Review how ESG information functions fit within the company’s control environment;
• Develop a process for elevating ESG information and management to the board;
• Ensure investor relations teams are soliciting feedback on ESG issues, pay attention to shifts in institutional investor behavior and know what issues are important to which investors in the company’s shareholder base;
• Keep an eye out for shareholder proposals that are gaining shareholder support over time;
• Prepare a strategy for responding to shareholder proposals, including a process for the board or relevant committee to assess the significance of underlying issues;
• Monitor industry and peer company developments and plan for how to address criticisms or gaps in the company’s approach to ESG compared to others; and
• Ensure ESG programs, initiatives or other evidence of commitment to ESG issues are showcased and emphasized for shareholders.