Investor interest in corporate social responsibility (CSR) issues, while evident for the past few years, is expected to continue to intensify and gain momentum in 2018. Investors and other stakeholders historically tended to focus on the environmental impact of companies in which they invested. Gradually, the focus has begun to broaden. As part of their risk assessment, investors are increasingly asking companies to report on their own sustainability in the face of climate change and to explain whether there may be regulatory, financial or business model challenges that could have a negative impact on shareholder value in the future.
Previously led primarily by small yet vocal socially responsible investors, many larger, long-term, institutional investors more recently are not just supporting—but are also championing—these issues. As a result, sustainability is rising on the list of priorities investors are eager to engage.
Among these new champions are largely indexed investors. Because of their passive investment disciplines, these investors are “permanent” and cannot simply sell companies they have concerns with. Being an indexed or passive investor may spur an investor to engage with and prod these companies to provide greater transparency about certain issues. As capital continues to flow more rapidly into indexed investing strategies, the clout of these shareholders increases.
Many companies provide robust reporting on sustainability issues in standalone CSR and similar reports, which are valuable. Furthering this trend, many institutional investors are asking companies to address CSR and sustainability issues in their financial reports as well as in their proxies.
To understand the importance of environmental and corporate sustainability, take a look at the words of leading investors:
Chairman & CEO Larry Fink in his 2017 letter to CEOs:
“Environmental, social, and governance (ESG) factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects. We look to see that a company is attuned to the key factors that contribute to long-term growth: sustainability of the business model and its operations, attention to external and environmental factors that could impact the company, and recognition of the company’s role as a member of the communities in which it operates.”
Investment Stewardship Officer Glenn Booraem in the “Investment Stewardship 2017 Annual Report”:
“As the steward of long-term shareholder value for more than 20 million investors, Vanguard closely monitors how our portfolio companies identify, manage and mitigate risks—including climate risk. Our approach to climate risk is evolving as the world’s and business community’s understanding of the topic matures.
“This year, for the first time, our funds supported a number of climate-related shareholder resolutions opposed by company management. We are also discussing climate risk with company management and boards more than ever before. Our Investment Stewardship team is committed to engaging with a range of stakeholders to inform our perspective on these issues, and to share our thinking with the market, our portfolio companies, and our investors.
“We take positions on these matters not because they are inherently good or noble, but because they are tied to the long-term economic value of your funds’ investments.”
In response to these forces (and in some cases in anticipation of them), companies in a range of industries that feel they have good stories to tell are incorporating CSR messaging into their proxies. For example, Verizon uses a combination of text and visual elements to describe relevant aspects of their CSR profile in a way that is easily located, digested and understood (see below). Verizon and other companies are raising the bar on this important topic.
Companies that stand still too long on this and other key disclosure issues risk being considered relative laggards when viewed in the context of peer company disclosures. If this information is not discussed to some extent in the proxy, voters at major investors, increasingly relying on the proxy as a one-stop shop for relevant information, may fail to take this important information into consideration as they cast votes on critical proposals.
Ron Schneider is the Director of Corporate Governance Services for Donnelley Financial Solutions. He can be reached at ronald.m.schneider@dfsco.com.