Here’s One Way Shareholders Can Get Companies to Act on Global Warming Morningstar.comHere’s One Way Shareholders Can Get Companies to Act on Global Warming Morningstar.comHere’s One Way Shareholders Can Get Companies to Act on Global Warming Morningstar.com
Impact Investing Forum 2023
London. May 04-05, 2023.
Your fund can encourage companies to take action on climate change by linking executive pay to plans to reduce global warming emissions. Then, every year, vote on how well the executives are doing in achieving those goals. In a “say on pay” measure, Congress required that shareholders approve the annual compensation for the CEO, CFO and top three highest-paid officers of a company. This would be done by voting on the proxy ballot of the company, as often as once per year. The goal was to fix the incentive pay practices that rewarded excessive risk-taking that led to the crisis. However, the say-on-pay results have not been overwhelming. According to a Morningstar survey, CEO pay today is 291 times the median worker in S&P 500. This is because investors are more focused on short-term stock prices and have approved stock- and stock-options-heavy compensation packages. Annual say-on-pay votes are almost always approved by shareholders, even those who oversee some of America’s most popular mutual funds or exchange-traded funds. Global Warming: The push to link pay to ESG metrics A top official at the Securities and Exchange Commission stated this year that the agency would be more attentive to climate-related risks. This includes examining how funds vote, “to ensure voting aligns well with investors’ best interests and expectations.” One proposal would require all investors with more than $100 million in stocks to disclose their voting patterns on say-on pay resolutions. This includes large swathes of money managers. It “will likely increase pressure [on fund managers] for justification of status quo pay practices,” Jackie Cook, director of the stewardship advisory company of Sustainalytics (a Morningstar company that provides ESG ratings, data, and research), writes. Cook published a study about climate and pay. A growing number of voices are calling for executive compensation to be linked with environmental, governance, and social metrics. How Shareholders can have a say on CEO Pay According a survey by law firm Shearman & Sterling 45 of the 100 largest U.S. companies already include such metrics in their compensation plans. These metrics were adopted by 15 companies last year, including Alphabet, Apple (AAPL), Visa, Walgreens Boots Alliance, Walt Disney (DIS), and Visa (V). Compensation tied to reducing greenhouse gas emissions. The net-zero plan is the most specific of climate-action plans. It describes how companies will reduce greenhouse gas emission to net zero by 2050. Because governments have determined that net zero by 2050 is crucial for limiting the worst effects of global climate change. This could open up new opportunities for say-on pay votes to rein in emissions. Cook says that “Say on Pay is an untapped source for strategic influence for investors” and could become an increasingly contested vote as investors make pledges to reduce financed emissions to net zero by 2050 to tackle carbon emissions at portfolio businesses. Cook says proxy voting on climate resolutions reached an all-time high in 2021 as large asset managers supported proposals for companies to set and publish emission reduction targets and clarify their lobbying on the topic. Cook states that shareholders will be more engaged with corporate management if they have strong proxy-voting support for climate solutions. Say on pay has been a backwater – only 4% of S&P 500 companies failed with an outright majority in the past year. Cook says that shareholders have been resentful of the wholesale approval for say-on-pay, with them voting down Paycom, Marathon Petroleum (MPC), Starbucks, SBUX), General Electric, General Electric (GE), Norwegian Cruise Lines, NCLH, and Phillips 66. After the shares had lost more than half of their value in 2020, Norwegian Cruise Lines saw only 17% support Frank Del Rio’s $36 million pay. While shareholder votes are not binding, boards of directors that oversee executive pay look closely at unusual results. They know that a poor result can reflect poorly on their performance as directors. U.S. companies rarely refer to emission-reduction targets as part of their pay practices. Oil and gas companies are the most affected by the energy transition. They don’t offer incentives to achieve net zero. They actually encourage fossil fuel production. However, many of the biggest investors, such as Vanguard (BLK), and BlackRock (BLK), have committed to net-zero emission across all portfolios by 2050. They are part of an international alliance of net-zero asset mangers, which controls $57 trillion in assets worldwide. Cook states that linking leadership incentives to decarbonization targets for the largest emitters promises the greatest real-world impact on investors. Rosanna Landis Weaver, who directs the Wage Justice & Executive Compensation program at shareholder advocate As You Sow recently published a study about executive compensation and greenhouse gas emissions. One problem is that companies tend to be too focused on short-term rewards, despite the fact that climate change is a long-term issue. This could change. In response to As You Sow’s proposal, Valero Energy (VLO), announced in March 2021 that it would use a new “energy transformation performance measure” to increase or decrease long-term incentive pay. This measure would be based on Valero’s annual progress in meeting its emission offset and reduction targets. Landis-Weaver states that the “say-on-pay” vote is a tool that attracts directors’ attention and should be considered. Many investors will raise the issue of say-on-pay in their conversations with companies. Chris Meyer, Praxis Mutual Funds’ manager of stewardship investment research and advocacy, has been speaking with electric utilities about how they will achieve their net-zero goals. Meyer says, “We don’t know how public policy will work out, but we discuss executive pay and how net-zero goals could be integrated into performance or pay.” Trillium Asset Management has filed a variety of shareholder proposals over the years about sustainability issues. It is now pushing companies to make sustainability factors part of their executive pay. Jonas Kron is Trillium’s chief advocacy Officer. He says, “If you want a business that meets its greenhouse gas emission targets, you must pay them to do so.”