ENVIRONMENTAL, SOCIAL, AND GOVERNANCE POLICIES

By asking for action on ESG policies, a lot can be accomplished by active, thoughtful shareholders. But there are rules and limitations—micro-management is not allowed. Asking Chevron to change the colors of its logo, suggesting that Burger King introduce hot-fudge French fries, or petitioning Google to delete some embarrassing images may be omitted by the company from the proxy statement as the Securities and Exchange Commission (SEC) would probably construe those things as “ordinary business”—how a company runs its business on a daily basis. These are not allowed in a shareholder resolution, but we’ll take a deeper look into the nuances of SEC rules later.

For now, let’s look at the broad areas in which shareholders do have considerable influence with corporations. Whether you are working independently or with an advocacy nonprofit organization, a faith-based institution, a pension fund, or a socially responsible asset manager, these issues pertain to a corporation’s ESG policies. In the broadest sense, here’s what those words mean in the context of shareholder advocacy.

Environmental: Nearly all corporations have an impact on the environment. If they manufacture or sell products, their operations affect the environment at some point in their production, transportation, or supply chain. The way a given corporation handles supply-chain issues under the umbrella of the environment is of concern to investors because the company may be, for example, using environmentally damaging mining, farming, or logging operations, thus creating risk and liability, which would affect shareholder value. The company has choices to make, and if its policies are clear and it considers looking at the larger system in which it operates, it can create great products with far less impact. These are some examples of environmental issues:

• Energy use and its impact on climate change

• Hydraulic fracturing (impact on water and air)

• Methane emissions and flaring

• Air pollution

• Water pollution

• Waste disposal and incineration

• Recycling

• Food toxicity

• Chemicals in consumer products

• Pesticides and herbicides

Social: By being in business and hiring people to work either directly or through suppliers, corporations intrinsically have a social impact, and investors have a legitimate concern about this impact. If, for example, a corporation’s hiring practices are discriminatory, they do not pay a living wage, and abuses or physical risks exist at company facilities, the corporation is exposing itself to potential liability, litigation, or regulation. If a corporation or its suppliers use abusive labor practices in their operations, here or abroad, this can harm the brand’s reputation and standing in the community and therefore its value. These are some examples of social issues:

• Human rights

• Indigenous rights

• Human trafficking

• Slave labor

• Fair pay

• Political spending

• Workplace diversity

• Decent work

• Conflict zone operations

• Tobacco

• Prison and executions

• Guns

• Data privacy

Governance: Publicly traded corporations have a board of directors and various executives who direct and manage the operation of the company. If board members or executives are underqualified, not diverse, overcompensated, have conflicts of interest, or are neglecting their fiduciary duties, investor value may be harmed, and the company may create legal liabilities. These are some governance issues:

• Executive compensation (CEO pay)

• Reporting and transparency

• Business ethics

• Board diversity

• Board oversight

• CEO / board chair split

• Shareholder right to nominate board candidates

• Stock buybacks

• Political spending and lobbying

• Unlimited and untraceable “dark money” given by corporations to influence elections