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Shareholders press boards on social and environmental risks - Take action - EY - United States

Shareholders press boards on social and environmental risks

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A growing number of shareholder proposals are linking social and environmental matters to traditional governance issues such as compensation and the qualifications of board members.

Summary: Risks related to sustainability, including climate change risk and other environmental issues, matter a great deal to shareholders. Yet many corporate directors lack a deeper understanding of these issues.

Actions to consider

At a minimum, companies and their boards must be prepared to do the following:

  • Enhance dialogue with shareholders and improve disclosure in key areas, particularly those related to social and environmental issues. Robust sustainability reporting can help with this.
  • Ensure that directors' skills are relevant to the chief areas of stakeholder concern, including risk management tied to social and environmental matters.

    In particular, companies must communicate with shareholders. They could, for example, take advantage of the SEC disclosure rules around director qualifications to explain how the qualifications, backgrounds and skill sets of their directors — both individually and as a group — contribute to overall corporate strategy, including risk mitigation.
  • Consider whether using non-traditional performance metrics — including those related to environmental/sustainability issues — could help align compensation with risk. In addition to financial metrics, performance goals could align with overall environmental strategy, including clearly defined metrics relating to energy efficiency, water usage and the reduction of carbon emissions.
  • Shareholders are paying closer attention to environmental and social matters, believing them to bear closely upon the risk to which investee companies are exposed and, ultimately, upon the financial performance of those companies.

    The upcoming proxy season will reflect this deepening trend. Driven by concerns about the financial and reputational risks associated with climate change, institutional investors will likely push harder for action on these matters. Forward-thinking companies will be prepared to address their concerns.

Examples from industry

Case study: mutual funds support climate change related resolutions

A clear example of the growing support for environmentally related proposals comes from the mutual fund industry.

According to an analysis by Ceres, a non-governmental organization, average support by mutual funds for climate change–related resolutions grew from 14% in 2004 to 27% in the 2009 proxy season.

Opposition to those resolutions fell from 76% to 55% during the period, reflecting a sharp departure from traditional voting policies. The Ceres analysis evaluates proxy votes on climate change–related proposals by 46 mutual fund companies with more than $5 trillion in total assets under management.

Proposals focus on directors' expertise, compensation

A growing number of shareholder proposals are linking social and environmental matters to traditional governance issues such as compensation and the qualifications of board members.

For example, some resolutions advocate tying performance metrics used for determining executive compensation to environmental goals. Others seek to ensure that board members have the environmental expertise needed to deal with sustainability and other environmental issues.

Oil company shareholders ask for board member with environmental expertise

At a large oil and gas company's 2010 annual meeting, for example, shareholders filed a proposal requesting that the company have at least one board member with expertise in environmental matters relevant to hydrocarbon exploration, and that the board member be recognized by the business and environmental communities as an authority on environmental matters.

This proposal received support from 27% of the votes cast. A similar initiative last year at a large mining and metals company was supported by 34% of votes cast.
This year, shareholders of a major energy company demanded that the company spell out how it planned to strengthen its risk management function to better prepare for environmentally related incidents, and how it would move to a low-carbon economy.


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Content

What is the triple bottom line

Today's shareholders expect organizations to meet standards of social, environmental and economic performance.

Below are the items that fall into each of these areas and comprise the triple bottom line.

Environmental

Energy-fuel, oil, alternative, Water, Greenhouse gases, Emissions
Waste reduction: medical; hazardous; non-hazardous; construction
Recycling, Reprocessing/re-use, Green cleaning, Agriculture/organic foods
Packaging, Product content, Biodiversity

Economic

Accountability/transparency, Corporate governance, Stakeholder value
Economic performance, Financial objectives

Social

Public policy and advocacy, Community investments, Working conditions
Health/nutrition, Diversity, Human rights


Shareholders press boards on social and environmental risks

Related content

  • For more information on how climate change risk can affect vital business functions, please visit ey.com/climatechange.

Contact

  • Steve Starbuck
    Americas Leader,
    Climate Change and Sustainability Services
    Ernst & Young LLP
    +1 704 331 1980

  • Ann Brockett
    Americas Assurance Leader,
    Climate Change and Sustainability Services
    Ernst & Young LLP
    +1 403 206 5016

  • Allie Monaco Rutherford
    Corporate Governance Group
    Ernst & Young LLP
    +1 703 747 1729 

  • Kellie Huennekens
    Corporate Governance Group
    Ernst & Young LLP
    +1 703 747 1736 


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