6 minute read 2 Feb 2021
EY - Pine tree germination

Four investor engagement priorities for 2021

By Jamie Smith

EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist

Trusted resource on corporate governance and institutional investor trends. Researcher and analyst. Lifelong learner. Mother and nature enthusiast.

Contributors
6 minute read 2 Feb 2021

Climate risk, human capital, diversity and COVID-19 recovery are all top of mind.

In brief

  • Investors want to know how companies are strategizing for a low-carbon future.
  • Getting diversity disclosures that include the workforce and the board is an investor priority.
  • Investors want to understand how pay decisions are being made in the context of COVID-19.

In 2021 investors continue to engage their portfolio companies on how they are responding to the pandemic, particularly what steps they are taking to build resilience and strengthen business continuity while supporting employee engagement, health and well-being. When we asked investors what engagement topics they will prioritize this year, the following themes were cited most often.

Workforce and board diversity

Around two-thirds of investors told us they will press for robust diversity disclosures inclusive of the workforce and boards. Regarding the workforce, most want disclosure of diversity data aligned to the disclosure framework of the United States Equal Employment Opportunity Commission’ s EEO-1 Survey (EEO-1 data) at minimum to enable assessment of diversity across the employee base and talent pipeline and, over time, progress related to diversity initiatives and commitments.

Some encourage companies to supplement EEO-1 data as needed with data that better reflects how the company is run but emphasize the need for EEO-1 data as a baseline to ensure comparability. A few investors seek promotion, retention and recruitment data for protected classes of employees to directly illustrate the upward mobility of diverse talent.

Investors pointed out that to be meaningful, workforce diversity data must be supported by a narrative about the company’s human capital strategy and goals. While many said they'll be looking closely at racial diversity, some added that they’re interested in diversity across many dimensions, including age demographics, noting interest in understanding how companies are managing a workforce that extends from millennials through retiring baby boomers.

At the board level, investors want disclosure of the board’s diversity across gender, race and ethnicity, and to see more diverse directors brought into the boardroom and policies that encourage diverse director recruitment (e.g., adoption of the Rooney Rule, which commits boards to including women and minority candidates in director nominee search pools).

Investors may vote against certain directors at companies not disclosing this information or making related progress. Having already established voting guidelines around minimum gender diversity standards, some are now incorporating broader diversity thresholds into their proxy voting policies and others indicated they may do so in the future.

Climate risk/environmental issues

Around two-thirds of investors said they will prioritize climate risk, and many of those are working with Climate Action 100+, an initiative of over 500 investors pressing for corporate action on climate change. Investors cited the acceleration of physical climate risks and the urgency to fundamentally reorganize the economy over the next decade to avoid the most catastrophic outcomes.

While the nature of climate-related engagements can be sector- and company-specific, a consistent thread is investors seeking company disclosures aligned to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which include disclosures related to the governance, strategy, risk management approach and metrics and targets used relative to climate-related risks and opportunities.

Additional comments we heard include requesting companies to commit to net-zero greenhouse gas (GHG) emissions by 2050, adopt science-based GHG reduction targets aligned to the goal of the Paris Agreement, conduct climate-related scenario analysis and adopt renewable energy targets.

Many investors seek more specificity around companies' decarbonization strategies for reaching aggressive, longer-term emissions reduction targets. They want to understand how businesses are transitioning in the short and mid-term and to hold companies accountable on the pace and trajectory of that delivery.

To that end, some investors said they will look to capital expenditures as a key indicator of how a company is positioning itself for the future and whether its climate ambitions are credible. Many are also focused on how physical climate risks are assessed and managed across the value chain, and how corporate political and lobbying expenditures align to stated climate commitments.

Investors are also making their own climate-related commitments, including through the United Nations- convened Net-Zero Asset Owner Alliance and the Net Zero Asset Managers Initiative, both of which support aligning investments with the goal of net-zero emissions by 2050. As investors act on these commitments, the pressure on companies to accelerate their transition to a low-carbon future will grow.

Executive compensation

Just under a third of investors said they will prioritize executive pay in their 2021 engagements. Most are focused on pay decisions related to the impacts of COVID-19 and are evaluating those decisions through the lens of stakeholder alignment, particularly how executive pay aligns with decisions related to the broader workforce (e.g., pay cuts, furloughs and layoffs) — and their expectations are more pronounced for companies that have received government subsidies. Many said they will scrutinize adjustments to performance goals and payout opportunities, option repricings and equity grants made at the bottom of the market. Additionally, some investors are engaging companies on tying ESG goals to executive pay, including considering whether current incentives exacerbate ESG-related risks.

Strategic workforce issues beyond diversity

A quarter of investors are prioritizing human capital management engagement more broadly. They are focused on the health and safety of the workforce as the pandemic continues, as well as on how companies are thinking about human capital strategy in a post-pandemic future. Investors want to understand how companies are taking what they’ve learned about their workforce through the pandemic and translating that into opportunity, including how they’re investing in job retraining and workforce adaptation as the nature of work and ways of working continue to transform.

Some investors want to see boards assign the compensation committee, or another board-level committee, responsibility for overseeing workforce matters, and want to understand board members’ line of sight into the employee experience (e.g., are they having regular discussions with the Chief Human Resources Officer and unstructured interactions with employees).

Additional discussion themes include continuing concerns from some investors around the impact of automation on jobs and the economy, and the impact of independent contractor models on workforce management, the long-term prosperity of workers and the economy.

Emerging areas of focus

A handful of topics stood out this year as gaining traction among a broader group of investors. These include biodiversity loss and protecting the ecosystems upon which business and society depend, the reflection of climate risk in financial statements, how companies are operationalizing their stakeholder commitments, and understanding and valuing the environmental and social impacts of a company’s products and operations. Investors interested in these topics have in the past been leading indicators of where investor sentiment will go.

Key board takeaways

  • Understand the evolving disclosure expectations, engagement priorities and proxy voting guidelines of key investors.
  • Across key focus areas such as workforce and board diversity and climate change, consider whether company communications make clear what the related strategy is, how progress is incentivized and measured and how oversight is executed at the board and committee level.
  • Approach engagement as an opportunity to gain external insights to further develop the company’ s strategy and disclosures.
  • Recognize that some investors have indicated an increased willingness to vote against directors, and in favor of shareholder proposals, as ways to communicate their views and drive change.

Summary

Investors want to know how companies are responding to disruption and what steps they are taking to build resilience and strengthen business continuity as they also support employee engagement, health and well-being.

About this article

By Jamie Smith

EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist

Trusted resource on corporate governance and institutional investor trends. Researcher and analyst. Lifelong learner. Mother and nature enthusiast.

Contributors