Working Together to Protect
Our Common Resources
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Welcome to our December newsletter. In this month's edition, we celebrate how our recent comment letter to the DOL helped to move the needle on their latest rule. We also catch you up on some shareholder proposal
developments and our proxy voting strategy, which is quickly ramping up ahead of the 2021 season. Lastly, we highlight the cutting edge work of Dr. Ellen Quigley, a Universal Ownership researcher and thought leader from the University of Cambridge.
As always, please reach out if you would like to further discuss any of the below or to get more involved with our work.
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TSC LETTER TO DOL ELICITS
CONFIRMATION THAT BETA ACTIVISM
CAN SATISFY FIDUCIARY DUTY
Your support is making a difference: a November release from the Department of Labor (the “DOL”) was a big win for shareholders. As you will see if you read to the end of this piece, part of that response was a
specifically related to a comment the Shareholder Commons filed with the DOL, and that response clarified how beta activism can help a pension plan satisfy its fiduciary duties.
In the summer of this year, the DOL (which regulates most private retirement plans in the US) proposed a rule regulating the use of environmental, social and governance (“ESG”) criteria by such plans. This proposal followed years of shifting guidance under Democratic and
Republican administrations, with the former largely blessing ESG questions as legitimate investment concerns and the latter putting up procedural obstacles, claiming that plans focusing on ESG were sacrificing the interests of retirees for other purposes. The 2020 proposal went much further than guidance under other Republican administrations, attempting to create a presumption that ESG considerations violated fiduciary duties, which would have undermined what has become standard industry
practice for many investment managers and plan trustees.
After receiving more than 8700 responses, many of which included overwhelming evidence that ESG strategies are largely designed to increase return and/or decrease risk, the DOL reversed course and issued a revised final rule (the “Final Rule”) that eliminated the anti-ESG presumption. Instead, the Final Rule simply reiterates that any strategy employed by a trustee must be designed to
financially benefit retirees and their beneficiaries by increasing and/or protecting the value of the assets in the plan (“pecuniary interests.”) The release accompanying the Final Rule (the “Release”) emphasized that the focus had shifted from the question whether a strategy involved ESG to whether it had a pecuniary element:
Thus, the final rule removes all ESG terminology from the proposed regulatory text. The Department anticipates that when a fiduciary is faced with a purported ESG factor in an investment, the regulatory requirement will be clearer and more consistent if it demands that fiduciaries focus on providing participants with the financial benefits promised under the plan and focus on whether a
factor is pecuniary, rather than being required to navigate imprecise and ambiguous ESG terminology.
In other words, the Final Rule says clearly that trustees can refuse to invest in companies that pollute if they believe that polluting companies ultimately make less money. But they cannot make the same decision because they want a cleaner world. Although some observers may hope for world that puts the environment before profits, the Final Rule does seem to draw the line in an
appropriate place, given that the job of trustees is to protect retirement income, not the planet.
Despite any disappointment that the outcome was not even more ESG favorable, the fact is that this is a significant victory for investors with an interest in ensuring responsible conduct by portfolio companies: the proposed rule was very dangerous, because it viewed any strategy considering society or the environment as suspect, no matter how successful it might be in increasing financial
returns. In the words of a prior Secretary of Labor describing Bush administration guidance, the proposal treated ESG as if it “had cooties.” In contrast, the Final Rule clearly encompasses strategies of ESG integration, i.e., examining an investment through a lens that includes the effect of its social and environmental
impacts on its financial returns.
In addition, and closer to home for The Shareholder Commons, the new standard should also permit stewardship that discourages portfolio companies from engaging in behavior that harms society and the environment, and consequently the value of shareholders’ diversified portfolios. Such beta activism is clearly aimed “providing participants with the financial benefits promised under the plan,”
and thus “pecuniary” as the term is used in the Final Rule.
It is interesting to note that that the Release attacks the strawman of shareholder activism designed to improve the world, but does not explicitly mention activism designed to improve overall stock market returns:
Finally, the Department does not agree with the position that ERISA permits or requires plan fiduciaries to premise investment decisions on the idea that, as investors, they own a share of the world economy, and, therefore, that their financial interests demand that they adapt their investment-related actions to promote a theoretical benefit to the world economy that might redound,
outside the plan, to the benefit of the participants in the plan.
This “disagreement” is manufactured. The discussion is clearly in response to the comment that TSC filed, but it misses our point entirely: “investment-related actions” that improve the world economy do not just create benefits “outside” the plan. To the contrary, because there is a linear relationship between GDP and corporate financial returns, shareholder activism that
preserves social and environmental systems critical to productivity will also protect and increase the value of assets held inside a properly diversified plan.
In this commentary, a leading law firm cautioned pension trustees that as a result of the Final Rule, they may be required to look for ESG strategies that improve return: “Fiduciaries may want
to consider whether there are new opportunities to capture improved returns or reduce risk exposures through carefully selected ESG investment approaches.” By the same token, the DOL response to our comment in fact clarifies how beta activism--consisting of diversified owners working together to improve the return of the very market in which they are invested--is perhaps the most important responsibility a pension trustee has under the Final Rule.
OFF TO THE (PROXY) RACES!
Over the last month, TSC has assisted a number of shareholder proponents in challenging companies to consider the threats to diversified investment portfolios created by profits that come at the expense of environmental systems and social institutions. The first filings are as follows, with more to come.
- A proposal at Goldman Sachs requests that the company disclose how its facilitation of multi-class voting, which gives individuals perpetual power over critically important companies like Facebook and Alphabet,
will affect the economy and markets over the long term. Goldman Sachs has asked us for a meeting to discuss this proposal, which we are currently working to schedule.
- A proposal at Pepsico requests a report on the public health costs of its food and beverage business and how those costs affect market performance, in light of the fact that the World Health Organization has assessed
the unpriced social burdens of obesity at nearly 3% of annual GDP. A similar proposal at CVS Health focuses on that company’s food retail business.
- Proposals at UPS, Tractor Supply, S&P Global and 3M request that the companies amend their certificates of incorporation to become public benefit corporations, in light of their adoption of the Business Roundtable’s Statement on the Purpose of a Corporation (BRT Statement). The proposals note that the companies’ current incorporation precludes the stakeholder
primacy model the BRT Statement proclaims. It also notes that the companies’ top beneficial owners are broadly diversified and thus have a direct interest in the overall health of the social, environmental, and economic systems on which long-term prosperity depends.
In a related matter, we filed our own “friend of the SEC” letter in response to a proposal at Apple from the National Center for Public Policy Research that is closely related to our last formulation
above (and possibly designed to undercut it), and that appears to have the countervailing objective of persuading the company to back away from the stakeholder model embedded in the BRT Statement.
If you are interested in this effort and would like to file or co-file a shareholder proposal urging a company to address the concerns of broadly diversified shareholders, please contact Sara.
We’re eager to see how these resolutions play out. In particular, we will be interested to see how institutional shareholders such as BlackRock, Vanguard, and State Street, who manage trillions of dollars for diversified investors, respond to these proposals. We would strongly urge them to support such proposals to represent the best interests of their clients. Whatever happens, we’ll keep you
posted!
Speaking of supporting proposals…
THERE'S A POLICY FOR THAT
We’ve put a lot of thought into how owners and managers can vote their proxies to improve the performance of the markets they invest in, and now we have developed a series of voting policies that can expand the scope of a mandate to include such voting. These include language to add to a statement of investment beliefs, along with specific additions to policies regarding director elections, shareholder proposals, benefit corporation certificate amendment, and mergers. As with everything we do, this is all in the service of empowering investors to fortify the social, environmental, and economic
systems on which our prosperity as diversified shareholders depends. We welcome your feedback on these policies, and it would bring us huge holiday cheer if you adopted them and/or encouraged your asset managers to do the same. Please get in touch with Sara to share comments or to learn more.
THOUGHT LEADER SPOTLIGHT:
DR. ELLEN QUIGLEY
One of TSC's most treasured collaborators and thought partners, Dr. Ellen Quigley is a Research Associate in Climate Risk & Sustainable Finance at the Centre for the Study of Existential Risk,
as well as the Advisor to the Chief Financial Officer (Responsible Investment) at the University of Cambridge. Our theory of change at TSC was greatly influenced by her paper, "Universal Ownership in the Anthropocene."
We're grateful to have individuals like Ellen who are working tirelessly to produce important scholarship on universal ownership theory that TSC's work relies upon. If you have other thought leaders that you'd like us to spotlight, please let us know!
THAT'S ALL FOR 2020
Thanks for reading. As 2020 comes to a close, we want to express our gratitude for your support and readership over the past year. It has been a wild ride, for TSC and the broader community, and we are looking ahead to 2021 with a sense of optimism and enthusiasm.
Wishing you all a happy, safe, and healthy holiday season - and don't forget to breathe!
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