Midyear Responsible Investing Update: Disclosures, Climate, and Diversity

As the world slowly opens up to a mask-free reality, we look back on what has made the first half of 2021 a very exciting time for investors, especially those interested in understanding how the pandemic has spurred the two most prominent environmental, social, and corporate governance (ESG) investing themes.

For years, investors have been clamoring for more comprehensive, consistent, and comparable disclosures so analysts can better assess the climate risks companies are facing and conversely the opportunities that may arise. This is true for all ESG risks but rings especially relevant for the two themes that have been dominating investors’ attention: climate change and diversity. Many believe shining a disclosure spotlight on climate is the most effective way to ensure companies pay closer attention to the issue and actually manage their exposure to the risks of our changing climate.  

While the SEC published guidance in 2010 to remind companies that climate change can be a material risk and thus should be disclosed, it did little—to nothing—to prod meaningful climate disclosure. 2021 looks like it might be the year the SEC requires companies to do more. The SEC received more than 6,000 comment letters in June after asking for comments on the need for additional climate disclosure regulation. While commenters had various recommendations, there appears to be consensus that this very important systemic risk deserves better disclosure. Subpar climate reporting is not an area the SEC can neglect any longer. SEC regulation is expected by the end of the year. Investors, companies, and the public at large are waiting with bated breath.

Climate change
Beyond the prospect of more thorough climate disclosures pushed by the SEC, shareholders have been busy on the active ownership front of the climate change battle. And we aren’t just thinking about the watershed moments described in last month’s blog post, Not-So-Silent Spring: Exxon and the Vote Heard Round the World. This year is also bearing witness to emboldened shareholder votes in support of companies taking real action. 


At Chevron, for example, which has already pledged to limit carbon emissions that contribute to climate change, more than 60% of shareholders supported a shareholder proposal to reduce scope 3 emissions. Scope 3 emissions aren’t tied directly to a company’s fuel production but instead come from other activities, like consumer use of the fuel sold. In 2019, Chevron’s scope 3 emissions were 91% of its total emissions from products sold.


We also saw shareholders being much more supportive of requiring reporting of climate lobbying activities, with shareholder proposals at six US companies getting majority support. Delta Airlines and United Airlines show what a difference this year has made, as these types of proposals got more than 60% support in 2021, while similar proposals got only a little more than 40% support last year. Never have we seen these levels of support, making this proxy season truly remarkable.


Diversity and inclusion
Climate isn’t the only theme dominating this space; diversity also stood out in terms of activity and progress. Investors have long advocated for more diversity on boards and can no longer lament that progress is slow, with almost 75% of all new director positions at S&P 500^® companies going to women and people of color. This is more than twice the percentage we saw a mere decade ago. While this uptick in progress is refreshing, it’s worth noting that boards have been increasing the number of seats instead of turning over seats, which is what we see during more typical years. This means the percentage of new directors from diverse backgrounds exaggerates the progress in the overall board population.

The 2021 proxy season proved boards were not immune to the broader public conversation on systemic racism reinvigorated by the Black Lives Matter movement. The push for gender diversity has gotten some tailwind over the past decade, but the push for racial and ethnic diversity was catapulted this season, with the percentage of new black directors in the S&P 500^® tripling that of last year. While these numbers are encouraging, progress remains to be made. In contrast to the almost 80% of S&P 500^® boards seats held by white directors, the 2019 US Census shows that the US population is 60% white and expected to continue diversifying faster than predicted.

Let’s not forget that investor efforts to encourage diversity and inclusion are not limited to the boardroom; shareholders are increasingly pushing for broader disclosures at companies to better assess how companies manage human capital and track their progress in terms of attracting, retaining, and promoting minority employees. One basic workforce disclosure investors are asking for is EEO-1 data, a report that’s already required to be filed with the US government for the vast majority of US companies. This data describes the gender, racial, and ethnic breakdown of company workforces by 10 job categories. 

This summer, Parametric is sending letters encouraging S&P 500^® companies to make the consolidated EEO-1 data public and asking for an open dialogue on diversity initiatives and disclosures. Doing so would levy minimal cost, since the data is already collected, and would be merely a first step toward encouraging better human capital disclosures. 

 
Encouragingly, more progress on diversity (and more broadly human capital) disclosures might be on the horizon. SEC chair Gary Gensler has stated publicly that human capital disclosure is one of his top priorities, and companies should expect more public scrutiny of their efforts, as well as new regulatory requirements.

 
The bottom line
Never have we seen such interest in all things ESG. The pandemic hit a reset button and prompted people to focus on what they see as most important. With this shift in mindset, the momentum demanding real action is gaining strength. But before we can witness real action, companies need to be able to quantify these issues and track their progress, and that’s exactly why so much effort is currently being spent on raising the bar when it comes to ESG disclosures.