Activist Investors Demand Boards Incorporate Sustainability Into Executive Performance Standards

Corporate Governance, Executive Pay Plan Design

This week, 31 activist investors, collectively managing $1 trillion in assets, sent a letter to Russell 1000 companies asking them to address sustainability issues through “board oversight and executive accountability,” among other approaches.  The letter states that "[e]nvironmental and social sustainability issues can no longer be considered off-balance sheet issues," but instead are "material financial issues posing both risks and opportunities to the long-term success of the business."  The letter urges companies to integrate environmental, social and governance (“ESG”) concerns in their business strategy, future decisions, and investor communications.  It also calls on companies to consider utilizing the Ceres Roadmap for Sustainability, a tool that seeks to incorporate sustainability concerns into all aspects of business.  For example, the Roadmap states that “[s]ustainability performance results must be a core component of the evaluation of senior executive performance and compensation packages.”  The letter and the report also state that companies should consider establishing new governance structures, such as risk committees, even though most experts have determined it is better to address risk issues through existing Board committees, given that risk touches on so many substantive areas under the Board’s control.  Despite the professed interest in sustainability issues, only three out of the 10 shareholder resolutions filed this year seeking to link executive pay to sustainability metrics went to a vote, and all received less than 7 percent support.  However, the advent of say on pay has given larger activist investors, such as CalPERs and TIAA-CREF, the ability to address issues, such as sustainability, during engagement on pay.  The letter campaign follows the public commitments announced last month by several of the signatories, such as CalPERS and the AFL-CIO, to fight climate change and advocate for other sustainability issues, as part of the Investor-Business Roundtable for a Sustainable Economy.