ESG In Pills July 2022
Top story
Business Roundtable is Business as Usual
In August 2019, the Business Roundtable (the “BRT”)—a prominent association of chief executive officers (“CEOs”) of major companies—issued a Statement on the Purpose of a Corporation (the “BRT Statement”), which was saluted as a “revolutionary moment in business” and a “major philosophical shift.”
Household names included Apple, Amazon, American Express, Goldman Sachs, JPMorgan Chase, Mastercard, Coca-Cola, Walmart, Procter & Gamble, Lockheed Martin, General Motors, IBM, Johnson & Johnson, Morgan Stanley, Exxon-Mobil, Pfizer, AT&T, Target, Texas Instruments, and Best Buy.
These companies overturned a 22-year-old policy statement that defined a corporation’s principal purpose as maximising shareholder return. In its place, the CEOs of Business Roundtable adopted a new Statement on the Purpose of a Corporation declaring that “companies should serve not only their shareholders but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.”
The updated Statement, in 2020, “better reflected the way CEOs endeavour every day to create value for all of their stakeholders and challenged companies to do more.” Per their view, “Business Roundtable companies have invested in workers, taken a leading role in fighting the pandemic, and supported the communities where they serve. Companies have powerfully demonstrated their commitment to work for the benefit of all stakeholders through the current crises.”
Because the BRT Statement committed more than 180 signatory CEOs to deliver value to all stakeholders, many observers expected the BRT Statement to bring about significant improvements in the treatment of stakeholders. In 2020 and 2021, the BRT and its leaders celebrated the first and second anniversaries of the Statement by highlighting the accomplishments made by its signatories.
The BRT Statement was celebrated by many as a meaningful commitment. Under this “Commitment” view, the Statement was expected to improve how BRT Companies treat their stakeholders significantly.
A recent paper by Harvard Law School professors Lucian Bebchuk and Roberto Tallarita proves that BRT Statement mainly was for show and that BRT Companies joining it did not intend or expect it to bring about any material changes in how they treat stakeholders.
Their analysis is based on a review of an extensive array of corporate documents of the 128 U.S. public companies that joined the original BRT Statement in August 2019 (the “BRT Companies”). They manually collected and analysed over six hundred corporate documents, which they have made available in an online archive, the BRT Corporate Purpose Archive. The analysis of these documents provides considerable evidence consistent with the hypothesis that the BRT Statement was mainly for show and did not reflect a meaningful commitment to bring about material improvement in the treatment of stakeholders.
More specifically, examining the two years following the issuance of the BRT Statement, the paper uncovers several findings.
In SEC submissions or securities filings responding to the over forty shareholder proposals submitted to BRT Companies regarding their implementation of the BRT Statement, most of the BRT Companies explicitly stated that their joining the BRT Statement did not require any such changes. None of them accepted that the Statement needed any changes. And “denied that they planned to make any major changes to implement the statement.”
To illustrate, it is worth elaborating on some examples. JPMorgan Chase, whose CEO Jamie Dimon was chair of the BRT at the time of the issuance of the BRT Statement and played a visible role in this connection, received three proposals about the implementation of the statement, one for the 2020 annual meeting and two for the 2021 annual meeting. In all three cases, JPMorgan sought a no-action letter from the SEC and, in so doing, made clear that the company did not need to change its corporate policies as a consequence of the BRT Statement.
Interestingly, some of these companies further played down the significance of the BRT Statement by suggesting that the statement encouraged companies to consider the stakeholders' interests only as long as these interests are compatible with shareholder value maximisation. Walmart, for example, argued that they already comply with the BRT Statement because they “maximise long-term value for our shareholders by serving our stakeholders.” Goldman Sachs stated that the company did not need to take any steps to implement the BRT Statement because the company’s “ability to drive long-term shareholder value is dependent upon how well we serve our clients, manage our people and support our broader stakeholders, including the communities in which we live and work.” In these statements and similar ones made by other companies, the board suggested not only that the BRT Statement will not produce any change in the treatment of stakeholders but also that stakeholders matter only to the extent they serve shareholder value.
The numerous BRT Companies that updated their corporate governance guidelines during the two years generally did not add any language that improved the status of stakeholders. Indeed, most chose to retain a commitment to shareholder primacy in their guidelines.
Furthermore, as of the end of the two years, most of them at the end years, most BRT companies had governance guidelines that reflected a shareholder primacy approach. Also, all BRT Companies retained corporate bylaws that reflect a shareholder-centred view. BRT companies all continued to pay directors compensation that aligned their interests with shareholder value and avoided using or supporting stakeholder-oriented metrics.
The conclusion of the investigation states: “In other words, these major signatories of the BRT Statement, as well as many others, explicitly admitted that the BRT Statement was not expected to produce any changes in how companies treat their stakeholders. Hence, stakeholders should expect to be treated in the same way they have been treated for many years or decades.”
Chart of the month
Environment
India Bans All Pesticides
The Indian state of Sikkim has banned all pesticides, and the world is waiting to see if it is viable. Recent reports show how this option is not only possible; it is much better than using them. Since 2003, all pesticides, herbicides, synthetic fertilisers and GMOs have been banned, becoming the world’s first fully certified organic state in 2016. At first, farmers struggled with the transition, with steep declines in crop yields, but the government promised things would get better in the long run and to compensate for their losses in the shorter short-term term. A decade and a half later, “the cloud-wreathed state is starting to see the dividends” of its investment. And now, the yield for most crops is higher than it was during conventional farming, according to a report by the Center for Research on Globalization. Fruit yields are up 5%, and the state’s cash crop cardamon has increased a whopping 23%. That’s in part thanks to rebounding pollinator populations. Since pesticides have disappeared, wildlife of all sorts is returning. The region boasts 500 species of butterflies, 4,500 flowering plants, and rare wildlife like the red panda, Himalayan bear, snow leopards and yaks. Tourism is also on the rise, increasing 70% since the state went all organic. Tourists travel far and wide to see the natural beauty and bounty of the ancient kingdom of Sikkim. Anyone caught using pesticides in Sikkim could be fined $1400 or spend three years in prison.
New Zealand Prices Cow Burp
Early last month, Reuters reported that New Zealand had released a draft plan to put a price on agricultural emissions to tackle one of the country's most significant sources of greenhouse gases, belching sheep and cattle. Under the draft plan, by government and farm community representatives, farmers will have to pay for their gas emissions from 2025. The proposal would make New Zealand, a significant agricultural exporter, the first country to have farmers pay for emissions from livestock, the Ministry for Environment said. The proposal includes incentives for farmers who reduce emissions through feed additives, while on-farm forestry can be used to offset emissions. Revenue from the scheme will be invested in research, development and advisory services for farmers. Nearly half the total greenhouse gas emissions of the country come from agriculture, mainly methane. Agricultural emissions have previously been exempted from the country's emissions trading scheme, drawing criticism of the government's commitment to stop global warming. A final decision on the project is expected in December.
How Thirsty is our Data?
What sort of data are we creating and storing? In 2019 alone, we took 1.4 trillion photos (more than in the entire 20th century), and by 2021 we were storing about 8 trillion images in data centres. What happens to all these photos and other data? “After 90 days, the probability of a piece of content being reused is 5%,” says Bill Tolson, VP of Global Compliance and eDiscovery. Data Centres are Data Dumps.
Data centre growth is set to go from $200 billion in 2021 to $200 billion in 2021 to $404 billion by 2028. We are doubling down and driving data growth when we’re supposed to be cutting consumption. We’re hoarding more data than ever, streaming more, storing more, keeping more. There is much misinformation on data centres being ‘carbon neutral. Some data centres claim carbon neutrality and do so based on using part renewable energy along with massive offsetting purchases. However, the carbon-neutral description only accounts for energy use. While many data centres are showing improvements, we must realise that electricity is just a tiny part of the resource impact that data centres have.
Furthermore, data often falls into most companies’ scope three emissions boundary, which is not always accounted for. “For data-centre operators and cloud providers, most emissions are construction, infrastructure, and hardware manufacturing,” a Harvard University-published study stated in 2020. And let’s not forget the massive thirst for water. US data centres used 626 billion litres of water in 2014, which is projected to grow to 660 billion litres in 2020. That would fill about 264,000 Olympic-size swimming pools. It’s funny that data centres know so much about us, but they are incredibly secretive about their operations.
"We don't know how much water data centres use”, Dr Arman Shehabi from Lawrence Berkeley National Laboratory research explains. "I never thought it could be worse transparency than on the energy side, but we know less.” Much of the water used is from water-stressed regions. As global droughts are brought on by climate change, the thirsty data centres, using water for cooling the equipment and electric generation, are often sucking up more than their fair share. “Collectively, data centres are among the top-ten water-consuming industries in the US”, comments DCD, and much of that comes from portable drinking water.
Aside from the energy, water and buildings, let’s look at the tech used in data centres. Google had around 900,000 servers in use in 2011. A study published in IEEE Xplore in 2022 estimated that manufacturing one server creates an average of 1.3 tons CO2e. It’s thought that data centres cycle through servers worldwide so quickly that something which should last five or six years ends up being discarded after only three. This is beginning to change in some places, not because of climate change, but the use of the millions of dollars that can be saved in making them last a few more months. These servers are destroyed rather than recycled (for security) at the end of their short life. So there is no circularity built into the system. Furthermore, servers need to back up your information several times (to ensure against a loss), so digital footprints can be doubled or tripled depending on the plan and the provider.
Social
Shein's band-aid on human rights abuses
During this month’s global fashion summit in Copenhagen, fast-fashion company Shein wins applause at an international conference on fashion sustainability. The ultra-fast fashion brand has been praised for donating $15m over three years to a charity working at Kantamanto in Accra, the world’s largest secondhand clothing market. Workers, primarily economic migrants from northern Ghana, are often women and children, some as young as six. They are carrying clothing bales on their heads which weigh 55kg, being paid a dollar a trip and coming home to sleep on concrete floors. Liz Ricketts, director of the Or Foundation, a Ghana- and US-based not-for-profit working with Accra’s textile waste workers, said, “Some [women] carry their babies on their back. Sometimes they fall backwards because of the weight of the bales, and their children are killed [underneath them].” There’s a narrative in a sustainable fashion that says: ‘There is no ‘away’’. This is the ‘away’. It is – unfortunately so – truly revolutionary that a fashion company is linking its operations to Kantamanto, as no other major fashion brand has been willing to state yet.
Nonetheless, such acknowledgement is minor. Giving money while upholding an unsustainable business model and profiting at $100bn is not addressing the root of the problem. Of which Shein is indeed part responsible. We need to start thinking about businesses, not throwing money as a solution. Reduced production of fast fashion is the answer. They should be addressing the root cause of the problem. The foundation says the money will fund an apprenticeship programme for Kantamanto women, help community businesses recycle textile waste and improve working conditions at the market.
Amazon's AGM Was All About its Workers
This year’s proxy season highlight is Amazon’s Annual General Meeting (AGM). Allegations of anti-union tactics by Amazon have made headlines around the world, including reports of intimidation strategies, retaliation actions and surveillance systems. Such practices directly contradict Amazon’s commitment “to non-discrimination and non-retaliation that ensures equal treatment for union and non-union employees”. A report published in May by the Center for Law and Work (CLAW) at Berkeley Law indicates that “Amazon’s freedom of association policy, on its face, is non-compliant with international labour standards, and Amazon management’s conduct before and after issuing the policy continues to violate international standards”.
The company faced unprecedented shareholder action as investors voted on workers’ rights to freedom of association and collective bargaining at their Annual General Meeting. The vote cast was historic as the first resolution of its kind and received a groundswell of shareholder support, with 47% of independent investors voting in favour. UNI Global Union and the International Trade Union Confederation (ITUC), representing Amazon workers around the world, applaud shareholders for stepping up to send this strong signal that Amazon’s union-busting does not have their mandate.
Amazon’s violations of trade union rights are a prime test case for whether the discourse on addressing inequality will amount to action, including how investors walk the talk on Environmental, Social and Governance (ESG) issues. With more than 1.6 million employees, Amazon is the world’s second-largest private-sector employer, even without considering the company’s much wider footprint with dubiously-categorised self-employed drivers, its vast value chain and outsized impact on setting the standards of the future of work.
Recommended by LinkedIn
The shareholder resolution, filed by SHARE (Shareholder Association for Research and Education), representing the Toronto-based Catherine Donnelly Foundation, urges Amazon’s board of directors to review how the company’s actions in the face of union organising efforts align with its stated commitment to freedom of association and collective bargaining and core International Labour Organization Conventions. Many big names among mainstream investors voiced their support in favour. Proxy advisors Glass Lewis and ISS recommended that shareholders vote in favour. Major institutional investors including the US$1.8 trillion Legal & General Investment Management (LGIM), US$1.2 trillion Norges Bank, US$1 trillion asset manager Schroders, $263 billion New York City Pension Plans, $250 billion Florida SBA and $312 billion pension fund CalSTRS have also indicated they voted for the proposal. Amazon shareholders also supported other landmark resolutions, including tax transparency, working conditions and worker representation on the board.
Google Mandated to Fill the Gender Gap
Google is set to pay $118 million to settle a class-action gender discrimination lawsuit involving around 15,500 women. As the settlement’s press release noted, Google must also have an independent labour economist evaluate its hiring practices and pay equity studies.
The lawsuit emerged in 2017 after three women filed a complaint accusing the company of underpaying female workers in violation of California’s Equal Pay Act, citing a wage gap of around $17,000. The complaint also alleges Google locks women into lower career tracks, leading to less pay and lower bonuses when compared to their male counterparts. The plaintiffs won class-action status last year.
Google’s treatment of workers has been scrutinised more than once. Last year, Google agreed to pay $2.5 million to settle a lawsuit that claimed the company underpaid female engineers and overlooked Asian job applicants. California’s Department of Fair Employment and Housing (DFEH) is also investigating the company over complaints of potential harassment and discrimination against Black female employees. Holly Pease, a plaintiff in the case, said in a statement. “Google, since its founding, has led the tech industry. They also have an opportunity to lead the charge to ensure inclusion and equity for women in tech.”
Several similar lawsuits targeting pay gaps have surfaced within the last decade, with class-action gender discrimination suits against Microsoft and Twitter failing to gain traction. Oracle is also facing a class-action lawsuit alleging unequal pay. Still, according to Bloomberg Law, the group of women suing the company will likely lose class-action status after a judge said a class with 3,000 employees and 125 job classifications would be “unmanageable to proceed to trial.” Other tech companies, like Apple and Riot Games, have also faced accusations of pay inequality.
Governance
Fossil Fuel Bombs
A bombshell international study out last month shows how, once again, people lose with dirty assets. The study, published in the journal Nature Climate Change, sought to understand who will take the financial hit as oil and gas production worldwide becomes unprofitable. Many identified losses will come through people’s pension funds and investments. People with their retirement savings tied up in funds like the Canada Pension Plan, Ontario Teachers’ Pension Plan, or the Alberta Investment Management Corporation are at risk of seeing their savings threatened if an energy transition is not well managed, given how deeply invested in fossil fuels many pension plans are. Tracing more than 40,000 of these assets back to their ultimate owners, the authors found that investors risk losing as much as $1.76 trillion globally. The study does not predict a crash but rather compares two scenarios — what investors currently expect from their investments and what it would take to hold onto the Paris Agreement’s goal of preventing the planet from warming more than 2 C — to identify the amount of cash at the risk of never the materialising. It only considered resources used in oil and gas production, meaning that the number could grow if things like pipelines and refineries were included. People in global financial powers like the United States and the United Kingdom have the most money at risk from transition — an exposure of roughly $350 billion and just over $125 billion, respectively. The British Virgin Islands and Hong Kong came third and fourth, with Canada rounding out the top five. In other words, financiers in rich countries are investing in fossil fuels to make money in the short term, but the more cash goes into these investments, the more those people stand to lose later on as the world stops using oil and gas. As we know, to avoid the more severe impacts of climate change, the world must rapidly move away from oil, coal and gas. As that transition happens, fossil fuel assets — like the equipment used to extract oil and gas, not to mention the oil and gas itself — will lose their value.
No matter what, phasing out the oil and gas industry, which must happen to limit global warming, will involve some financial pain. Since the Paris Agreement was signed, banks and other financial firms in Canada have pumped over $900 billion into the coal, oil and gas industries. If the country acts quickly to address climate change, they are unlikely to see those investments pay off as expected. However, there is an even for continuing to invest in fossil fuels. A report published last year by the Canadian Institute for Climate Choices estimated that the damage to infrastructure like roads, buildings and power lines caused by climate change would cost roughly $30 billion annually.
Shell and BP Lack Transparency
Earlier this year, oil giants BP and Royal Dutch Shell assessed the climate lobbying done by trade associations they have been involved with. They publicly quit a handful of high-profile industry groups campaigning to undermine regulations to reduce greenhouse gases. Shortly after taking the helm in February, BP CEO Bernard Looney began a review of lobbying by the company’s trade groups. He billed the effort as a “small but important step towards rebuilding trust in BP.” He promised a new era of climate change, where the company rebranded a decade earlier as “Beyond Petroleum”, would eliminate its carbon footprint and direct its powerful lobbying machine toward “advocacy for policies that support net-zero.” Shell published its review in 2019, updated this year as part of what CEO Ben van Beurden called “the first step towards greater transparency around our activities with industry associations on the topic of climate change.” Yet the reviews covered only a narrow slice of their memberships. The effort was part of a vow to increase corporate transparency and bring planet-heating emissions to zero over the next few decades. Nonetheless, an Unearthed and HuffPost investigation has found they are still active members of at least eight trade organisations lobbying against climate measures in the United States and Australia that were not disclosed in the public reviews.
Reviews of leaked and publicly available documents show those groups are part of the sprawling network of state and regional trade associations that have, in at least one case, boasted about quashing the very carbon-reduction policies the oil giants publicly claim to support. “This is a standard business practice,” said Robert Brulle, a climate denial researcher and professor at Brown University’s Institute at Brown for Environment and Society. “They’re trying to have it both ways, being socially responsible without changing their positions.”
The findings illuminate their new climate pledges, raising questions about how seriously they can be taken when the companies are still funding lobbying operations that undermine their new commitments. In the United States, both Shell and BP support groups such as the Alliance of Western Energy Consumers, which crusaded against Oregon’s efforts to put a price on carbon emissions, and the Texas Oil & Gas Association, a trade group in the nation’s top oil-producing state battling rules to restrict the output of methane, a super-heating greenhouse gas. In Australia, the two giants back the Australian Petroleum Production & Exploration Association and the Business Council of Australia, two groups fighting to undercut the country’s contributions to the Paris climate accords. Shell, meanwhile, quietly held its seat on the Queensland Resources Council, a key advocate of building the world’s largest coal mine.
The EU Labels Gas as Green
After a long-contested discussion on nuclear and gas, the European Parliament backed EU rules labelling investments in gas and nuclear power plants as climate-friendly. The new rules will add gas and nuclear power plants to the EU "taxonomy" rulebook from 2023, enabling investors to label and market their investments as green. The EU taxonomy aims to clear up the murky world of sustainable investing by ensuring any financial products making eco-friendly claims meet specific standards. Gas plants, for example, must switch to low-carbon gases by 2035 and meet an emissions limit. According to the IEA, we cannot invest in new fossil production this year. Yet, the EU surges ahead with this highly problematic decision.
The European Commission welcomed the result. It proposed the rules in February after more than a year of delay and intense lobbying from governments and industries. Gas is a fossil fuel that produces planet-warming emissions; it is not ‘green’. Nonetheless, given its lower share of emissions than coal, some EU states see it as a temporary alternative to replace the dirtier fuel. Nuclear energy is free from CO2 emissions but produces radioactive waste. Supporters like France say nuclear is vital to meet emissions-cutting goals, while opponents cite concerns about waste disposal. This is why countries such as Austria and Luxemburg are preparing to challenge the law in court after having warned against labelling gas as green. "It is neither credible, ambitious nor knowledge-based, endangers our future and is more than irresponsible," Austrian climate minister Leonore Gewessler said. "This is a poor signal to the rest of the world that may undermine the EU's leadership position on climate action," said Anders Schelde, chief investment officer at Danish pension fund AkademikerPension. It seems then that the EU will be the place where you cannot label soy milk as 'milk', but can label gas as 'green'.
Events
Sustainability Conference
July 14-15, 2022
New York
Annual Conference
September 5-7
Zurich
PRI in Person
Sept-20-22, 2022
Barcelona/Virtual
World Standard-setters Conference
Sept. 26-27, 2022
London