ESG in the Proxy: 5 Expert Tips for Getting It Right
Proxy season is upon us, and most companies recognize that ESG integration is a must. Over time, as proxy statements have evolved from a regulatory requirement into an integral tool for investor communications, proxy ESG-related disclosures have increased exponentially, coming into their own as a critical form of communication with stakeholders.
But what, where, and how to include the additional ESG disclosures investors increasingly expect to see in SEC filings is still a fuzzy area for many organizations.
The good news is, there’s still time to get this year’s proxy ESG right. We asked our proxy advisory specialists, “What is the one must-have for enhancing ESG disclosures in the proxy this year?”
Read on for their expert advice.
Describe your ESG programs and progress
“It was not that long ago that investors were hard-pressed to find any ESG-related content in the proxy statement. Some companies in certain sectors, such as oil and gas or manufacturing, may have noted environmental compliance or workplace health and safety in their discussion of annual incentive compensation. But those were the exceptions and not the rule.
Times have changed. Now it is commonplace for companies to use their proxy statements to communicate broadly about their ESG initiatives, achievements, and how ESG has been integrated into their governance. ESG is making an appearance in more and more sections of the document. For example, we’ve seen a significant expansion in the frequency of ESG mentions in the compensation section. While still relatively modest, companies are starting to address additional subjects in this area, including employee diversity and environmental sustainability issues, such as GHG emissions. Beyond compensation matters, investors can also find ESG making an appearance in director/director nominee bios as well as in the increasingly popular board skills matrix.
Perhaps most notable is how frequently companies are including a general ESG section in their proxy statements. Many of these sections are no longer just a few brief paragraphs in length but may consist of a page or two (sometimes more) of ESG content. Companies are discussing the current state of their ESG programs, ESG initiatives that were launched in the last year, recent ESG performance metrics, and noting the year’s ESG achievements including any awards or acknowledgements they may have received.
Clearly, an expanded ESG proxy statement footprint is here to stay.”
Explain your board oversight strategy
“The traditional three-committee framework adopted by most boards in the U.S. reflects a time in which directors’ enumerated responsibilities were limited to a few key duties such as providing accurate financial information, managing executive pay, and ensuring Board succession. Over the last couple of decades, the role of directors has expanded dramatically and now includes the management of risks associated with the brand, the company’s impact on the environment, and social-related expectations.
These new responsibilities come with the risk of overburdening directors by placing too much responsibility on a single committee. Companies need to be mindful of delineating the purview of each committee in a way that allows directors to be briefed regularly and make recommendations on what should be implemented by management.
A common approach is to create new and dedicated groups to address these additional responsibilities, such as a Risk Committee, Sustainability Committee, and ESG Committee. This allows the traditional audit, compensation, and nominating committees to continue providing oversight in their areas, ensuring that all critical issues receive the focused attention they deserve.
Whichever ways your different board committees embrace the new responsibilities, the topic is something that needs to be discussed at the highest level of the company and communicated broadly and clearly in the proxy.”
Include a board skills matrix
“A growing number of companies are adding a board skills matrix to the director profiles in their proxy statements. Board matrices are a great way for investors to quickly visualize the competencies of the board as a whole as well as at the individual level. Increasingly, board matrices include ESG-related skills to demonstrate ESG oversight. With the pending SEC rules, companies inevitably will be expected to showcase both a level of cyber expertise and climate expertise at the board level.
Many companies are already getting ahead of the rules, now expected in April. For example, American Homes 4 Rent’s 2022 proxy statement includes callouts for both ESG and cybersecurity skills, along with other common skills and industry backgrounds.
Other companies showcase board diversity along with their board qualifications. Dow Inc.’s proxy statement includes separate skills columns for Environmental (E), Social (S), and Corporate Governance (G) along with diversity attributes.
For most companies, publishing a skills matrix is simply a matter of making an internal document publicly facing. As part of board planning and succession, boards often maintain such matrices to identify skills gaps and needs for the next board director hire. To ensure your matrix accurately represents the competencies of your board, take advantage of the annual D&O questionnaire to assess your board’s qualification in more depth.”
Incorporate ESG metrics in executive compensation
“The remuneration of named executive officers (NEOs) is traditionally tied to the achievement of certain financial goals, such as revenue and total shareholder value. This approach fits a business framework in which investors are the key, if not the only, stakeholder that matters to senior management.
However, most companies realize that achieving success today depends on meeting the demands of multiple stakeholders: employees, customers, regulators, communities, and governments. Executives’ incentive plans should thus incorporate goals in areas critical to these groups—sustainability, diversity, and customer satisfaction, for example—as a way to ensure the implementation and monitoring of such programs.
To that end, from 2020 to 2021, the share of S&P 500 companies tying executive compensation to some form of ESG performance grew from 66 to 73 percent. The most common approach is to add an ESG metric or a basket of metrics into the short-term incentive plan (annual plan). Many companies use traditional financial metrics to determine the overall performance and then add a quantitative modifier tied to environmental or social goals.
When considering this approach, make sure you pick metrics and goals that make sense to the company’s business strategy and ESG mission. In proxy commentary, inform stakeholders on why those metrics matter and how they will help align the interests of multiple stakeholders.”
Highlight your ESG engagement details
“As companies integrate ESG in their proxy in new ways, shareholder engagements should be part of the story. ESG discussions during shareholder engagement have become common practice, and companies that have these conversations with their investors can benefit from showcasing the highlights in their proxy statements.
Start by reporting the essence of engagement on ESG including the percentage of aggregate shareholder holdings engaged, ESG topics discussed, and any company participants involved. But don’t stop there. Give some additional color. During engagements, the board should acknowledge the ESG landscape and shareholder concerns as well as any gaps between the company and its peers. Use the proxy to elaborate on these details and stress positive outcomes.
For example, Hasbro’s proxy uses the shareholder engagement section to demonstrate validation from its top shareholders.
Lowe’s discusses the results of its engagement efforts and the resulting ESG improvements, illustrating how ESG engagement has led to fruitful changes while highlighting the board’s knowledge of ESG and its ability to receive feedback and make appropriate changes.
The bottom line? Companies can no longer cover only Governance topics in the shareholder engagement section of the proxy. Those that use the section to give more context on ESG send the message that ESG is integral to company strategy while also leveraging the opportunity to boast about the success of corporate efforts.”
Need help with your proxy? It’s not too late.
Riveron can help ensure your proxy addresses investor expectations for ESG in the ways that are best suited to your company. We can assist with developing and implementing a program, writing policies, and updating the proxy with critical E&S information that fills in gaps and is easily digestible for all stakeholders. Give us a call to learn more about how to get this year’s proxy statement ESG-right.