Being Intentional
The bi-weekly newsletter from Motive, covering ESG and Sustainability. In this edition: Dynamic Materiality, Shareholder resolutions, Palo Alto Networks, and who reads those sustainability reports?
Welcome to another edition of Being Intentional. Thank you to everyone for your continued support. If you find this newsletter interesting please consider sharing it.
What does sustainability mean to you?
Sustainability has gone mainstream of late. It’s nearly impossible to read any news section, be it Current Affairs, Business, and Finance, Politics, Science, Legal, Society, and Community, or Opinions, and not come across the term. Even if you don’t follow any specifically-associated hashtags on social media, ‘sustainability’ will still make its way into your feed. It is such a beautifully vague and aspirational concept that today it is showing up everywhere.
We work in the ESG and corporate sustainability space and our days are filled with the finer details and messy workings of policies, regulations, metrics, impacts, materiality, and program developments around sustainability. Yet whenever we hear or read the word, we often picture rainforests and tree frogs, community wells and smiling children, and so much other imagery associated with the UN Sustainable Development Goals. For a quick second, it’s all soft and fuzzy...for a quick second, sustainability is about the feel-goods. (Maybe this is because we grew up in the 80s surrounded by passed-along copies of National Geographic).
Is this how sustainability is framed? Is this fueling the exponential rise in interest in sustainability? Not quite...at least not explicitly so.
A great way to better understand a concept that has been purposefully developed in such elegant vagueness is to take a quick look at other keywords which are used when discussing the concept. And we did just this for sustainability.
Our Dynamic Materiality application helps us make sense of how people perceive various issues. In this case, we wanted to see what the Dynamic Materiality application had to say about 'sustainability.' Looking back at global news and social media mentions in 2021 so far, we retrieved over 10.7 million articles and posts. This breaks down to an average of 15.6 thousand news articles per day and 16.2 thousand Twitter mentions per day (as we said, sustainability has gone mainstream!).
Here are the top keywords associated with sustainability:
In fact, the only keyword with any sort of ecological connotation comes in at #10. Expanding our view, Climate Change would come in at #11, Planet at #18, and Water at #24--all interspersed with the keywords of Growth at #12, Technology at #16, and Investors at #22.
Paraphrasing these keywords into themes would suggest sustainability is about corporate transparency in delivering new products and developing new markets for a better global future.
Sustainability has out-grown its warm-and-fuzzies. It is still aspirational in nature but it is no longer driven by feel-goods, it's driven by market imperatives.
Sustainability has gone mainstream. Sustainability is a business strategy. Now…what does sustainability mean to you?
The Business of Sustainability
Shareholder resolutions are typically big news, but As You Sow’s (Link) recent success at the Sysco annual general meeting did make a few headlines.
As You Sow is a non-profit organization that works with investors to drive companies to a more sustainable future through the use of shareholder resolutions. Their most recent target was Sysco (Link)--and the resolution asking the company to establish Paris-aligned net-zero targets and an associated climate transition plan received over 92% shareholder support.
As impressive as this is, it wasn’t the only such resolution to gain favor throughout the 2021 proxy season. So far this year, As You Sow has worked with shareholders to file a total of 86 distinct ESG-type resolutions seeking action on issues such as climate change; diversity, equity, and inclusion; human rights; plastic pollution; and executive compensation. What’s really neat is to compare the organization’s efforts and successes in 2021 to those of 2016 spanning a convenient 5-year window.
What really stands out here is that:
The total number of ESG-related shareholder resolutions nearly doubled over five years.
Resolutions with a ‘social’ focus have really developed of late, growing from a base of 0 only five years ago.
A larger proportion of resolutions are being withdrawn, signaling that companies are willing to engage in meaningful discussions and agreements instead of proceeding with a resolution vote. (Withdrawn resolutions are typically a good sign as only the filer can withdraw the resolution).
Many resolutions which proceeded to a vote actually achieved majority support-something which never happened in 2016. In fact, four of the seven resolutions to receive majority support were filed with large companies such as Dupont, General Electric, Union Pacific, and Sysco and all received >80% support.
In total, over 65% of ESG-related resolutions were either withdrawn or received majority support upon voting.
Of course, the sample of resolutions supported by As You Sow is inherently tilted toward ESG themes given the organization’s mandate. But the observations above still stand even when we expand the sample beyond ESG-focused filers.
The ProxyMonitor (Link) is another non-profit organization, yet one which tracks the outcomes of all voted resolutions filed with Fortune 250 companies. This organization is not collaborating with investors to file resolutions, nor does it maintain a distinct ESG focus, rather it provides resolution tracking for market information purposes.
In 2021, Fortune 250 companies voted on a total of 506 shareholder resolutions (excluding blocked or withdrawn resolutions), and of these 112 were ESG-related fitting with the themes discussed above. This number is actually down relative to the total of 162 such resolutions in 2016, but what is interesting is that far more resolutions are receiving majority support in 2021—a full 22 ESG-related resolutions— compared to 2016 and these resolutions now cover topics such as climate reporting, targets, and outcomes; diversity, equity, and inclusion; climate lobbying; and lobbying and political spending. In contrast, only two resolutions ESG-related resolutions received majority support in 2016, and these related to animal rights and lobbying/political spending.
Notably, all climate- and diversity-related resolutions at Fortune 250 companies failed to achieve majority support in 2016, yet these two categories now represent more than half of all majority-supported ESG resolutions in 2021.
That ESG-identified investors are filing ESG-linked shareholder resolutions is not shocking, but what is truly notable is how successful these resolutions are becoming. To gain majority support in a vote requires that many(!!!) investors who do not self-identify as ESG investors also vote in support of the resolution.
ESG resolutions were once opposed as agenda-setting efforts by fringe activists. Today, ESG resolutions are supported by a wide diversity of mainstream institutional and retail investors. Why? Because everyone is now coming to realize that good ESG and sustainability performance is good business, and good business makes for good investments.
CSR Spotlight: Palo Alto Networks
Palo Alto Networks recently released their 2021 Environmental, Social, and Governance Supplement (Link). Although Palo Alto Networks has been actively managing their ESG profile for years, this is their first distinct ESG report. Digital tech companies, in the relative absence of much physical infrastructure and production, can sometimes get a little creative in their ESG reporting, so it was very interesting to see what Palo Alto Networks has been up to.
Spoiler alert: What they have been up to is impressive! Our job would be much easier if more companies followed Palo Alto Network’s lead in reporting.
What we like:
Clear materiality assessment including stakeholder engagement: It is clear what they are focusing on and why. Not every company can address everything, so knowing where and why Palo Alto Networks is focused is helpful. Transparency is great.
Clearly identified chain of accountability: Palo Alto Networks has a committee of the Board of Directors to provide oversight of ESG strategies (although this committee does have split responsibilities), along with a dedicated senior executive in charge of the ESG program and an identified chain of command throughout the executive ranks...and all with compensation linked to ESG performance. ESG is not a side-project here.
Clear definitions: So many words like ‘sustainability’, ‘net zero’, ‘diversity’, ‘inclusion’, and so on are just vague enough to leave companies enough wiggle room to claim success no matter what comes from their efforts--but not in this case. Palo Alto Networks is clear in what they mean and how they intend to achieve it.
Legitimacy: Associating key metrics, programs, and initiatives with independent third-party verification, such as backing emissions programs with the Science-Based Targets initiative, shows Palo Alto Networks is open to collaboration and critical oversight.
Transparency: Provision of data and links to all supporting material and associated policies is helpful. Trust but verify.
What we would like to see:
Integrated Reporting: As Palo Alto Network’s first dedicated ESG report, this is an excellent start. We would like to see this material more comprehensively tied in with the company’s annual report. Rather than an ESG supplement, it would be great to see full-scale integrated reporting. “Our business vision and ESG strategies are closely aligned”, states Nikesh Arora, CEO & Chairman, Palo Alto Networks--and this recent report would suggest this statement to be authentic--and a shift to integrated reporting would be a great opportunity to more clearly explore how the company is incorporating their ESG decision-making framework into business strategy and success.
Board Focus: Over time, it may be advisable to reorganize the oversight committee among the Board of Directors. ESG is complex and Palo Alto Networks is demonstrating great initiative and growth in this field. A dedicated ESG committee chaired by Directors elected on the merit of their expertise in this field may prove beneficial to the company.
What We Are Saying
Who Reads Sustainability Reports? (Link)
Companies write ESG and Sustainability reports under the framework of ‘telling your story’, painting a picture, or ‘sharing a vision’ in the hopes of reaching customers, investors, employees, communities, and regulators. Please don’t shoot the messenger...but these intended audience members do not read sustainability reports. Algorithms and hyper-focused research analysts (like us!) read reports and intermediate the content for all other stakeholders. So rather than write for your intended audience, why not optimize for your actual audience? Sustainability reporting has never been in such high demand, it’s time to enhance the ROI of these reports.