Building a portfolio of companies with strong environmental, social and governance (ESG) practices is foundational to any sound approach to responsible investing. But good security-selection decisions are only half the battle. To drive meaningful and lasting progress towards our ESG goals, investors must adopt an active ownership mindset, which means engaging with companies on an ongoing basis to ensure they continuously strive to elevate their ESG performance.
Engagement can take a variety of forms, but one of the most important and effective is the use of shareholder resolutions. A shareholder resolution is a proposal, put forward by a qualifying shareholder, requesting that the company adopt a specific policy or take a specific course of action. Strictly speaking, the proposal is a formal resolution to be voted on by all shareholders at the company’s annual general meeting. In practice, however, the aim is to convince management, through formal discussions, to adopt most or all of the proposal without having to hold a vote. When this happens, the resolution is withdrawn.
In cases where management does not agree to adopt the proposal, the resolution is brought to a vote. Companies typically pay close attention to the results, and a strong vote in favour could spur management to change course and implement the requested changes.
The ESG team at Vancity Investment Management Ltd. has a very active program of shareholder engagement, so we frequently deal with both of these scenarios. Let’s look at one example of each.
Engaging Costco on Biodiversity Loss
Costco Wholesale Corp. (Costco) has a very strong ESG record. But one area where we would like to see improvement is on the issue of supply chain-driven biodiversity loss.
Biodiversity and ecosystems touch every element of human life. From the food we eat to the medicine we take, humans – and economies – are heavily reliant on properly functioning ecosystems. For example, about 70% of medicines used to treat cancer are natural (or synthetic products made possible by nature), and more than 75% of global food crops rely on animal pollination. Annually, the global economy derives roughly $125 trillion of value from natural ecosystems, and according to the Convention on Biodiversity, 40% of the world’s economy relies on biodiversity.
Because of these interdependencies, the rate at which biodiversity is being destroyed is particularly concerning: one quarter of the world’s plants and animals, meaning roughly one million species, are at risk of extinction.
The production of food, energy, infrastructure, and fashion drives 90% of human-caused pressure on biodiversity, and these four elements account for approximately 46% of Costco’s revenue, with food alone accounting for 35%. This heavy reliance on declining ecosystems presents a material risk to the company and its shareholders. Specifically, the loss of, or decreased access to, materials and products due to depleting natural capital can drastically impact profits.
Costco does have a pollinator policy, and it represents a critical step towards addressing key biodiversity risks in the company’s supply chains. However, in our view, the risks associated with biodiversity require a broader assessment of dependencies and impacts. Following a series of conversations, Costco acknowledged our position and agreed to identify, assess, and report on at least one significant supply chain. The company also agreed to consult guidelines from the Task Force for Nature-related Financial Disclosures, which provide a framework for evaluating the financial risk of biodiversity loss.
As a result of these positive steps, we withdrew our shareholder resolution but will continue our dialogue with Costco’s management to monitor their progress and assist with feedback.
Engaging Amazon on Transparency
Amazon.com Inc. (Amazon) is the world’s largest e-commerce platform. Its market dominance makes it not only a key source for day-to-day purchases, but also a primary platform for distributing and accessing information and ideas in print and other media.
Numerous reports have suggested that Amazon has complied with demands from authoritarian regimes to restrict access to or remove products from its online store. The company has also been pressured into disabling website features that allow customers to share opinions on products. For example, in December 2021, Reuters reported that Amazon yielded to demands from the Chinese government to disable the review option on the product page for a book made up of President Xi Jinping’s speeches and writings.
Unlike peers such as Meta and Google, Amazon does not provide specific disclosures related to government-requested content removal. We view this lack of transparency as a material risk to investors, so we co-filed a shareholder resolution requesting that the company align its reporting regime with established best practices.
After receiving our proposal, Amazon did not reach out to engage in dialogue. Instead, they noted that the company complies with all laws and regulations of the countries in which they operate, and that the resolution would go straight to a vote at the annual general meeting. Together with our co-filers, our task now is to educate other shareholders to build support for a strong vote in favour of the resolution.
It may be tempting to suggest that Amazon should be excluded from a responsible investment portfolio given this and other ESG shortcomings. Our view is that, when dealing with a company of this magnitude, the crucial work of advocating for positive change is more effectively done from within – as a shareholder with a voice and a vote – than from the outside. Industry giants like Amazon have an outsized influence on our economy and society, making it critical that we do our part to bring it closer to being an exemplary corporate citizen.
Vancity Investment Management Ltd. is the sub-advisor of the IA Clarington Inhance SRI funds and portfolios.
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