Tag Archives | #ciifall2017

CII: Climate Competency & Risk

Shifting Investor Perspectives on Climate Risk & Board Climate Competency

These notes on climate competency are my last post from the Council of Institutional Investors Fall 2017 conference.  Find more at .  As a member of the press, I was excluded from the policy-making meetings. Still, it was a great opportunity to touch base with members of CII and to learn of recent developments and where we may be headed.

The panel discussion on climate risk and board competency hosted by the 50/50 Climate Project and the New York City Comptroller’s Office. From the program:

Following the historic majority votes on climate risk shareholder proposals in 2017, this panel discussion will explore evolving institutional investor viewpoints on climate risk and opportunity. The panelists will also examine how these changing perspectives and other shifts in the capital markets will sculpt investor expectations and engagements around climate risk disclosures and boardroom climate competency at portfolio companies in the 2018 proxy season.

Climate Competency: The Speakers

Climate Competency: High Profile Changes

I may not have the numbers totally accurate, but the direction is clear. There was a sea-change in support for climate competency resolutions at high profile companies. The vote at Exxon-Mobil went from something like 36% in 2016 to 62% in 2017.

At Occidental, it went from something like 49% in 2016 to 79% in 2017. The vote was large credited to BlackRock and Vanguard finally voting to address this growing risk. It was pointed out, change occurred not only on climate but other issues as well. For example, the Say-on-pay withhold at Southern went from something like 7% to 39%.

Are we witnessing a revolution in how large mostly indexed funds will vote going forward? Maybe, but there was little change in voting at less visible companies. Let us hope this year was aimed at real change, not just positive publicity to help investors feel better. See Key Climate Vote Survey Provides Tool.

Climate Competency: What I Heard

Asset owners are updating their policies led by the New York City Comptroller, CalPERS, CalSTRS, and other public pensions. Now mainstream funds are beginning to see climate competency or risk as material. BlackRock is looking at risk.

At the NYC Comptroller, about 1/3 of proxy access targets were chosen because of questionable climate competency. They wrote to 150 companies. 140 did proxy access without proposal. 11 with. Now they are seeking a matrix of board race, gender, etc. and are asking to engage on the board refreshment process. They are reviewing several mechanisms for investor input, wanting to ensure climate competency and diverse boards. Capital allocations are positioning for low carbon future. So far, initiatives have led to positive engagements.

There was discussion around the recently released 5050climate.org Key Climate Vote Survey. Carbon foot printing is an imperfect assessment of risk. NYC Comptroller has engaged with many companies. Hear what the company says. Give them a chance to talk through. We want to be seen as constructive. We don’t want to tell companies to do something that they can’t. We are providing risk profiles on clients to them. At this point, there is no real competition yet between major funds for lowest carbon footprint and highest return. That could be coming.

State Street put out its first paper on topic in early 2016. Their CEO sent out a letter that boards should consider sustainability. They took a deep dive into 50 companies around the globe to determine the role of investors. Is risk analysis robust and integrated into long term strategy? What is the board oversight? Does the company have GHG goals, carbon price disclosure (average and range), and can they articulate how their analysis impacts the allocation strategy? Reports go back to the investment analysts.

Dave Jones has influence over the 1300 insurance companies operating in California. In 2009 the national association put out climate risk survey. We want insurance companies get positive returns on their investments so they can be solvent enough to pay claims. They found insurance companies were not paying adequate attention to risk in portfolio companies that directly rely on burning carbon. In 2016, part of their initiative was to get public disclosure of investments in high carbon companies through a mandatory survey.

Particular concerns are with coal as many of those companies have started going broke. Jones became convinced that most thermal coal would be stranded assets. He has asked insurance firms to stop such investments. However, there is no mandate, other than to report. They also looked at companies putting too many eggs in one basket – like investing in specific geographic areas but also having heavy insurance concentrations in same areas.

His office is sharing best practice with insurance regulators around the world. Washington State is also doing quite a bit in trying to get climate competency in all sectors of the economy by at least reporting GHG.

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CII: Index Providers Speak

Index Providers Speak: Policy Process and Voting Rights

Index providers spoke at  about how they develop their policies. Specifically, they discussed recent developments around voting rights.

Index Providers Represented

  • Annalisa Barrett, Clinical Professor of Finance at the University of San Diego (Moderator)
  • David Blitzer, Managing Director & Chairman of the Index Committee, S&P Dow Jones
  • Pavlo Taranenko, Executive Director, Index Research, MSCI (standing in photo)

Index Providers: What I Heard

As with all my other posts on , I mostly refrain from quotes, since my typing speed is abysmal. I try to be accurate but don’t always hit the mark. You may also find some difficulty determining if what write is my opinion or that of a speaker. Be forewarned.

Annalisa Barrett started off with a little background of the importance of indices. For example, index funds will hold more than half the assets in the investment-management business by sometime between 2021 and 2024, according to Moody’s Investors Service Inc. By definition, actively managed investments, in aggregate, cannot deliver above average performance

Some index-tracking exchange-traded funds charge as little as $3 annually for every $10,000 invested. The average charged by U.S. stock mutual fund managers is $131. (Index funds to surpass active fund assets in U.S. by 2024)

David Blitzer then opened his remarks by discussing the work of S&P Global. They are not just index providers. They also do credit rating and provide financial information.

With regard to indices, they have a plethora or products from equities, to commodities and housing. Committees have ultimate responsibility on index policies and governance. Voting policy determines which and how firms go in an out of the indices. They start with the International Organization of Securities Commissions (IOSCO) guide.

S&P Global index methodologies are published. Material changes require review and consultation. S&P Global publishes questions before making changes on their website to published policies. Consultations, if public, take a minimum of 30 days. The Index Committee reviews all comments. All revisions to policy are done on noncommercial side of the company.

The most discussed decision in their history came with the Snap controversy . 75-80 responses on consultation. Two public comment periods. No changes in the broadest indexes. However, for the largest indexes, 1500 (large, mid, small) accounting for 50%+ stock in market, the big change left companies like Snap off. Now companies can have only one class of stock unless they were in the index before.

Index providers do not see themselves as a regulators. Committee members are all on the noncommercial side, experienced, with appropriate degrees, etc. Sometimes they have partners but they insist those representatives on the Committee are noncommercial as well. Yes, they heard from the major ETF providers, CII, etc. but did not hear from corporate managers — although they did hear from some attorneys who represent them.

Companies can increasingly get a huge amount of capital without going public. There is less anti-trust action.  Majority vote standard? That could be petitioned. (unlikely) Stock market should be a market for corporate control.

Pavlo Taranenko noted that MSCI was founded in 1969 and is based in Geneva. Then it connected to Morgan Stanley but is no longer affiliated. They acquired Risk Metrics. He briefly touched on portfolio analytics and other products. MSCI can create leveraged indexes.

Market-cap weighted, ESG indexes, Islamic, etc. Generally, policies are consistent globally. Equity index committee discusses changes in methodologies. Committee members are senior researchers (noncommercial). Sounded much the same process as S&P Global, although I do not recall anything about a public comment period. Majority vote standard? Some ESG indexes address.

Both looked at the issue because there was a consensus in investment community. Index providers can act faster than regulatory agencies.

Personally, I am interested in MSCI’s approach to optimizing factor and ESG exposure, which places a higher weighting on stocks with alpha potential, based on less risk/controversy, higher ESG.

Index Providers: What Others Write

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CII: William Hinmam Interviewed

Keynote Interview: William Hinman of the SEC

William Hinman, Director of the SEC’s Division of Corporation Finance, was interviewed by CII Co-Chair Gregory Smith, Executive Director, Colorado Public Employees Retirement Association at #, I scribbled a few notes.

As you can well imagine for someone speaking from such a sensitive position, there were no bombshell announcements. However, it is certainly good to have a dialogue between CII members and the head of CorpFin. William Hinman did not disappoint.

William Hinman: Disclaimer

I am sure Hinman gave a disclaimer but this is mine. My skills as a journalist are limited to those of the typical sociologist. I only took a few notes on what I thought was timely. If you were there and heard something else, let us know by leaving a comment below sending me an email. Even if you were not there but have something to contribute, please do so.

William Hinman: What I Think I Heard

The SEC’s job is protecting investors without overburdening issuers. They recently revised the rules so that companies can stay private longer with more shareholders. Private markets are developing so that more employees can redeem early shares without the need to go public. See CII: Public Companies Endangered Species?

The massive breach at Equifax is likely to hurt — and may ultimately doom — efforts by Republicans to overturn the Consumer Financial Protection Bureau’s rule banning mandatory arbitration clauses. Will mandatory arbitration change? William Hinman discussed s0me of the issues. For background, see Arbitration Clauses and Class Certification Standards: How the Supreme Court Is Limiting Plaintiffs’ Ability to Maintain Class Actions. He said the SEC would have to analyze the issue if it comes up. However, he does not see it as a rule-making issue… at least not for now.

Universal proxy? Yes, it is widely seen as a positive move. SEC Chair Jay Clayton is reportedly concerned with retail. As I recall (that’s me, not Hinman), Clayton thinks universal proxies will lead to confusion among retail investors. To me, nothing could be further from the truth. Getting multiple proxies and timing delivery is more confusing than anything a universal proxy could add. Mr. Smith said, CII also thinks multiple proxy cards are confusing to retail.

Hinman responded saying SEC may seek still more comments. The debate among commissioners mostly revolves around the level of solicitation effort a dissident must undertake. The currently proposed rule requires that a majority of shareholders be solicited.  What if they don’t solicit? What is the penalty? Background: Four-Year Effort to Allow Universal Proxy Cards for Contested Shareholder Elections Moves Through SEC Channels.

The SEC Looked at 280 no-action letters. In 75% of cases, they agreed with the company. I know that our little group lost far more no-actions than ever this year (specifically on proxy access amendments) because we tried to “compromise” with issuers over raising the group limits for proxy access.

We generally requested fifty, instead of no group limit. That turned out to be a mistake because it was more difficult to prove that limit of 50 (our proposals) was substantially different than a limit of 20 (the most common group limit in company bylaws). Next year should see fewer successful no-actions as our group moves back to requesting no limit.

Of course, those SEC numbers also don’t take into account that shareholders like me essentially withdrew proposals in many cases because companies moved in the right direction. For example, I recently withdrew a proposal at Symantec (SYMC), during the no-action process, because SYMC raised the group limit for proxy access to 50. That kind of partial victory happened in almost 50 cases. Seen in that light, the report that 75% of cases were decided in favor of companies is tempered.

William Hinmam indicated there is a new focus on proxy plumbing. Background: Fixing the stock market’s ‘clogged toilet’ starts in Delaware. Additionally, staff will put out a new SLB (Staff Legal Bulletin) as a result of the annual stakeholder meeting and other input. See my Shareholder Action Handbook for a crude index of SLBs. Suggestions for better descriptors are welcome.

Proven Shareowner Action Formulas


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CII: Public Companies Endangered Species?

Public Companies Endangered Species: CII Panel

Are public companies an endangered species? If so, why? How can we solve that problem? At last week’s Council of Institutional Investors (CII) Fall Conference there as an informative panel discussion entitled Public Companies: An Endangered Species?

Panelists were David BrownMichael Mauboussin, and Robert McCooey moderated by the always erudite and entertaining Frank Partnoy, one of the best facilitators in the corporate governance industry. Continue Reading →

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Key Climate Vote Survey Provides Tool

The 50/50 Climate Project released their Key Climate Vote Survey 2017 (link) of votes by America’s largest investors. Those attending last week’s informative Fall Conference of the Council of Institutional Investors in San Diego found out about it and many other newsworthy items.

Key Climate Vote Survey 2017: Groundbreaking Season?

First-time approval of climate risk proposals at Exxon (XOM) and Occidental (OXY) represents a huge win. Victory was only possible because of a highly visible shift in voting by mainstream funds State Street, J.P. Morgan, as well as from BlackRock and Vanguard, which joined climate risk proponents for the first time.

However, do not get complacent. More effort to get mutual funds to address climate change is still needed. According to the 50/50 Climate Project representatives at CIIVanguard backed only 15% of such proposals, while Blackrock voted for only 9%.  while —despite both managers’ high-profile support of resolutions at ExxonMobil and Occidental. The cynic in me says votes may be more driven by the potential for adverse publicity, rather than potential impact on value, although the two are undoubtedly correlated. Compare to Vanguard’s Investment Stewardship 2017 Annual Report.

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