The sudden injection of ESG matters into an otherwise straightforward proxy fight at a Nashville-based shoe retailer is a reminder that ESG activism is still a work in progress.
Q1 2021 hedge fund letters, conferences and more
Legion Partners Target Genesco
Yesterday, Legion Partners Asset Management took aim at target Genesco Inc. (NYSE:GCO) for trumpeting its actions on ESG and diversity, equity, and inclusion (DEI) over the past year, including the formation of a board subcommittee devoted to ESG.
Despite the activist previewing this attack in an investor presentation earlier this week, it represented a shift in the tone of a campaign that has largely been focused on traditional issues such as stock-based underperformance, operations and portfolio mix, and governance.
"Genesco has neglected this critical driver of shareholder value for years – even in the direct aftermath of widespread social unrest in 2020," Legion said in a press release, arguing that the company's efforts lack legitimacy and credibility. "In contrast to the incumbents, our nominees are energized to spearhead robust ESG and DEI initiatives. We believe that maintaining these initiatives is no longer just a 'nice-to-have' – instead, it is absolutely necessary and directly tied to corporate success."
In response, the company issued a statement, saying that "Genesco's commitment to ESG and diversity, equity and inclusion has been part of the company's DNA for decades and Legion's assertion that it is a new concept within the company is grossly inaccurate and blatantly misleading."
The company is unlikely to leave it there. CEO Mimi Vaughn is in only her second year in the job, having moved from the chief financial officer's desk last year, and one of the directors Legion is attacking is Thurgood Marshall Jr., son of America's first African-American Supreme Court justice. But if personal pride is at stake, the company will also want to set the record straight. Although the company's proxy statement has undoubtedly had a major refresh, I understand that Genesco is likely to talk up its history of ESG reporting and employee welfare.
Interest In ESG Activism
The spat was perhaps inevitable after interest in ESG activism rocketed following the proxy contest at Exxon Mobil last month. But the fact remains that it is still early days for determining how important ESG issues are in run-of-the-mill proxy fights. Many investors had longstanding grievances with Exxon that related both to shareholder engagement and environmental concerns. Another attempt to leverage ESG concerns, at Tegna, failed to unseat directors.
Legion, which is more used to settlements than it is to the late stages of proxy fights, has approached the issue by promising small but not insignificant ESG benefits from siding with its slate. Its nominees promise to improve board diversity (three of the four are female, compared with one of the four incumbents being targeted), start an executive search for a leader in DEI, and push for changes to sustainability and employee engagement practices including transparent performance tracking. Perhaps wisely, the slate has avoided promising a compensation policy that incorporates ESG metrics – a popular experiment with big companies this year – after criticizing Genesco's "overly complicated" approach.
But there is nonetheless a risk that ESG becomes an outsize part of Legion's case at Genesco, or at least of its meetings with proxy voting advisers and investors. Although the activist believes there is a connection between governance and sustainability or diversity best practices, its recipe for fixing the company is rooted in a strategic review, balance sheet optimization, and operational turnarounds.
ESG might also be an area where the absence of known workplace issues or clear sector norms means investors give Genesco the benefit of the doubt. The company says it outperforms the S&P 500 Consumer Sector benchmark on racial and gender diversity on its board. And investors might wait to evaluate the performance of the company’s DEI task force before acting on Legion's warnings that its disclosure habits lag its peers.
Is Legion wasting its time by bringing up ESG? Perhaps not. One factor in how proxy contests are decided is when proxy voting advisers or investors meet incumbent directors and dissident nominees, they are looking to get the measure of how interested or informed each side is on the issues that are being articulated. Legion might be gambling that raising ESG will highlight its nominees as fizzing with ideas and Genesco's directors as merely paying lip service.
But it could just as easily give its opponent a platform on which they impress, as well as distracting from the heart of Legion's thesis.
Josh Black, Editor-in-Chief, Insightia
Environmental Reporting Has Become More Nuanced
Shareholder proposals seeking environmental reporting have become more nuanced this year, calling for increasingly specific information tailored to sustainability issues such as plastic pollution, deforestation, and climate lobbying, as opposed to all-encompassing environmental reports.
Proposals of this kind are also performing especially well, as investors seek enhanced disclosure surrounding supply chain issues of significance to particular companies. For example, 15 proposals seeking industrial waste and pollution reporting that have gone to a vote won 40.9% average support, compared to 20.1% and 25.8% average support in 2019 and 2020, respectively.
Climate lobbying proposals are also a new kind of environmental resolution first filed and subject to a vote in 2020, but have gone on to win majority support at six of the seven companies where they have been voted on so far this year. As investors expanded their environmental considerations to risks present in corporate political expenditures, climate lobbying proposals have won an average of 66.8% support so far this year globally, compared to 44% support last year.
Shareholder proposals aren't the only avenue investors are using to seek out targeted environmental reporting from issuers. On Monday, 168 investors, representing $17 trillion in assets under management, engaged 1,320 companies from 51 countries, urging them to disclose targeted environmental data through the Carbon Disclosure Project (CDP).
Approximately two-thirds of companies engaged were selected by investors, including Amundi, Legal & General Investment Management, and Schroders, to specifically disclose their impacts on climate change, while one-fifth were asked to report on at least two themes from climate change, water security, or deforestation.
Aberdeen Standard Investments Support Proposals Requiring Amazon And DuPont To Report On Plastic Use
Shareholder proposals asking Amazon and DuPont to report on their use of plastic were both supported by Aberdeen Standard Investments, which highlighted that "concern over the environmental damage caused by plastics is rising. Additional disclosure would help shareholders gauge whether the company is appropriately managing risks related to the creation of plastic waste."
Legal & General Investment Management similarly supported a shareholder proposal at Bunge, seeking revisions to the company’s deforestation policy, on the grounds that the company's supply chains are "known to be linked to deforestation" and a better understanding of risk mitigation will help improve investor decision-making.
BlackRock supported both shareholder proposals seeking climate lobbying disclosure at Exxon Mobil and Rio Tinto this year, suggesting both resolutions "help investors understand and assess the possible misalignment in public positions on key strategic policy issues."
As reporting frameworks surrounding environmental risks continue to evolve and environmental shareholder proposals more generally are subject to increased levels of support, shareholder engagements will naturally also become more nuanced and targeted, something already being exhibited by the broad range of environmental shareholder proposals filed this year.
When analyzing whether to support shareholder proposals seeking specific environmental-related reporting, investors are evidently paying increased attention toward materiality and what specific environmental operations have a big impact on a company's environmental footprint. But the move also comes as average support for environmental shareholder proposals overall has exhibited a significant increase this year to 41.7% globally, compared to 16.8% and 20.8% in 2019 and 2020, respectively.
Rebecca Sherratt, Corporate Governance Editor, Insightia
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