CLEVELAND—Many of today's shareholders want to see the companies they're investing in do more than just make money. They want them to curb greenhouse gas emissions and diversify their boards.
Large companies such as Apple, Exxon Mobil and General Motors have faced environmental and social issue-related shareholder proposals in recent years.
Cleveland-based aerospace component maker TransDigm Group Inc. is facing similar shareholder pressure to adopt a policy to reduce its greenhouse gas emissions.
Activism focused on environmental, social and governance issues, or ESG, has been increasing in recent years, said Josh Black, editor-in-chief of Activist Insight, a London-based news and data source on shareholder activism with an office in New York. These topics have been of interest to investors for quite some time, but the 2016 presidential election and the subsequent announcement that the U.S. planned to withdraw from the Paris Agreement—a global plan to address climate change coordinated by the United Nations—put climate change at the forefront.
"A lot of investors decided that if government wasn't going to play a more active role in addressing climate change or social problems, then investors would have to do that," Black said.
At TransDigm, a shareholder group made up of representatives of the New York City comptroller and five city retirement systems or pension funds is asking the company to take into consideration the recommendations of the Paris Agreement and create a policy that helps manage and track greenhouse gas emissions. The proposal in the company's proxy statement filed with the U.S. Securities and Exchange Commission states that the shareholders' aim isn't to "micromanage." Instead, it asks TransDigm to create a policy and report on achievements, leaving the nature and timing of the goals up to the company.
"There are numerous cost-effective ways for companies to reduce GHG emissions and help protect society from the worst impacts of climate change while reaping financial benefits," the proposal states.
TransDigm had tried to block the proposal from being included on the proxy statement, according to a news release from the New York City comptroller—an approach other companies have also taken. But the comptroller filed a lawsuit to contest TransDigm's request to the SEC, and the parties were able to reach a settlement.
"The need for climate leadership is more urgent than ever. Yet, just when we need to speed up the pace, federal rollbacks are making polluting easier and could cause generations of damage. That's why, as investors, we're using our voice to pressure companies to step up and address their role in climate change," comptroller Scott M. Stringer said in the release. "Reducing greenhouse gas emissions is a moral imperative—and it's better for business. We'll continue to fight for shareholders' rights and to hold companies like TransDigm to the highest standards for business and our planet."
TransDigm's board of directors is asking shareholders to vote against the proposal, arguing that it's a "one-size-fits-all approach to a complicated issue." Many of its sites already work to reduce energy use and waste, the statement said, and its processes produce limited emissions.
"A top-down approach to establishing companywide quantitative and time-bound goals related to GHG emissions that was driven at the corporate level would not be practical for the company," TransDigm stated in the proxy statement. "Our business model uses an entrepreneurial and decentralized approach, and environment and health and safety issues are handled on a local basis. The company's 34 operating units, with over 65 manufacturing locations in North America, Europe and Asia, produce numerous products, have different energy needs, face varied regulatory requirements and otherwise have different strategies and characteristics."
TransDigm's annual meeting will be held March 12 at its headquarters in Cleveland. The company declined the opportunity to comment further on the issue.
Shareholder proposals are far from guaranteed to pass, but companies and their boards of directors are taking these investor concerns seriously, reviewing ESG issues as part of their compliance and sustainability plans, said Jurgita Ashley, a corporate and securities partner at law firm Thompson Hine LLP in Cleveland. All companies are putting a stronger focus on environmental, social and governance issues, but companies in the energy and transportation spaces are receiving more climate change-specific proposals, she said.
These kind of environmentally and socially focused proposals were broader when they started to become popular, noted Kris Spreen, partner and co-leader of law firm Calfee, Halter & Griswold LLP's capital markets and securities transactions team in Cleveland. Shareholders had been asking for more general policies or reports on sustainability or philanthropy, he said. But there's no standard set of required reporting on this kind of topic. Now, the proposals seem to be getting more specific, homing in on specific issues such as climate change.
If companies think their shareholders may have concerns around these issues, they may want to be proactive and adopt their own goals, Spreen said. If not, shareholder proposals could write those plans for them.
"I think it's a case-by-case basis, but it's something that everybody needs to be aware of and at least be prepared to think about," Spreen said.