ESG stewardship topics in focus

The challenges of the past year have highlighted the potential for environmental, social, and governance (ESG) factors to become even more relevant to the investments we make on our clients’ behalf and have underscored the increasing importance of stewardship by fiduciaries and active investors. In 2020, an unprecedented number of our corporate engagements included ESG topics, a trend we think will continue in 2021 and beyond. In particular, we expect many conversations to address executive compensation and climate change, along with diversity, equity, and inclusion (DEI).

Executive compensation

Ahead of proxy voting season, we are paying particularly close attention to executive compensation plans. Following corporate layoffs and furloughs during the COVID-19 pandemic, outsized executive pay plans have come under greater scrutiny. We prefer executive pay to be more closely aligned with company performance. Generous executive compensation packages that set low bars for performance may be inconsistent with the experience of company shareholders and other stakeholders.

Climate change

Another focus is climate change, which we believe poses material long-term financial risks for economies, companies, society, and (therefore) client investment portfolios. Companies will need to prepare for both the physical and transition risks associated with climate change. We expect to engage more deeply with companies to help them assess and improve their climate preparedness and disclosures. In December 2020, Wellington became a founding member of the Net Zero Asset Managers initiative. This opportunity enables us to demonstrate continued leadership on climate issues, strengthen engagements with portfolio companies, and enhance consultative client relationships.

DEI/racial inequity

We continue to improve our understanding of portfolio companies’ response to and action on racial inequity. While we believe DEI practices can impact long-term performance, we can only adequately assess these practices when robust disclosure is in place. We encourage companies to disclose the racial and ethnic composition of their boards and (starting in 2021) plan to vote against the reelection of US nominating or governance committee chairs that fail to disclose this information. We also expect companies to communicate goals and strategies for fostering a diverse workplace and disclose workforce diversity data. We plan to encourage transparency and improvement in these areas through engagement and proxy voting.