Outcome: Successfully withdrawn based on a commitment to enhance reporting and continue dialogue in 2017.
Shareholders request that A.O. Smith Corporation (AOS) issue a report describing the company’s policies, quantitative metrics, and improvement targets related to environmental, social and governance (ESG) issues, including greenhouse gas (GHG) emissions. This report should be updated annually, be prepared at reasonable cost, and omit proprietary information.
Proponents believe tracking and reporting ESG practices strengthens a company’s ability to compete in today’s global business environment, which is characterized by finite natural resources, changing legislation, and heightened public expectations for corporate accountability. Transparent, substantive reporting allows companies to capture value from existing sustainability efforts, identify gaps and opportunities, develop company-wide communications, and recruit and retain employees.
Support for the practice of sustainability reporting continues to gain momentum. In 2015, KPMG found that of 4,500 global companies, 73% had ESG reports. CDP, representing 827 institutional investors globally with approximately $100 trillion in assets, calls for company disclosure on GHG emissions and climate change management programs. 70% of the S&P 500 reported to CDP in 2015.
The link between strong sustainability management and value creation is increasingly evident. A 2012 Deutsche Bank review of 100 academic studies, 56 research papers, two literature reviews, and four meta-studies on sustainable investing found 89% of the studies demonstrated that companies with high ESG ratings showed market-based outperformance.
Currently, AOS’s Corporate Responsibility and Sustainability webpage includes brief qualitative descriptions of some of the company’s environmental stewardship efforts. However, these disclosures are largely anecdotal and do not include company-wide metrics conveying AOS’s operational ESG performance, its GHG data, or goals to reduce its environmental impacts.
In particular, GHG reduction goals often have a strong correlation with enhanced returns. A report published by WWF, CDP, and McKinsey & Company, The 3% Solution: Driving Profits Through Carbon Reduction, found that companies with GHG targets achieved an average of 9% better return on investment than companies without targets. Setting GHG emission targets is widespread among U.S. companies – presently 60 percent of Fortune 100 companies have GHG reduction commitments, renewable energy commitments, or both.
In contrast to AOS, Assa Abloy, Barnes Group, Donaldson Company, Masco Corporation, and Lincoln Electric are examples of the numerous small industrial companies publishing sustainability metrics alongside qualitative supporting details.
As shareholders, we believe it is prudent for AOS to disclose how it is managing its ESG impacts, which can pose significant regulatory, legal, reputational, and financial risk to the company and its shareholders. Without proper disclosure, investors and other stakeholders cannot ascertain how the company is managing its ESG-related risks and opportunities.
We recommend that the report include a company-wide review of policies, practices, and quantitative metrics related to ESG performance. The Global Reporting Initiative index, CDP, and Sustainability Accounting Standards Board all provide resources and tools for guidance in developing this report.