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Asset Management

Real ESG

  • Oppenheimer Asset Management
  • June 17, 2019
Actual case studies on how investment managers are engaging public companies and embedding environmental, social and governance factors into fundamental analysis and security selection.
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At Oppenheimer Asset Management, we believe ESG investment strategies allow investors to incorporate socially conscious principles into their portfolios without sacrificing investment performance. A growing number of investors are expressing interest in strategies that incorporate environmental, social and governance factors into their investment processes.

Our latest case study focuses on ClearBridge’s interactions with Fortune 500 industrial conglomerate 3M. The company has made significant strides with workplace diversity and the advancement of women to executive leadership roles. The following Q&A highlights 3M’s management of critical ESG initiatives on the heels of ClearBridge’s recent meetings with CEO Mark Roman who took the helm in July 2018.

Q&A

3M (MMM) is a diversified industrial company specializing in tapes and adhesives, safety and graphics products, health-care supplies, optical films for electronics and energy products and a variety of household and office products. ClearBridge engages with 3M management on a variety of ESG- related issues including diversity and inclusion, governance and leadership, sustainability and environmental impact.

In 2018, ClearBridge investment teams met with 3M’s newly appointed CEO Mike Roman three times and Mike Eskew, lead director, once. Given this change in top leadership, two of the most relevant ESG issues for 3M have been governance and diversity and inclusion. Governance and diversity are issues that are pertinent to 3M and the various industries it competes in. Specifically, ClearBridge focuses on management compensation and alignment with shareholders, as well as management and board composition and diversity and inclusion for all levels of talent.

ClearBridge is happy to see a substantial number of women in senior executive positions. In the five-year period ended 2017, the percentage of women at the director level increased to 23% from 18.2%. Women’s representation on the executive team—those who report to the CEO—increased to 20% from 12.5%. The percentage of women  at the vice president level and above grew 24.2% from 16.7%. The representation of women in technical and lab manager roles jumped to 23.9% from 19.1% and the percentage of women manufacturing facility managers grew from 11.4 percent to 17.4 percent. This remains a key area of focus for the firm.

3M has a well-deserved reputation regarding its environmental responsibilities. However, like most companies that have made chemicals, it has residual chemical disposal issues. For example, 3M recently settled a disposal case in Minnesota for $850 million. Historically, 3M hasn’t done a good job with the CEO/chairman transition. While this most recent transition has been largely seamless, ClearBridge prefers to see the CEO step down completely rather than holding on to the chairman seat.

ClearBridge believes engagement is not episodic but rather a continuum. ClearBridge regularly meets with 3M senior management to discuss business trends, diversity and inclusion, executive compensation, governance and environmental performance. Given the recent CEO change, ClearBridge was seeking to understand the board’s process, who was considered and why Mike Roman was selected. ClearBridge also wanted to learn whether Roman’s approach to ESG issues differs from his predecessor.

ClearBridge consistently requested a meeting with the board’s lead director for several years, believing it is important to establish a relationship with those who have a definitive fiduciary responsibility to represent shareholders. 3M finally agreed to a meeting and there are hopes that it will become an annual event. ClearBridge communicated the importance of diversity to the board (which we consider extremely important from a global talent perspective) and generated some incremental thought about executive compensation, which ClearBridge believes has expanded well beyond alignment with shareholder interests (3M is far from unique on this issue.)

Through their various meetings with CEO Mike Roman, ClearBridge was satisfied that he firmly believes that success through innovation and agility are only achievable by embracing diversity and inclusion more fully. He was clear that 3M needed to accelerate its diversity programs. Competition for top talent, both domestically and globally, is fierce and he firmly articulated that the company’s recruiting efforts across demographic groups were critical to its ability to maintain its current globally competitive position.

We believe greater willingness to diversify the workforce naturally will attract greater talent, which conceptually should lead to greater performance. Similarly, ClearBridge believes companies willing to engage with shareholders on multiple levels ultimately are willing to be more accountable to those shareholders. 3M currently holds the highest ESG rating of AAA, which is unchanged from its rating prior to ClearBridge’s engagement with senior leadership.

As part of its proprietary rating system, ClearBridge assigns companies one of four ESG ratings, ranging from AAA (highest) to B (lowest) that is based on performance or behavior and a comparison with industry peers. The AAA rating reflects best in class, which means the company has integrated ESG strategy into its business model, usually with full CEO or employee support, formally measures sustainability efforts and proactively communicates to investors.

Disclosures

To formally recognize Environmental, Social and Governance (ESG) factors in its investment process, ClearBridge Investments has an internal ESG ratings process across its equity research platform. ESG ratings are proprietary scores intended to signal to investment teams how well a company has executed its ESG practices. ClearBridge analysts have long integrated ESG factors into their processes for generating investment recommendations. To learn more, read ESG Ratings: Integrating Fundamental Analysis with Environmental, Social and Governance Considerations.

2019 All rights reserved. This report is intended for informational purposes only. All information provided and opinions expressed are subject to change without notice. The information and statistical data contained herein have been obtained from sources we believe to be reliable. No part of this report may be reproduced in any manner without the written permission of Oppenheimer Asset Management or any of its affiliates. Any securities discussed should not be construed as a recommendation to buy or sell and there is no guarantee that these securities will be held for a client’s account nor should it be assumed that they were or will be profitable. Past performance is no gurantee of future results. The Consulting Group is a division of Oppenheimer Asset Management. Oppenheimer Asset Management is the name by which Oppenheimer Asset Management Inc. (“OAM”) does business. OAM is an indirect, wholly owned subsidiary of Oppenheimer Holdings Inc., which is also the indirect parent of Oppenheimer & Co. Inc. (“Oppenheimer”). Oppenheimer is a registered investment adviser and broker dealer. Securities are offered through Oppenheimer. 2571301.1