Defense Contractors Face Shareholders’ Climate Demands

Defense contractors are arming up for demands that they make greater efforts to address the warming planet. Mother Nature is also on the proxy-voting ballot, in this week’s roundup of proxy-voting themes, based on proxy-voting research from Morningstar Sustainalytics, a division that provides sustainability research. And Berkshire Hathaway faces a raft of demands, which you can read about here.

Defensible?

Global militaries reportedly account for 5.5% of global greenhouse gas emissions that cause climate change. Indeed, it’s said that if the global military were a country, it would be the world’s fourth largest emitter, between India and Russia.

That’s part of the reason investors are pushing defense contractors Lockheed Martin LMT, RTX (formerly Raytheon) RTX, and Huntington Ingalls Industries HII to address how they plan to cut emissions.

Such demands are popular. Last year, similar resolutions won 35% of the shareholder vote at Lockheed and 38% of the vote at RTX.

As You Sow, on behalf of the LongView LargeCap 500 Index Fund, Warren Wilson College, and Lisette Cooper 2015 Trust, asks that Lockheed report on its plans to cut emissions along its full value chain and ensure they’re aligned with the Paris Agreement’s goal of keeping global warming at 1.5 degrees Celsius above preindustrial levels.

According to the proposal: “The proposed Federal Supplier Climate Risks and Resilience Rule would require large federal contractors, such as Lockheed Martin, to disclose Scope 1, 2, and 3 emissions and set science-based emission reduction targets. By reducing emissions from its full value chain, Lockheed Martin can reduce regulatory burdens and better assess technological changes, capital deployment needs, and financial opportunities.” Lockheed has yet to set a target for reducing emissions from its value chain, which accounts for 95% of total emissions. The proposal maintains that Lockheed “risks falling behind” peers such as Airbus EADSY, BAE Systems BAESY, Cisco Systems CSCO, Deere DE, Honeywell HON, and Safran SAFRY.

(For a primer on 1.5 degrees, the different types, or “scopes,” of emissions, and other global warming concepts, read this.)

Meanwhile, Warren Wilson College and Minnesota Valley National Wildlife Refuge Trust are asking RTX to essentially do the same.

Both the Lockheed and RTX proposals are up for shareholder votes on May 2. Both companies recommend voting against the measures. In a similar vein, Huntington Ingalls shareholders on May 1 voted on a proposal for the company to issue greenhouse gas-reduction targets aligned with the Paris Agreement. A vote count wasn’t available at the time of publication.

Writes Jekaterina Spiridonova, analyst at Morningstar Sustainalytics: “Lockheed Martin has updated its Scope 1 and 2 emissions reduction ambitions, aiming to reduce absolute emissions by 36% by 2030. However, the company has not yet committed to net zero emissions by 2050 in line with the global standards and has not set emissions reduction targets for Scope 3 emissions, which is by far the biggest category of the company’s total emissions.”

As for RTX, the contractor “states that it plans to directly address 30% of air transport carbon dioxide emissions by optimizing engines, aircraft systems and services in its 2050 civil fleet,” writes Morningstar Sustainalytics analyst Matteo Felleca. “The company’s ESG report describes planned actions to contribute to decarbonization of aviation, including aircraft system improvements, alternative aviation fuels, aircraft trajectory and ground operations improvements and engine efficiency improvements. However, the company has not set concrete time-bound emissions reduction targets for Scope 3 emissions covering both upstream and downstream emissions, which likely represent the biggest category of the company’s total emissions.”

Morningstar Sustainalytics recommends investors vote in favor of the proposals.

Recycling, Biodiversity on the Proxy-Voting Ballot

More proposals about Mother Nature are on the ballot. One big theme is recycling.

On May 2, Kraft Heinz KHC shareholders will decide whether Kraft should report on the facts around recyclable claims made on plastic packaging. Plastic packaging has pretty low acceptance rates for recycling, and only some types of plastic bottles and jugs are recyclable in the US. As a result, California and other entities are challenging the legitimacy of recycling labels on the bottles. The proposal, made by Janet Jensen Dell of the group The Last Beach Cleanup, notes that other major brands have already said they’ll stop using such labels. “It is deceptive to consumers and harmful to recycling systems to label such unwanted, worthless plastics as recyclable,” Dell says. Kraft recommends shareholders vote against the proposal.

Writes Spiridonova: “While Kraft Heinz describes its efforts and progress to reduce use of plastics and improve recyclability and has an internal process to ensure its packaging claims are not misleading, we believe that the requested report by independent legal and technical experts could help shareholders better understand the legal and reputational risks. The proponent refers to three specific labels in this proposal - Store Dropoff, Check Locally and Remove Label - that are being legally challenged, and points out that other brands have announced they will stop using the labels on their products.”

Morningstar Sustainalytics recommends investors vote in favor of the proposal.

At a May 1 meeting, some 18% of PepsiCo PEP shareholders supported a proposal for Pepsi to report on how its supply chains and operations are vulnerable to risks associated with biodiversity loss, according to Green Century Capital Management, which filed the proposal. In a statement, Leslie Samuelrich, Green Century CEO, said, “We hope they hear this clear message from shareholders: the company should account for its reliance on nature, it should disclose its impacts, and it should reduce those impacts wherever possible.”

Expect more proposals to protect Mother Nature, Morningstar Sustainalytics analysts say. For example, recently adopted European Sustainability Reporting Standards include mandatory reporting of biodiversity and ecosystem impacts and risks. Meanwhile, 175 nations have agreed to develop a legally binding agreement on plastic pollution by the end of this year.

More than 25% of Goldman Sachs, Bank of America Shareholders Support New Climate Metric

Some 28.8% of Goldman Sachs GS shareholders and 26% of Bank of America BAC investors voted in favor of adopting a new metric called the Clean Energy Supply Financing Ratio in company disclosures.

The votes represent strong support for a first-time ask, Morningstar Sustainalytics analysts say.

The ratio looks at banks’ clean energy financing as a proportion of fossil fuel financing. You can read more about the proposals here.