7 min read

CEOs Are Having an ESG Glow-Up

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Hi there,

Welcome to March! February is actually the longest month in the year, and we’re eagerly looking for signs of spring. Markets are tense this week as the shelling and strikes in Ukraine continue and sanctions on Russia pile up. Corporations are also working to isolate the eastern European aggressor – and protect their reputations – by selling stakes and ending partnerships (BP, Exxon, Shell, Delta Air Lines) or halting shipments and exports (UPS, FedEx, GM, BMW). There’s even a cultural element with a ban on the Russian soccer team and reports of a vodka boycott.

We’re seeing the war spill over into the virtual world as well. Cryptocurrencies are having a moment after credit cards in the region stopped working and sanctions were imposed on Russian banks. The Ukraine government and a nonprofit supporting it have raised over $54 million in crypto and NFTs from investors around the world. The conflict is providing a better argument for decentralized, digital money than the hype and ads preying on FOMO, but officials worry it could soften the blow of sanctions.  

Now, a major matter of concern for the private sector is the risk of ransomware attacks stemming from Russia. There’s been a spate of cyber crime in recent days with major companies like Nvidia, Toyota, and logistics giant Expeditors being hit. Organizations need to invest in good cyber risk management to protect their operations and sensitive data, or they risk losing millions of dollars and trust. Employees need to be on guard, especially those with the propensity for opening emails like “click to see cute cat.”

Companies involved with cyber security are outperforming the broader market amid the heightened worries. Below are the three most popular ETFs and their gains in the last month (as of Tuesday’s close). For perspective, the S&P 500 is down over 6% during this period.

News you can use

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  • US tech companies are stepping up to help and protect those affected by the violence in Ukraine. Google has disabled live traffic data. SpaceX has activated its satellite internet service. Tesla is offering free charging for all EVs in border areas, and Airbnb will provide free, temporary housing to 100,000 refugees. Social media companies are focused on taking down Russian propaganda, misinformation, and ads.
  • Oil & gas company Chevron is buying Renewable Energy Group for $3.15 billion to grow its biofuels production capacity. The announcement sent REGI shares over 40% higher on Monday. There were a record 973 merger and acquisition deals in the global energy sector last year as large companies rushed to decarbonize.
  • Apple CEO Tim Cook’s $99 million pay package is on the line tomorrow at the company’s annual meeting. The executive pay plan, which will be voted on by shareholders, is seeing some noteworthy opposition from an influential proxy voting advisory firm and the world’s largest sovereign wealth fund.
  • The world could miss “a brief and rapidly closing window to secure a liveable future,” says a new dire report from the UN-backed IPCC that details the irreversible, cascading impacts of global warming that exceeds 1.5°C (2.7°F). The report calls for more climate funding, technology transfer, political commitments, and partnerships.
  • Finding out what’s in an ESG-labeled investment should be as easy as asking “Is this fat-free?” at a restaurant or grocery store. That’s what SEC chief Gary Gensler says ahead of new transparency and disclosure rules from the agency targeting greenwashing.
  • March is Women’s History Month—a great time to learn about the “First Woman of Finance” and investing with a gender lens. Global assets in gender lens equity funds grew 51% in 2021 to $4 billion, according to Parallelle Finance, which has a list of them ranked by size.

Not your parents’ CEO

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In the spring semester of 2020, Harvard Business School introduced a course that earlier generations may have considered a tad “kumbaya.” Professor Arthur Brooks’ “Leadership and Happiness” class teaches future MBAs to lead in a way that makes themselves and those they manage happier. Today the course is oversubscribed and more relevant than ever, considering the Great Resignation. (Brooks just released his 12th book, From Strength to Strength, which we highly recommend.)

This is a small example of how our understanding of leadership is evolving. For a long time the CEO’s central priorities were thought to be day-to-day business and increasing shareholder value by driving short-term revenue and profits. But the rise of stakeholder capitalism and sustainable investing, and the resetting of goals post-pandemic, are changing that.

ESG investors are focused on how CEO decisions (the “G” is for governance) affect long-term prospects too. They want to see CEOs care for the wellbeing of their employees and the community, as well as the company’s environmental impact and diversity (falling under the “E” and “S”). CEOs are expected to respond to a wide range of social issues, and those with soft skills like communication, trustworthiness, transparency, and empathy get the highest employee approval on Glassdoor and improved their reputations the most after Covid.

With expectations changing, so are pay packages. One way big companies are promoting better decision-making is by linking CEO compensation with sustainable outcomes. Traditionally, incentive plans (like annual cash bonuses or long-term stock awards) were tied to financial goals, but ESG targets like employee health and safety and emissions reduction are now being added to the mix. Last year, 60% of the S&P 500 members had at least one ESG metric in their executive incentive plans, up from 52% the year prior. For instance, McDonald’s has tied 15% of exec bonuses to diversity in senior management. Starbucks’ CEO earned 10% of his 2021 bonus by eliminating plastic straws and reducing methane emissions.

How CEOs are paid, which the board decides, is also facing increasing shareholder opposition in recent years. Pay plans for a record 16 S&P 500 companies were rejected by investors last year, including General Electric, Walmart, and AT&T’s, up from seven in 2019. Apple could join the 2022 list tomorrow.

Socially responsible investors are also watching the expanding pay difference between CEOs and the average worker, or CEO pay ratios, which you can view here. Each year shareholder advocacy nonprofit As You Sow ranks the 100 most overpaid CEOs by considering shareholder returns, shareholder votes on CEO pay and CEO pay ratio.

You can find details on payment plans in company annual proxy statements on the SEC database. The regulator is preparing a new rule to increase disclosures about the link between financial performance and executive compensation so shareholders know they’re getting their money’s worth.

Taxes and stocks: The basics

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We’re now a little over a month into tax filing season and approaching the April 18 deadline. If you’re a new investor and procrastinating because it seems complicated, we want to help you get started on the process — #adulting #taxpanic. As always, it is a good idea to have a tax or financial advisor to guide you.

Do I owe taxes on my investments? Only if you sold stocks in a taxable account (not an IRA or 401(k)) for a profit in 2021. These are known as realized gains. If your shares have been rising and you’re still holding them in your account, these are unrealized gains and you don’t owe any taxes on them.

How much do I owe? Taxes on any profit you made are known as capital gains taxes and there are two types, short term and long term. For stocks you sold in a year or less, the proceeds are taxed like ordinary income. Long-term capital gains taxes apply for stocks you held over a year before selling and can be 0%, 15%, or 20% depending on your income bracket. You report this information on a Schedule D form and the results are incorporated into your Form 1040.

This also seems like a good time to remind you that FWIW does not provide any financial, investment, or tax advice and nothing mentioned in our newsletter or any of our other venues is intended as such.  

How do I keep track of all my gains and losses? Your brokerage (Fidelity, TD Ameritrade, Robinhood, Charles Schwab, etc.) should send you a Form 1099-B which contains all the data you need to fill the Schedule D form.

What about stock dividends? Ordinary dividends are taxed like your ordinary income, and your brokerage or a holding company will send you a Form 1099-DIV with the information. You may need to fill out a Schedule B form if the total exceeds $1,500. You may also receive “qualified dividends”, also listed on the Form 1099-DIV. These are taxed in a similar manner as the long-term capital gains mentioned above.

Can my losses or donations reduce the taxes I owe? Yes! Your capital losses can offset your capital gains of the same type. If you saw a net capital loss (total losses exceeded total gains in the year), you can deduct up to $3,000 on your regular income. Your tax or financial advisor may be able to help you time your stock sales strategically to minimize your liability. Donating stocks to qualified charities can also help you avoid capital gains taxes and claim a deduction.

Before you go -

Speaking of taxes… Charity Navigator has a list of highly-rated US-registered charities helping Ukraine where your donations will be tax-deductible. Chef José Andrés and his team, whom you can support here, are already at the border, serving hot meals and warming our hearts.