How an Investor Helped Netflix Disclose Its ESG Performance

Editor's note: A version of this article will appear in the Q3 2021 issue of Morningstar magazine.

Lily Bowles is a Netflix (NFLX) subscriber and shareholder. She believes in the company’s ability to not only entertain but also challenge prejudice and create a greater sense of human connection.

As a self-described steward of her capital, Bowles wanted to know how Netflix, whose stock she first bought in 2016, was performing on material environmental, social, and governance risks. These are sustainability issues that can be reasonably expected to have a financial impact on a company.

Bowles’ finance background, and her roughly 20 years as a Netflix viewer, made her uniquely positioned to get information on Netflix’s material ESG risk performance.

In previous jobs, she had worked with ESG data sets and was curious how truly financially material these risks were--and not just as a public-relations play. “I fundamentally believe that material ESG factors do affect the bottom line, and I have a curiosity of how they’re doing on material ESG issues,” she says.

Bowles’ story with Netflix, while a successful one, also highlights how difficult it is for individual investors to engage with companies they own--a task that has only gotten harder since the SEC passed new rules during the waning days of the Trump administration.

Who Is Lily Bowles?

Bowles’ interest in sustainable investing sparked in 2009 while she was studying political and social thought at the University of Virginia in Charlottesville. Bowles attended a talk by Muhammad Yunus, a Nobel Peace Prize-winning economist, in which he discussed the concepts behind microfinance, she says.

Wanting to see how business was a direct solution to local problems, Bowles interned at Grameen Bank, a microfinance organization in Bangladesh. She also interned at B Lab, an organization that certifies a company's social and environmental performance, and Village Capital, a venture capital firm that funds startups trying to solve social and environmental issues.

Driven to learn how social problems and inequities develop, Bowles received her master’s degree in international development at the London School of Economics in 2015. This education helped her to understand the power of multinational corporations--the amount of people they employ, their environmental footprint, and the importance of corporate governance.

Bowles founded and co-leads the Los Angeles chapter of the Women Investing for a Sustainable Economy, or WISE. She works with the Sustainability Accounting Standards Board and US SIF: The Forum for Sustainable and Responsible Investment. Bowles also holds the Fundamentals of Sustainability Accounting credential from SASB.

Submitting Shareholder Resolution to Netflix

According to SASB, Netflix’s most material ESG risks include the environmental footprint of hardware infrastructure, data privacy and advertising standards, data security, workforce diversity, and intellectual property. To get more information about how Netflix performed on these issues, Bowles submitted a shareholder resolution in December 2018.

In her proposal, she asked Netflix to disclose its “material ESG-related policies, practices, and performance using company-specific information and sustainable accounting metrics in its next annual report.” Bowles also explained “reporting could be done at reasonable cost and omit proprietary information or data the company was reluctant to share.”

And with that, the ball was in Netflix’s court.

Working With Netflix to Disclose ESG Performance

It didn’t take long for Bowles to realize how willing Netflix was to share its performance on material ESG issues. As a result, she withdrew her shareholder resolution--a typical move shareholders make when they have confidence the company will follow through on a proposal, says Morningstar’s head of policy research Aron Szapiro.

In February 2020, just over a year after Bowles filed her resolution, Netflix released its first Sustainability Accounting Standards Board Report, detailing how the company performed on material ESG risks. For example, this report identified that Netflix matches 100% of nonrenewable energy use with renewable energy certificates. It uses a similar matching program for nonrenewable energy consumption from its cloud-hosting partners.

This report was a success for Bowles. “[It] was truly exactly what I, and other members of the sustainable investment community, needed in order to feel more informed and confident about our decision to invest in Netflix,” she says. Bowles says the report might have been published even without her efforts, but her involvement certainly helped the process.

A Netflix spokesperson says the company had a positive experience working with Bowles and had already been working to disclose its performance on material ESG issues when her resolution was introduced. Since then, it has disclosed its ESG performance and what’s material to its business and industry using SASB’s framework in annual reports. It has also hired a head of sustainability and outlined other ESG information to its investors.

Despite Netflix’s efforts, Sustainalytics, a Morningstar company, only ranks Netflix 44 out of 66 on its ESG risking rating among other companies in the movies and entertainment subindustry. This ranking is explained by its low management scores on issues like corporate governance, business ethics, and human capital. Jennifer Vieno, a Sustainalytics analyst who covers Netflix, says the lack of disclosures and programs targeting these issues are the main reasons behind the company’s scores.

How Unique Is Bowles’ Story?

There is a history of individual investors like Bowles submitting resolutions to their companies for better shareholder outcomes.

According to James McRitchie, founder of Corporate Governance, the Securities and Exchange Commission in 1942 allowed shareholders to submit 215-word proposals with no minimum ownership requirements, no holding period limits, and no limits for resolution submissions. In 1947, a judge ruled in SEC v. Transamerica that a “corporation is run for the benefit of its stockholders and not for that of its managers.”

This decision helped individual investors like Bowles who wanted to improve their companies. Some investors even filed thousands of resolutions to spur action on corporate governance. Although many of their resolutions didn’t have majority support, these investors helped secured the right for shareholders to file proposals and vote on auditors, McRitchie says.

However, the average individual investor would find it difficult to replicate Bowles’ efforts today.

Resolution filers now must understand the whole proxy process and have a keen sense of corporate governance, says Jackie Cook, Morningstar’s director of sustainability stewardship research. Such individuals also need to engage with the company’s management team, which is no easy task.

This is where Bowles stands out, Cook says. Most successful resolutions require significant time and effort, which is easier for large asset-management firms that can devote entire teams to engagement.

Cook says the success of these resolutions depends on the company. A corporation whose founder owns a majority of stock, like Facebook (FB) or Amazon.com (AMZN), “makes them really impervious to shareholder pressure,” Cook says.

The SEC Proposes New Restrictions

When Bowles submitted her resolution in December 2018, individual investors had to own at least $2,000 worth of stock and be a shareholder for at least a year before submitting resolutions. To resubmit a failed resolution, the proposal must have received 3% of the supporting vote once in the last five years, 6% of the vote if voted on twice in the last five years, and 10% of the vote if voted on three times or more in the last five years, according to an SEC press release.

However, just weeks before Bowles submitted her resolution, the SEC held a roundtable aimed at changing the way shareholders communicate and submit resolutions. This discussion would lead to rules that make it harder for individual investors to do what Bowles did with Netflix, Cook says.

The rules, enacted in September 2020, upped the thresholds of support needed to resubmit a failed resolution from 3% to 5%, 6% to 10%, and 10% to 20% and shortened the resubmission window for failed resolutions from five years to three years. These changes went into effect during the Trump administration under SEC chair Jay Clayton.

What This Means for Individual Investors

In a letter to the SEC, Szapiro, Cook, and Morningstar’s associate director of policy research Jasmin Sethi explained why this hurts investors. “This rulemaking is not necessary for the protection of investors. Instead, the proposal would make it more difficult for shareholders to exercise their voices in corporate governance,” they wrote.

Bowles expressed similar concerns and calls the changes “absolutely un-American.”

“Investor participation in shareholder engagement shouldn’t be viewed as a burden to corporations but rather as an opportunity to listen, learn, reflect, and improve,” she says. “The U.S. corporate-investor relationship is unique, and there is no doubt the SEC rule fundamentally weakens this relationship.”

Going Forward With a New SEC

With Democratic President Joe Biden now occupying the White House, the SEC has a new chair, Gary Gensler. He is the former chair of the U.S. Commodity Futures Trading Commission under former President Barack Obama. Serving with Gensler are two Democratic commissioners and two Republican commissioners.

The appointment of Gensler gives Democrats a 3-2 majority in the SEC, which favors Democratic-leaning proposals, Szapiro says. As a result, the rule proposed to limit shareholder resolutions has come back into discussion. In a June 1 public statement, Gensler announced that he’s “directing the staff to consider whether to recommend further regulatory action regarding proxy voting advice.”

SEC commissioner Allison Herren Lee highlighted in March 2020 the importance of proxy voting and how essential it is to the SEC’s mission of protecting, serving, and empowering investors. She told attendees of the 2020 Investment Adviser Association Compliance Conference how she viewed the effects of the proxy-voting rule.

“A reduction of investor engagement with the companies that they own--is clearly not in the best interest of investors,” Lee said in the speech. “This is the opposite of investor empowerment.”

Bowles said the power of shareholder resolutions can help investors enact change in the companies they own.

“All companies, whether they like it or not, are on an ESG sustainability journey,” she said. “And some are further ahead than others. But we’re trying to, as shareholder advocates, get them further along to have a better environmental and social impact.”