Morningstar - Q3 2021 - 39

Engaging Netflix on Sustainability
How one investor encouraged the
company to improve its ESG disclosures.
Sachin Nagarajan
NETFLIX
Lily Bowles is a Netflix NFLX subscriber and
shareholder who believes in the company's ability
to not only entertain but to 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-sustainability issues that can be
reasonably expected to have a financial impact
on a company.
" I fundamentally believe that material ESG factors
do affect the bottom line, " Bowles says.
So, she filed a shareholder resolution with Netflix.
The outcome of Bowles' story with Netflix shows
the power shareholders can have engaging
with a multinational company. But the process
can be difficult, and has only gotten harder
since the SEC passed new rules in the waning
days of the Trump administration. Bowles'
experience and contacts were key to her success.
Her interest in sustainable investing was sparked
in 2009, when she was studying political
and social thought at the University of Virginia in
Charlottesville. She attended a talk by Muhammad
Yunus, a Nobel Peace Prize-winning economist,
who discussed the concepts behind microfinance,
she says. Wanting to see how business could be a
direct solution to local problems, Bowles interned
at Grameen Bank, a microfinance organization
in Bangladesh; 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.
Since earning her master's degree in international
development at the London School of Economics
in 2015, Bowles has been building a career in
sustainable investing. She founded and co-leads
the Los Angeles chapter of Women Investing
for a Sustainable Economy. She also got involved
with the Sustainability Accounting Standards
Board, where she holds the Fundamentals
of Sustainability Accounting credential. SASB is an
independent nonprofit organization that works
with investors and companies to develop corporate
sustainability standards.
Advocating for Information
According to SASB, Netflix's most material
ESG risks included an 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 made it clear
that " reporting could be done at reasonable cost
and omit proprietary information or data the
company was reluctant to share. "
Netflix responded a few weeks later and set
up a call with Bowles. An executive also sent links
to articles about Netflix's ESG efforts. But Bowles
says she was more interested in the metrics
identified as material by SASB, and she sent
Netflix screenshots of the board's analysis of the
company's 10-K ESG disclosures. She offered
to introduce executives to SASB leaders and says
Netflix welcomed the opportunity to meet.
After her call, it was clear that Netflix was willing
to improve its ESG disclosures. So, she withdrew
her resolution-a typical move shareholders make
when they're confident 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 SASB report, detailing how the company
performed on material ESG risks. The report
identifies, for example, 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.
To Bowles, the report was a success. " [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. " It might
have been published without her efforts, she says,
but her involvement accelerated the process.
A Netflix spokesperson says the company had a
positive experience working with Bowles and
had been working to disclose its performance on
material ESG issues when her resolution was
introduced. Since then, the company has disclosed
more about its material ESG risk using SASB's
framework in annual reports. It's also hired a head
of sustainability and outlined other ESG
information for investors.
Sustainalytics, a Morningstar company, ranks
Netflix 46 out of 66 on its ESG Risk Rating among
other companies in the movies and entertainment
subindustry. According to Sustainalytics,
Netflix scores poorly on issues such as corporate
governance, business ethics, and human capital
compared with its peers. Jennifer Vieno,
a Sustainalytics analyst who covers Netflix, says
the lack of disclosures and programs targeting
these issues hurt the company's scores.
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