More Companies Face Backlash on Social Issues. Is Citigroup the Next Disney?

Companies are increasingly finding themselves at odds with states seeking to regulate the behavior of company employees. Disney DIS landed in Florida's crosshairs recently, after the company vowed to back the repeal of the state's Parental Rights in Education—the so-called Don't Say Gay—law, a statute that restricts public school teachers from instructing children about sexual orientation or gender identity. In a move widely seen as retaliatory, the state then passed a law that would limit Disney's autonomy over its Florida resort. Disney is expected to challenge that law and said, "Our goal as a company is for this law to be repealed by the legislature or struck down in the courts ... We are dedicated to standing up for the rights and safety of LGBTQ+ members of the Disney family, as well as the LGBTQ+ community in Florida and across the country."

Now it may be Citigroup's C turn. Recently, Texas state Rep. Briscoe Cain threatened to introduce legislation to prevent Citi from underwriting municipal bonds in the state unless it withdrew its policy covering travel expenses for workers who go out of state for abortions. In September, a Texas law banning abortion after six weeks of pregnancy took effect. Citi has said it would provide travel benefits to its 8,500 employees in Texas if seeking an abortion outside the state. Other companies, including Salesforce.com CRM and Uber Technologies UBER, have also announced policies in opposition to the abortion law, according to The New York Times.

The Texas Legislature doesn't meet until next year, so Cain's threat can't materialize soon. But corporate protections for their workers and others have become more important as the U.S. Supreme Court reportedly readies to overturn Roe v. Wade, the landmark case that established the right to abortion. Recently, for example, Amazon.com AMZN said it would reimburse U.S. employees for travel expenses for an elective abortion and other non-life-threatening medical treatments.

At Citi's April 26 annual meeting, Citi CEO Jane Fraser said: "We know this is a subject that people feel passionate about. I want to be clear that this benefit isn't intended to be a statement about a very sensitive issue. What we did here was follow our past practices. We've covered reproductive healthcare benefits for over 20 years. And our practice has also been to make sure our employees have the same health coverage, no matter where in the U.S. they live. So, to that end, we've had a practice of reimbursing travel for many years. We respect everyone's views on this subject."

A Citibank spokesperson declined to comment further.

What Happened to Disney?

Disney's experience may prove instructive. Over the past month, Disney's shares have fallen more than the S&P 500. To be sure, Disney also faces concerns that inflation will hit attendance at parks and that streaming growth is less robust than expected. But the faceoff over "Don't Say Gay" hasn't helped. Critics say that Disney's problems illustrate what happens when companies wander from the purpose of creating long-term value for shareholders and pursue "political agendas that they couldn't persuade voters to approve and for which they won't have to pay."

Trouble with that view is that shareholders, among others, are pushing for corporations to speak out—however uncomfortable that might be. Companies have amassed power in an era of increased corporate concentration. Disney's move was in line with the tenets of so-called stakeholder capitalism, endorsed by the influential Business Roundtable, which describe a company's purpose as serving not just shareholders but also employees, suppliers, customers, and its community as a way of building long-term success.

Even mainstream shareholders are pushing companies to be inclusive, partly as a way to reduce environmental, social, and governance risk, including the possibility that the company may lose attractive employees. For example, during its annual meeting this year, 59% of Disney shareholders asked the company to report on racial and gender pay gaps.

“Corporations have a role to play—they’re global citizens,” says Steve Norcini, head of sustainable investing at Wilmington Trust. Disney “is behaving appropriately.”

Meanwhile, some shareholders argue that reproductive healthcare is a critical part of corporate efforts to promote diversity and inclusion. It's a key benefit for female employees. In one survey, nearly 90% of women said that controlling if and when to have children has been important to their careers.

More companies may fall into the crosshairs of increasingly conservative states. Utah wants S&P Global Ratings to stop applying ESG factors to the state's ratings, saying that they "politicize what should be a purely financial decision."

Citi Just Came Back to Underwriting Texas Bonds

The implications for Citi are less clear, analysts say. Citi recently re-entered the Texas municipal-bond market, leading a $1.2 billion bond sale for Dallas Fort Worth International Airport, after the bank was reportedly shut out of underwriting bonds because it ran afoul of a Texas law that said underwriters couldn't discriminate against firearms entities or trade associations. Citi said in June that it "simply requires our clients to use best practices when selling firearms." (Other banks, including Bank of America BAC, JPMorgan Chase JPM, and Goldman Sachs GS, have also reportedly been sidelined because of the law.)

Another new Texas law requires the state to avoid doing business with companies "boycotting" fossil fuels, including those with funds that limit investment in fossil fuels or potential underwriters of a forthcoming $3.4 billion Texas storm bond issue intended to bail out natural gas utilities hit by the deadly 2021 winter storm.

Citi Walks a Fine Line With Investors

Citi, too, has walked a fine line with shareholders encouraging the bank for a stronger response to global warming. At Citi’s recent annual meeting, an attempt by shareholders, including the New York State Common Retirement Fund, to push the bank to end its support for new fossil fuel development failed. Citi will almost certainly face the same attempt next year. On the other hand, it decided this year to address deforestation in the projects it finances. Deforestation accounts for nearly 15% of global greenhouse gas emissions, which cause global warming.

“Citi will become the leading U.S. bank when it comes to addressing deforestation exposure in its financing. That’s an important step toward Citi aligning its forest policies with its climate ambitions,” says Thomas Peterson, a shareholder advocate with Green Century Capital Management.

Meanwhile, Citi, in its ESG report, says it's moving "to further the acceleration to a sustainable, low-carbon economy that supports the environmental, social and economic needs of society." It has a plan to reach net-zero emissions by 2050 and to reduce emissions intensity by 29% for the energy sector financing by 2030 and by 63% for the power sector. It's also bolstering its efforts to increase worker diversity, particularly at management levels. "We know that ESG considerations will only become more prominent as all of our stakeholders increasingly prioritize the need for our bank to help chart a sustainable and equitable future," it said. Sustainalytics, a Morningstar company specializing in ESG research, says Citi's "overall management of material ESG issues is strong" and gives Citi a Medium ESG Risk Rating.

The Outlook for Citi Shares

For now, Texas Rep. Cain’s threats are just that: The Legislature doesn’t meet again until January.

Like Disney, Citi has lagged the market this year. It’s in the middle of a major strategic shift, moving to sell multiple consumer units in Asia and Mexico and refocusing on its core North American consumer and global wealth operations. That may not make Citi the industry’s most profitable bank, but Morningstar strategist Eric Compton believes such moves will make it easier to understand, “structurally more focused, and will hopefully [give Citi] a more predictable and stable return profile.” Compton doesn’t regard the potential threats in Texas as “material.”

He notes that Citi was the book runner for more than $500 billion in debt deals in 2021: “One-off U.S. muni deals from individual states shouldn't be material to the bank's overall valuation.” At a recent $48, Citi trades at a steep discount to Compton’s fair value estimate of $78 per share.

Still, more threats to Citi and others could materialize from other conservative states as employees and consumers force companies to speak out on social issues. That won't change anytime soon.