December 9, 2010
Ethical Investors Successfully Engage
Companies and Governments
By Ron Robins, Founder & Analyst -
Investing for the Soul
Ethical and socially responsible (SR)
investors and funds, through their powerful growing
presence, are increasingly succeeding in engaging
companies in the process of improving their
environmental, social and governance (ESG) policies and
actions. And they are proving adept in getting
governments and regulatory authorities on their side as
well.
However, for most SR/ethical funds, corporate engagement
activities are a secondary function. But one new ethical
fund deserves a mention as it makes its corporate
engagement activities its primary activity. And its
approach could be one that other SR/ethical and
conventional funds may adopt.
The fund is the Australian Climate Advocacy Fund with
its mandate to specifically engage companies on their
climate change issues. But what is also unusual about
this fund—and breaking ranks with virtually all other
SR/ethical funds—is that it does not employ any
sustainability or ESG screens!
Instead, the Climate Advocacy Fund invests in, and seeks
to engage, all of Australia’s top 200 companies (as in
the S&P/ASX 200) in enhancing their climate change and
ESG activities. In this way, the fund believes that by
helping those companies do better on climate change,
their share values will rise and increase the value of
the fund.
But not applying screening is antithetical to SR/ethical
funds. For most SR/ethical investors, it is heretical to
buy stock in companies they prefer not to own, though
there are some historical precedents. Often leading the
way in this have been religious funds and associated
groups with some specific cause they want to support.
For instance, in 2006, an article in the Christian
Science Monitor, entitled, “The power of nun: taking a
lead role in shareholder activism,” the article stated
that, “the Bronx-based Sisters of Mercy bought stock in
Synagro, a fertiliser pelletmaker with a plant in the
Bronx, in order to lean on them to clean up emissions
caused by burning New York City sewage in the
pelletmaking process.”
In the US, a significant proportion of all proxy
initiatives—stockholder proposals voted on at company
meetings—are sponsored by religious organisations.
Leading these fights in the US is the Interfaith Centre
on Corporate Responsibility (ICCR). The “ICCR raises the
prophetic voice of faith [on behalf of nearly 300
faith-based institutional investors] to change the way
companies conduct themselves as good corporate
citizens... In 2010, ICCR's members have filed 282
shareholder resolutions on social, environmental and
corporate governance issues.”
An example of how successful the ICCR has been is the
following: “an ICCR member-sponsored proposal requesting
greater transparency around derivatives achieved an
unprecedented 30 per cent approval by shareholders
(typically, a shareholder vote in the double-digits is
considered very successful) and went on to produce votes
above 30 per cent at the AGMs [annual general meetings]
of Bank of America, Goldman Sachs and JP Morgan.”
Among other successes that SR/ethical investors have had
in engaging companies and regulatory authorities has
been ‘say on pay.’ This is where stockholders get a vote
on executive compensation, though it is usually
non-binding.
Hence, together with the public outcry, SR/ethical
investors and funds have now moved the US government and
the Securities Exchange Commission (SEC) to act on say
on pay.
The SEC is proposing “new rules to give all shareholders
non-binding votes on executive compensation at the
public companies they own. This regulation came out of
the Dodd-Frank bill that was signed into law earlier in
the year. Also proposed by the SEC were rules that
required institutional investment managers to file with
the SEC on how they voted for these new non-binding
resolutions at companies they owned stock in for
clients. The new disclosure will hold institutional
managers accountable for their voting on such important
measures.”
And with their growing influence, SR/ethical investors
and funds have helped move the SEC to acquiesce in
proposing that it should be made easier for shareholders
to nominate directors to company boards. Though likely
to happen, it was met with resistance from the US
Chamber of Commerce, representing as it does, the status
quo of many corporate boards.
SR/ethical funds and investors are also taking on the US
Chamber of Commerce on another issue—corporate political
donations. A press release dated November 4 states,
“investors today announced the filing of shareholder
resolutions at several corporations that sit on the
Board of the US Chamber of Commerce, challenging their
corporate boards to review their policies and oversight
of political expenditures, especially through trade
associations. The first four companies to receive this
resolution are Accenture, IBM, Pepsi and Pfizer.”
SR/ethically oriented investors and funds are aided in
their engagement efforts by research and proxy services
of a number of key organisations. In the US, besides the
ICCR, they include Institutional Share Services (ISS),
RiskMetrics, and Moxyvote. In Canada, SHARE also
performs such work. ISS and RiskMetrics assist in such
activities globally as well.
In the UK, one of the largest firms engaging companies
on ESG issues there is the hugely influential firm,
Hermes—backed by Britain’s largest private pension fund,
BT Pension Scheme (BTPS). They said that, “over the
[second quarter of 2010]… we engaged with 183 companies
on a range of 425 social, environmental and governance
issues.”
In addition, the UK government on July 10 instituted the
Stewardship Code, “[which] aims to enhance the quality
of engagement between institutional investors and
companies to help improve long-term returns to
shareholders and the efficient exercise of governance
responsibilities by setting out good practice on
engagement with investee companies,” says the UK’s
Financial Reporting Council (FRC).
Furthermore, companies are realising that if they want
their share prices high, they have to be considered
‘best-in-class’ companies on ESG issues by analysts.
They know that making it into the respected Dow Jones
Sustainability or the FTSE4Good indices, for instance,
can mean higher stock prices and better public
perception of them resulting in higher revenues. Hence,
they are increasingly abiding and willing to engage
SR/ethical investors on ESG issues.
In the US, the Social Investment Forum (SIF) reported on
November 9 that US SR investment assets total a huge $3
trillion, while Eurosif said on October 13 that European
SR investment assets have shot up to a mammoth €5trn.
Clearly, the power and influence of SR/ethical investors
and funds is growing enormously. From companies wanting
to be seen doing the right thing to the most commanding
regulatory authorities, all are now bowing to the
increasingly authoritative and moral force of the
SR/ethical investor.
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