Ethical Investors Successfully Engage Companies and Governments

By Ron Robins, Founder & Analyst, Investing for the Soul

Blog Enlightened Economics; twitter

First published December 9, 2010, in his weekly economics and finance column at
alrroya.com

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, and that is the primary activity, which 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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