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October 01, 2003
ISIS Product Offers Shareowner Action without Portfolio Management
    by William Baue

Institutional investors can use ISIS's Responsible Engagement Overlay to promote better social and environmental performance at companies through dialogue, proxy voting, shareowner resolution filing, and research.

Socially responsible investment (SRI) portfolios that offer shareowner action as a component of their activities are commonplace; offering such engagement as a separate product, however, is rare. ISIS Asset Management is one SRI firm that has decoupled shareowner engagement from asset management with its Responsible Engagement Overlay (reo). ISIS introduced reo in 1999 when it still went by the name Friends Ivory & Sime.

ISIS's 12-member reo team dialogues with companies to encourage improved social and environmental performance, files shareowner resolutions, votes proxies, and produces research on social and environmental issues, among many other things. Reo clients are predominantly institutional investors concerned about social and environmental issues and the financial risks they introduce.

"What's so attractive to institutional investors such as universities or pension funds that want to address social and environmental issues is the that this work doesn't in any way impact stock selection," said Elizabeth McGeveran, vice president of governance and socially responsible investment at ISIS. "Reo allows them to have their cake and eat it too: they still have the whole universe of stocks to pick from while we're out there working for productive change in the marketplace."

"With screening, you avoid the ownership position, but reo is a completely unscreened option that works directly with companies to get them to alter corporate practice: it's totally focused on change," Ms. McGeveran added.

While the majority of ISIS clients use both its asset management and reo services, some ISIS clients, such as the Dutch health workers pension fund PPGM, one of the largest pension funds in Europe, use reo separately while retaining their own money managers. This approach allows institutions to demonstrate to their stakeholders and constituencies their active engagement over social and environmental issues.

"For example, a university with students asking 'we're invested in X,Y, and Z companies--what is being done on human rights?' can respond, 'We're not divesting, but we have representatives out in the marketplace talking to these companies about these very issues, trying to get them to change,'" Ms. McGeveran explained.

The reo team establishes a working relationship with a company as a basis upon which to effect change. Only if this dialogic approach fails does ISIS file or co-sponsor shareowner resolutions, such as the case of EMC (ticker: EMC), a computer hardware and storage manufacturer.

"Walden Asset Management and ISIS together filed a shareholder resolution on board independence out of frustration--we felt we we're getting anywhere with the company," said Ms. McGeveran. "But over the past year-and-a-half or two years, that relationship has really evolved and transformed from being very hostile to being very productive, and now we have regular meetings with EMC to talk about emerging corporate governance issues."

"Our goal with these companies is to build long-term working relationships," added Ms. McGeveran.

In addition to dialoguing and filing shareowner resolutions, the ISIS team can vote clients' proxies or make recommendations on key votes.

"We take our own proxy voting principles and adopt them to what's appropriate in each market," said Ms. McGeveran. "When we vote against management, we try to contact the company before the vote or after to let them know how we vote and why, so there's a very extensive feedback loop in our voting."

The ISIS team also produces original research on social and environmental issues, or teams with other organizations to support their research projects. For example, ISIS recently published Environmental Credit Risk Factors in the Pan-European Banking Sector, a benchmarking study that identified leading, mid-level, and laggard practices in environmental credit risk management.

ISIS publishes a quarterly public report of reo's activities in order to practice the kind of disclosure it encourages of companies. The report is divided up into themes such as transparency, environmental management, climate change, and bribery, among others.

"We think that these issues are linked to long-term shareholder value," said Ms. McGeveran. "Part of the financial calculus is, since we can't do everything under the sun, we do what we think will have the most long-term benefit for company performance."


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