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May 06, 2011
How Companies Should Respond to ESG-Related Shareowner Resolutions
    by Robert Kropp

Ernst & Young publishes a white paper that traces the increase in resolutions addressing environmental, social, and corporate governance issues, and advises companies to recognize the link between sustainability and financial performance.


At SocialFunds.com, shareowner resolutions addressing environmental, social, and corporate governance (ESG) issues are most often viewed through the prism of the sustainable investment industry. The publication by Ernst & Young of a white paper addressing shareowner activism from the corporate perspective provides sustainable investors and other shareowner activists the opportunity to better understand that perspective.

Despite the perception that shareowner resolutions on ESG issues reflect a measure of confrontation between investors and the boards of companies they own, Ernst & Young's white paper is straightforward in acknowledging that such proposals "reflect a growing belief on the part of institutional investors that a company's social and environmental policies correlate strongly with its risk management strategy —and ultimately its financial performance."

As the white paper indicates, the number of resolutions addressing environmental and social issues continues to increase; in 2011, the number of such proposals is expected to be half the total of all shareowner resolutions. Furthermore, many proposals "are linking social and environmental matters to traditional governance issues such as compensation and the qualifications of board members;" the percentage of proposals addressing corporate governance and compensation constitute an additional 30% of this year's resolutions.

Shareowner support for ESG-related proposals has been growing as well. Citing a 2010 survey by
Institutional Shareholder Services (ISS), a proxy advisory and voting service, the white paper states, "83% of investors now believe environmental and social factors can have a significant impact on shareholder value over the long term." Voting support for ESG-related proposals has grown from 7.5% in 2000 to 18.4% in 2010. Over half of such proposals now receive more than 10% of shareowner votes, and the average support threshold was 26.8% in 2010.

Asserting that "forward-thinking companies will be prepared to address" the concerns of institutional investors on matters relating to sustainability, Ernst & Young provides several recommendations for corporate boards and management. Companies and their boards must be prepared to enhance dialogue with investors, and improve disclosure through such measures as robust sustainability reporting.

With shareowners increasingly requesting that companies nominate directors with expertise in relevant ESG areas, companies could use new disclosure rules from the Securities and Exchange Commission (SEC) "to explain how the qualifications, backgrounds and skill sets of their directors — both individually and as a group — contribute to overall corporate strategy, including risk mitigation."

 

 
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