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July 12, 2012
Proxy Season Results Support Mainstreaming of ESG
    by Robert Kropp

This year's shareowner resolution tracker from Ceres notes that almost half of the environmental and social resolutions coordinated by the organization were withdrawn after successful engagement with companies. First of a two-part series.


According to the recently published Economics for the 99%, radical deregulation of the US economy took hold with Reaganism. Since then it would be understandable if sustainable investors often felt themselves to be voices in the wilderness, as it has always been central to their mission that effective regulation provide a measure of certainty for companies and investors.

But a look at this year's shareowner resolution tracker from Ceres makes an emphatic case that significant accomplishments on behalf of sustainability are occurring with such frequency that they have become mainstream, even in the absence of legislative or regulatory action. After all, while the number of assets devoted to sustainable investment is surely increasing, shareowner resolutions addressing environmental and social issues are consistently gaining more than 30%, and often more than 40%, of shareowner support. The results indicate that increasing numbers of mainstream investors are supporting those resolutions.

And increasingly, companies are listening. Of the 110 resolutions coordinated by Ceres this year, 44 have been withdrawn following successful engagement. In some cases, engagement proved successful at most companies within an entire sector; for example, resolutions calling for improved risk disclosure and increased transparency on the impacts of hydraulic fracturing were withdrawn at six natural gas companies. And resolutions filed at four of the largest computer companies—Apple, Dell, HP, and Intel—by the New York City Office of the Comptroller, requesting that they require their suppliers to produce sustainability reports, were withdrawn as well.

Both examples point to the growing awareness by companies of the material risks presented by environmental, social, and corporate governance (ESG) issues. The primary lead filers of the fracking resolutions—Green Century Capital Management and the Investor Environmental Health Network (IEHN), with assistance from As You Sow—"Made a conscious decision to get companies to realize they're having major impacts on the communities," Rob Berridge, Senior Manager of Investor Programs at Ceres, told SocialFunds.com. "Some of those impacts are environmental, but many of them are social. If the companies don't address them, the communities will be less enthusiastic about having them there. There's lots of money to made, but if your town is overrun with trucking traffic and your water supply becomes contaminated, at some point it becomes not worth it."

The heightened awareness of investors on the issue was borne out by on similar resolutions at Chevron, where 40% of shareowners supported improved disclosure, and at ExxonMobil, where almost 30% did so.

The successful engagement with computer companies occurred in the aftermath of widely publicized risks to the sector. In Thailand, severe flooding last year led to the loss of as much as 40% of global hard drive manufacturing capacity. And poor working conditions at Foxconn, a giant Chinese supplier to Apple and other companies, forced Apple to agree to have workplace conditions at three of Foxconn's plants investigated.

"Companies in the tech industry often have thousands of suppliers," Berridge said. "It's a highly leveraged strategy for investors because companies clearly have real risks here. It's exciting to think abut the risk reduction that's possible, and the benefits to the environment and society in countries where these companies operate."

"Higher votes are creating pressure on management to engage, as is the massive growth in networks like the Principles for Responsible Investment (PRI) and the Carbon Disclosure Project (CDP)," Berridge observed. Another factor is the increased support from the major proxy advisory firms for resolutions coordinated by Ceres.

Also, "Some of the big mutual funds are voting for the resolutions we support," Berridge said. "And Fidelity and Vanguard have switched from voting against to abstaining."

"A foundational ask for investors to make," Berridge continued, is that companies issue sustainability reports. About 20% of companies listed in the S&P 500 index currently do so, and the percentage is much higher in the global index of largest companies. "Investors want to see more than just greenwashing and a brochure. They want to see trends over the years. They want to see goals."

As the number and overall quality of sustainability reports improves, companies will have to acknowledge the materiality of ESG issues. And as that acknowledgement becomes mainstream, the likelihood that the performance of corporate managers will be linked to such issues will increase. Support for shareowner resolutions calling for such linkage has been steadily increasing; it isn't as yet as robust as that for other ESG-related resolutions, but it is strong enough for the resolutions to reappear on next year's proxy ballots.

"The sustainability report should be a management tool," Berridge said. "If you want to manage ESG issues well, you should be incenting managers to do a good job on them."

"It also makes it easier for investors to compare data across companies," he continued.

The Rio+20 conference on sustainable development concluded last month with yet another failure of government negotiators to adopt binding agreements addressing climate change and unsustainable global consumption patterns. And in advance of the conference, the Dialogue on a Convention on Corporate Social Responsibility and Accountability (CSRA) warned, "Voluntary corporate social responsibility reporting has made significant contributions to corporate operations. However the incremental progress of such initiatives poses environmental and societal risks."

But as this year's proxy season demonstrates, many investors and corporations have concluded that the business case for sustainability is beyond doubt. In fact, Berridge suggested, successful engagement on ESG issues may well have driven regulatory change, and has the opportunity to do so in the future as well.

"We hope there are feedback loops going on," he said. "In 2010, the SEC issued guidance on climate risk disclosure. We think that the work investors did prior to that got companies to recognize climate change as a risk, which made it easier for the SEC to issue its regulatory statement."

As the number of companies issuing sustainability reports increases, Berridge continued, "The regulators have a much easier job of acting."

 

 
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