Two Sides of the Coin: Shareholders Engaging Companies
on Sustainability Issues/Companies Promoting CSR
Leadership as Good Business

An accelerating trend is bringing us close to, if not past, a tipping point. Increasingly investors and companies alike are embracing the importance of corporate leadership on environmental, social, and governance (ESG) issues. Companies call it Corporate Social Responsibility (CSR) or Sustainability or Corporate Citizenship or ESG leadership, but it all comes down to the importance of responsible corporate leadership on environmental, social, and governance issues to protect long-term shareholder value while being responsible for our planet and people.

Investor engagement or advocacy has been a central contributor to making this trend a reality. For more than 40 years, investors have engaged companies on a wide range of social and environmental issues. I was privileged to be present at the 1971 General Motors stockholders meeting where one of the very first shareholder resolutions on a social issue was voted upon. The issue was South Africa and the resolution sponsor was the Episcopal Church. The presiding bishop of the church actually attended the stockholders meeting to present the resolution, which received dramatic front page New York Times headlines but a paltry vote in the 3% range.

Previously, the only shareholder resolutions filed had been sponsored by a few individual investors (the Gilbert Brothers and Wilma Soss along with Evelyn Davis) who sought changes in corporate governance. The Episcopal Church resolution launched a new era in shareholder advocacy. Led by the religious community, investors coordinated by the Interfaith Center on Corporate Responsibility (ICCR) began using the proxy process to engage hundreds of companies on such important issues as strip mining, the environment, employee diversity, and human rights questions like apartheid in South Africa. Over the years, the list expanded to literally dozens of ESG issues. Meanwhile, there was also a gradual convergence of environmental, social, and governance issues, which had resided in separate silos in the past.

There has also been an expanding impact on company policies and practices and a demonstrable track record of effective shareowner engagement. No longer are investors knocking outside boardroom doors; they are increasingly respected and their input taken seriously by boards and management. In short, a new paradigm is emerging.

Four decades later, a new breed of investors has emerged, creating a new reality and new expectations for company boards. These investors include pension funds, mutual funds, investment managers, trade union funds, foundations, and religious investors. Increasingly, they come from mainstream Wall Street firms as well. They understand themselves as “shareowners” and long-term investors. Many of them are “universal investors,” investing in the whole market. Obviously they seek superior financial returns in their portfolios, but they also integrate environmental, social, and governance (ESG) factors into their investment analysis and engagement with companies in the firm belief that ESG factors affect shareholder value.

For example, globally 870 investors with assets under management totaling more than $25 trillion are members of the Principles of Responsible Investing (PRI) and declare they integrate ESG into their investment process. They believe ESG issues can and do have a financial impact on the bottom line. Therefore, these investors see it as part of their fiduciary duty to address and promote corporate leadership on ESG.

The growth of the PRI and its global membership is a significant indication of the mainstreaming of ESG investing and the respect it has gained. It has moved from the perception of investors pressing a “social agenda” to understanding investors as fiduciaries, acknowledging that ESG issues are important to deal with as risk factors. An evolution of how a company will deal with compelling challenges like climate change or water shortages is seen as making a thoughtful assessment of a company’s future business plans.

An equally compelling example is investor support for the Carbon Disclosure Project (CDP), which last year asked 4,000 companies around the world to disclose information on their carbon emissions contributing to climate change. A worthy environmental initiative! And now 551 investors with over $71 trillion of AUM have officially endorsed this request. And over 3,000 companies responded to the 2010 questionnaire, including 70% of S&P 500 companies.

Also impressive is a new CDP initiative asking companies to disclose their “water footprint,” recognizing the global challenges to companies that water plays now and in the future. A more recent initiative, it has taken off dramatically with 137 investors with $16 trillion in AUM supporting the request to companies for more water disclosure. Approximately half of the initial companies contacted responded positively, another sign of the convergence of the ESG agenda with investors and companies alike.

Again, as with PRI, these investors see addressing these issues of climate and water as central business challenges as well as sustainability questions. They recognize companies unprepared to address such issues may jeopardize long-term shareholder value and negatively affect their portfolio.

Mainstream investment firms like Goldman Sachs (GS SUSTAIN strategy) argue that companies that are ESG leaders are better equipped to deal with future problems and will outperform financially for investors. State Street Global Advisors has made a similar argument.

ESG investors have emerged as new set of active owners reaching out to engage companies by voting proxies, writing letters, engaging in dialogue with management and/or Boards of companies, and sponsoring shareholder resolutions. Scores of them are actively involved in filing resolutions on ESG issues (e.g., TIAA-CREF, CalPERS, CalSTRS, State of Connecticut, City of New York Pension Funds, State of New York Pension Funds, Walden Asset Management, Nathan Cummings Foundation, Mercy Investment Services, and the Presbyterian Church, to name a few). They seek expanded reporting and transparency as well as specific changes in company policies and practices.

The year 2011 saw more than 1,000 shareholder proposals on dozens of issues from executive compensation to climate change, from annual election of directors to international codes of conduct, from disclosure of political spending to separation of the chair and CEO. These resolutions often result in creative dialogue that results in “win–win” agreements and the withdrawal of the resolution.

Proxy votes demonstrate a new level of investor awareness as well. Votes on governance (e.g., resolutions seeking declassification of the board or majority vote for directors) regularly receive votes over 50%. Votes on issues like political spending disclosure, sustainability reporting, and hydraulic fracturing practices rose to the 30%–45% level in 2011. Shifts in votes reflect an expanding serious examination by investors regarding how an issue like water, climate change, and good governance can affect the bottom line.

Styles of engagement differ among investors. Some resolutions will be addressed quietly and constructively in private dialogues, while others will be hotly debated public challenges.

Nevertheless, this is a creative opportunity for companies, not a threat. Boards and management can use communications with stakeholders to identify trends and potential potholes for the company, build positive relations with investors, and head off public conflicts on ESG issues.

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