The corporate mind shift is underway
Shareholder votes on environmental issues producing victories
I am wearing my optimist’s hat today, because it has been raining and I am tired of rain that charges sideways and convinced that by the time this ode is published it will be sunny and spring sprung.
We are witnessing a mind shift. I stole that thought from a true optimist, this one in the investment community, convinced that at last we have moved beyond a mere awareness of responsible, sustainable investing, to a moment of real change. Let’s pull some threads together. Thirty years ago, I was in the habit of calling up Institutional Shareholder Services Inc. (ISS) to get the firm’s take on this company or that company. ISS was at the forefront of providing proxy voting advice to institutional investors at a time when the phrase “corporate governance” did not trip easily from the tongues of chief executive officers, who were of a type.
Today, ISS is a global advisory giant that has broadened its focus from what we have traditionally thought of as “governance” — director independence, gender parity, voting share structure, etc. — to add a sharp concentration on environmental and social issues (ESG) to its governance basket. Its ESG screening tool includes global sanctions screening (assessing companies with ties to “countries of concern” or those under UN, EU or U.S. sanctions), ethical screening (from pesticides to predatory lending), energy and extraction screening (fossil fuel extraction, coal mining etc.) and more.
In March, it launched ESG Index Solutions, tracking companies with superior performance across these metrics. Transparency, goal setting and shareholder engagement are the watchwords.
“Performance” can be something as
simple as getting the company in question to agree to publish annual sustainability reports. If that sounds like a no-brainer, you have forgotten that, this time last year, the board of directors at Kinder Morgan Inc. voted against two environmentally related proposals — one on sustainability reports and the other outlining how the company was preparing for a two-degrees Celsius limit on global warming. Despite the board’s opposition, both resolutions passed and, while they are non-binding, the majority vote helped affirm that ESG concerns are becoming mainstream.
Look at the shareholder advocacy group As You Sow. I wrote about the group’s shareholder resolution put to a vote at the Starbucks annual meeting two months ago. That resolution called for the transparent development of aggressive reuse and recycling goals. ISS supported the resolution, noting in its analysis that the fast-serve coffee company had “dramatically lowered” its sustainable packaging targets set a decade before.
The resolution did not pass, but it sure came close at 44.5 per cent. That’s a victory in the context of historical support in the 10 to 20 per cent range.
Companies are waking up, at least in some cases, to the public relations benefit of agreeing to resolutions before they are put to a vote. Scanning a list of 58 As You Sow resolutions put to companies as diverse as Chevron and YUM! brands, we see that 28 were set aside because the targeted companies did just that.
Perhaps you find these examples small and of little consequence.
But amid the political standoff on climate change, we have voices raised in the investment community alert to the urgent imperative to, say, set internal corporate goals for reducing greenhouse gas emissions or to report transparently on supply chains. The New York State Common Retirement Fund, with $207 billion (U.S.) in assets under administration, places environmental analysis alongside labour management, human rights and other concerns in its ESG framework. It filed 60 proposals last year, including pushing for that sustainability report at Kinder Morgan. Investors need an analysis of, and corporate responses to, ESG issues, the retirement fund reasoned. In other words: how high is the risk and how is it being managed?
The U.S. research firm and investment manager Morningstar is of comparable size to the New York retirement fund. Morningstar has long argued that embracing sustainability does not mean sacrificing financial returns.
This year it launched its Low Carbon Risk Index Family, which it defines as aligning with the transition to a low carbon economy. Sustainability, the company wisely asserts, is a stewardship obligation.
Stewardship: such a quaint, almost antique word, implying duty, obligation, care.
One more thought: Next month, the European Union will implement amendments to its Shareholder Rights Directive, which aims to encourage a move away from shorttermism and to embrace ESG as an integral element of responsible investing.
And Canada? I can tell you that the Financial Services Commission of Ontario presented ESG guidelines for pension plan administrators three years ago.
Federally, we are still awaiting the report from the Expert Panel on Sustainable Finance, which is supposed to present concrete steps to promote low carbon, a.k.a. clean, economic growth in Canada. It’s hard to imagine how that will play out amidst the current political turmoil.
Perhaps this doesn’t come down to policy. Or perhaps we just can’t wait. Perhaps the responsibility lies with the private sector which will either adapt voluntarily, or be pushed to adapt.
I know for certain that we can each play a part, as individuals, as stewards. But then again, I’m feeling optimistic. If only for a day.