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Corporate Social Responsibility (CSR) is an idea that corporations have to consider the interests of customers, employees, shareholders, communities, and ecological considerations in all
Socially responsible investing (SRI) describes an investment strategy which combines the intentions to maximize both financial return and social good.

green@work : Magazine : Back Issues : Mar/Apr 2004 : Special Section

Special Section

The Data Game
Want to built trust and attract more investors? Corporate sustainability and environmental reports are a good way to court stakeholders who are in it for the long-term.

Special Section

At a recent conference on reporting, two environment, health and safety professionals were discussing the subject of sustainability surveys. Sustainability surveys are questionnaires that ask companies about their environmental, social, economic and corporate governance performance. One of them succinctly expressed a view held by many in the corporate world:

“Those surveys drive me nuts,” he said.


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Sustainability surveys, and sustainability reports, cause frustration because they often require gathering data that spans multiple departments, measuring performance in formats that differ from ones the company normally uses, or collecting data that has never been collected before.

Yet sustainability surveys and reports are vital means by which pertinent data is distributed through the social investment food chain. Social investors* use environmental, social, economic and corporate governance performance data to screen and compare companies in order to determine which ones merit investment. They also use the data to identify companies that are underperforming on particular issues, and may take steps to communicate to the board of directors and senior management of certain companies that shareowners are concerned about that underperformance.

Some companies dismiss social investor requests for sustainability data and choose to shut their ears on issues of environmental or social underperformance. Does taking this path provide the most benefits for those companies?

The Familiar Dance with Investors

Perhaps the most obvious potential benefit of meeting the data needs of social investors is the same benefit of meeting needs of any type of investor: it builds trust and potentially makes the company more attractive to more investors.

“The more investment groups there are where we have passed a screen and have been deemed a company worth investing in, the more we will be increasing Motorola shareholder value based on increased investor demand,” said Michael Loch, corporate director of EH&S strategic initiatives at Motorola (MEU).

Loch notes that the number of social investment dollars continues to grow in the U.S. According to the 2003 Report on Socially Responsible Investing Trends in the U.S., a biannual report issued by the U.S. Social Investment Forum, in the four years between 1999 and 2003, socially screened assets in the U.S. increased from approximately $1.5 trillion to $2.1 trillion, a 40 percent increase.

There are several explanations as to why individuals and institutions are continuing to turn to social investing. One is that investors perceive it as a “safe haven” from corporate scandal. Another is that more investors are taking notice of the increasing correlations being drawn between environmental, social, economic and corporate governance performance and share value.

“Not only do social investors see compelling financial returns, they also have confidence that they are encouraging greater corporate responsibility. They increasingly see the tie between corporate integrity, reduced risk and better long-term sustainability,” said Reggie Stanley, senior vice president and chief marketing officer at Calvert Group. Calvert offers the largest family of socially responsible mutual funds in the U.S. and manages approximately $9 billion in assets.

Stanley’s comment about long-term sustainability reveals another reason why companies should consider actively wooing social investors. Because social investors generally are in it for the longer-term and are not only concerned with financial returns, they are “sticky” and tend to stay in the market during volatile times. As such, social investors can contribute to the stability of a company’s share price.

Social investors exhibited this stickiness factor with regard to mutual funds during the market doldrums of 2002. According to Lipper, a Reuters-owned firm that tracks 80,000 mutual funds worldwide, between January and September of that year non-SRI mutual funds had net outflows of $9.2 billion. SRI mutual funds, on the other hand, had net inflows of $1.2 billion.

Transparency on sustainability issues can attract investors from beyond U.S. borders as well. European research firms offer U.S. companies opportunities to become better known to European social investors through three popular stock indexes: the FTSE4Good U.S. Index, the FTSE4Good Global Index and the Dow Jones World Sustainability Index (DJSI World). One of the prices of admission to one of these indexes is completing a comprehensive sustainability survey.

European investors generally place a high value on sustainability performance, and European companies understand that well. Susanne Stormer, manager of stakeholder relations at Denmark-based drug manufacturer Novo Nordisk, says there are a number of benefits to being included in an index such as the Dow Jones World Sustainability Index.

“Being rated as number one among pharma companies in the DJSI is a signal to investors that our management capacity is high, that we are able to manage opportunities and risks, and that we have identified and properly addressed material issues,” she explained.

Values and Value

Social investors often tout, rightly so, that socially responsible investing enables a person or institution to align investments with values. But from an investment perspective, better corporate citizenship is not an island in and of itself. Tied along with it are qualities such as lower reputation risk, lower litigation risk and better preparation for regulatory changes.

Intuitively, these qualities contribute to share value. When one looks at average price-to-book ratios, it seems that the market bears that out. For example, according to the Chicago, IL-based investment research firm Morningstar, the current market value of S&P 500 companies is 4.9 times higher than what shows on the companies’ respective balance sheets. Another way to look at that is for every $4.90 of market value, only $1 appears on the company’s books as physical or financial assets. This means that non-physical assets account for approximately 80 percent of the value of S&P 500 companies. Within this 80 percent are many of the “intangible assets” that social investors value.

Intangible assets can include the company’s reputation, employees, brands, patents, research and development prowess, and ideas and processes. Little is known about which intangible assets account for what portions of market value. Nevertheless, reputation, brand value, the ability to retain good employees and other such factors associated with better-than-average environmental, social, economic and corporate governance performance certainly are components of that 80 percent.

Most CEOs agree. For its fifth annual Global CEO survey, PricewaterhouseCoopers interviewed 1,161 CEOs in Europe, Asia and the Americas, the results of which were released in January 2004. The survey found that 68 percent of respondents agreed that corporate social responsibility is vital to the profitability of any company.

The survey also found, however, that a majority of CEOs have failed to realize that reporting is often the first, best step toward improving sustainability performance. Less than 25 percent of CEOs said their companies currently issue a report dedicated to corporate social responsibility issues, and only 14 percent have plans to issue a report in the future. With numbers such as these, clearly there are early bird competitive advantages to be had for companies that take steps to improve their sustainability performance and then report it.

Sharp Rise in Shareowner Oversight

Social investors have been practicing active shareownership in order to induce companies to rectify their underperformance on environmental and social issues for over 30 years. The stalwart has been the Interfaith Center for Corporate Responsibility (ICCR), a coalition of religious institutional investors that coordinates shareowner campaigns. ICCR members and the other social investors they work with have earned deep respect among investor relations departments over the years—they are known for being sensible and also for being tenacious.

Shareowner activists such as ICCR members have essentially three means to influence companies: direct dialogue with senior management; presenting a non-binding resolution to the company that is voted on by shareowners; and voting on resolutions and other issues put before shareowners. In most cases, shareowner activists first hold a dialogue with a company with the objective of reaching a mutually agreeable solution. If the dialogue fails, then the activists often file a resolution.

In the past, companies that chose not to compromise on a given issue always could hope that the resolution would fade away from lack of shareowner support. According to SEC rules, if a resolution does not receive a certain level of support, it cannot be submitted again for three years.

That hope has become quite a distant one now. Because of Enron, WorldCom and other corporate scandals, shareowner oversight of the companies they are invested in is clearly on the rise. According to the Investor Responsibility Research Center (IRRC), a provider of investor services and research on corporate governance and corporate social responsibility, in the 2001 proxy season** a total of 744 shareowner resolutions were filed. In 2003, 1,080 resolutions were filed, the highest number ever. Meg Voorhes, IRRC’s director of social issues services, says 2004 is on track to match or eclipse 2003.

With regard to sustainability performance, most significant is that the average number of shareowners who are supporting environmental and social issue proposals. In 2001, environmental and social resolutions received an average of 8.7 percent shareowner support; in 2003, the average was 11.9 percent. That is the highest annual average ever recorded by IRRC in its 30-plus years of tracking environmental and social issues proposals.

This average vote figure is significant because it crosses the SEC threshold of 10 percent for allowing any resolution to be resubmitted the following year. So, companies that are hoping an issue will go away through lack of shareowner support will likely face the issue again the next proxy season.

Some companies are already seeing the writing on the wall. American Electric Power and Cinergy, a pair of Midwest power companies that rely heavily on coal, were two of five power companies targeted during the 2003 proxy season by a coalition of shareowners concerned about the business risk of greenhouse gas emissions. The resolution asked the companies to report on that risk as well as on the potential economic benefit of curtailing greenhouse gas emissions.

The resolution did not come to vote at Cinergy, but it received a strong 26.9 percent support at AEP. This year the two companies have decided to compromise rather than fight. In February, they jointly announced that they would work with social investors to report publicly about how they are responding to growing pressure to reduce greenhouse gas and other emissions.

Social investors can help companies identify issues before they become problems. By taking on a strategy of collaboration with social investors, rather than confrontation, companies can eliminate embarrassing shareowner resolutions and may ultimately reduce their risk and enhance their share value.

Reinterpretation of Fiduciary Duty

Passive observers might say that the recent increase in shareowner activism is a temporary blip due to a spate of corporate scandals. If they did, they would be overlooking a trend that has tremendous implications for all publicly-traded companies. The trend concerns some of the major parties responsible for filing shareowner resolutions: union pension funds, public pension funds, foundations and college endowments.

Investment decision-making authority within these types of institutional investors typically rests with some type of board of trustees. The members of these boards are legally obligated to manage the assets in their charge in a manner that is in the best interest of participants or beneficiaries (if it is a plan or trust) or in the best interest of the institution itself. In the past, trustees shied away from implementing social investing strategies because they perceived, falsely, that such strategies hurt financial performance (religious institutions are the exception here; they have been practicing social investing for hundreds of years, dating back at least to the Quakers in the 1600s).

But as more research has been conducted on social investing, the more academics and investors have concluded that social investing strategies have, at worst, a neutral effect on financial performance (a significant number of studies have found financial outperformance). However, the same studies have indicated that social investing can increase the volatility of investments. Sophisticated institutional investors use risk optimization models to offset this additional risk. Thus, trustees who explore social investing strategies in-depth find that the major barrier to implementation—financial underperformance—is more a myth than a reality.

At the same time, the business case for implementing sustainability continues to build. Just last December, Munich-based sustainability rating firm Oekom Research released a study jointly conducted with Morgan Stanley Dean Witter that found that sustainability leaders in the MCSI World Index financially outperformed sustainability laggards over the past four years. Institutional investors are paying attention, and a small but growing number of them now state that fulfilling fiduciary duty requires considering sustainability issues in investment decisions.

The State of Connecticut treasurer, Denise Nappier, took this stance (which is consistent with Connecticut law) a few years ago and has since steered the $19 billion Connecticut Retirement Plans and Trust Funds (CRPTF) toward shareowner activism. According to Meredith Miller, the assistant treasurer for policy, “The treasurer believes that environmental, social and economic issues are inextricably tied to the financial performance of our portfolio company investments.” CRPTF was the lead filer of the previously-mentioned greenhouse gas report resolution at AEP.

Another state treasurer, California’s Philip Angelides, is also looking to implement social investing strategies. He recently proposed committing $1.5 billion to environmentally sound investments through what he is calling the “Green Wave Initiative.” Angelides sits on the boards of CalPERS and CalSTRS, the nation’s largest and third-largest pension funds with $164 billion and $113 billion portfolios respectively. CalPERS is the California Public Employees’ Retirement System and CalSTRS is the California State Teachers’ Retirement System.

Perhaps even more telling about growing institutional investor interest in environmental and social performance issues is last year’s Institutional Investor Summit on Climate Risk, which was convened in late November at the United Nations headquarters in New York City. The institutional investors gathered at the summit included eight state and city treasurers, comptrollers and labor pension fund leaders. They represented assets totaling a whopping $1 trillion.

At the meeting, New York State comptroller Alan Hevesi stressed to his fellow shareowners that divestment would not convince companies to address climate risk. “We want to stay in the game for the long haul and continue the pressure with shareholder resolutions, proxy fights and persuasion in order to get companies to change.”

Those in the corporate world who feel sustainability surveys and reports “drive them nuts” should be reassured that their hard work is not for naught. By helping report sustainability performance data, they are helping their company be better prepared to address future risks and opportunities.

The future is what sustainability is all about. Bart van der Steenstraten of Royal Dutch Shell says that engaging socially responsible investors is a part of Shell’s overall strategy to be at the forefront of sustainable development. That strategy, he explains, will keep Shell a step in front of its peers.

“A successful business has to be ahead of its competitors. We are now anticipating the future rather than running to catch up with it. That will make us a more profitable business.”

Mark Thomsen is research and news director at SRI World Group, Inc., Brattleboro, VT. He has written extensively about socially responsible investing for SRI World Group’s Web site, as well as for other publications such as Business Ethics and Ethical Investor.

* For the purposes of this article, this term encompasses socially responsible investors, ethical investors and sustainability investors. While each of these three terms imply slightly different perspectives, they generally have a common thread of considering environmental, social, economic and corporate governance performance in the investment decision-making process.

** Proxy season is loosely defined as being from late fall of one year through the summer of the following year. Late fall is when shareowners can begin filing resolutions for the next annual meeting, and most (but not all) companies hold their annual meetings during the first half of the year.

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