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.
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
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.
Stanleys 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 companys share
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
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
companys 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 companys 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
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 yearsthey
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, IRRCs director
of social issues services, says 2004 is on track to match or eclipse
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
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 implementationfinancial underperformanceis
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, Californias 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 nations
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 years
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 Shells 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 Groups SocialFunds.com Web site, as
well as for other publications such as Business Ethics and Ethical
* 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
** 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.