mast image

Special Report

Impact investing

Sections

Taking it to the top

Unlike most socially responsible investment funds, the New York City pension funds do not apply social screens in their investment strategies. For the most part, the funds’ domestic and international equity holdings are held in index funds, passively or actively managed by outside managers. However, the funds have historically advocated SRI by using the leverage and power of substantial ownership of shares of common stock to persuade corporations to be socially and environmentally responsible. Primarily, through written communications and face-to-face meetings, the New York City pension funds seek to establish meaningful dialogue with the top executives and boards of companies. Depending on the outcome of these outreach efforts, issue-specific shareholder proposals are submitted to companies for the consideration and vote of their shareholders.
This year, our programme includes seven social issue proposals. One or more of these have been submitted to a total of 47 companies. The proposals fall into two main categories: human and worker rights, protection of the environment and renewable energy.
Under the latter category, we submitted a proposal to ExxonMobil asking it to issue a report, by September this year, outlining how it will promote renewable energy sources and develop strategic plans to help bring bio-energy and other renewable sources into the company’s energy mix. ExxonMobil has reacted strongly to this proposal. The company’s counsel wrote to the Securities and Exchange Commission (SEC) requesting concurrence that the company can omit the proposal from its proxy materials. The company contends, among other frivolous arguments, that the proposal “confuses renewable energy with clean energy”; that it “asserts that nations have agreed to final emissions reductions rules for the Kyoto Protocol, when no nation has agreed to the rules, because they are not yet final”; that we are misleading the shareholders in stating as a fact that the US is over-dependent on fossil fuels, and that ExxonMobil is over-dependent on fossil fuels. We are awaiting the SEC’s decision.
We submitted two more proposals to ExxonMobil. One asks the board of directors to develop and adopt a comprehensive and verifiable human rights policy, including an explicit commitment to support and uphold the principles and values contained in the Universal Declaration of Human Rights; and workplace standards based on core conventions of the International Labour Organisation. The other addresses an issue we have been pursuing for the past three years with ExxonMobil. It calls on the board of directors to amend the company’s equal employment opportunity (EEO) policy to explicitly prohibit discrimination based on sexual orientation and to substantially implement that policy. In the past three years, ExxonMobil has sought, unsuccessfully, SEC concurrence that it can omit this proposal from its proxy materials. 1 to form, the company is at the SEC again, arguing that the proposal is moot despite having not yet adopted a formal EEO policy prohibiting discrimination based on sexual orientation.
By far the majority of the companies we are pursuing this year are being asked to adopt and implement global labour standards based on the core ILO standards, and to implement a programme of independent monitoring of compliance with the standards. The list includes: Amerada Hess, American Eagle, Ann Taylor, Colgate-Palmolive, Dillard’s Department Stores, Federated Department Stores, The Gap, Hasbro, Home Depor, Kohl’s, Lowes, Nordstrom, Philip Morris, Sears Roebuck, Stride Rite, Talbots, TJX Companies and Wal-Mart.
Last year, companies had their way as the SEC agreed that our proposal on global labour standards could be omitted from the proxy materials. Company after company omitted the proposal. We took a beating. It became important, then, for us to understand the reasons for the SEC’s decisions. We requested a meeting with the SEC to determine why the proposal was flawed. The SEC agreed to meet us. While the SEC did not tell us how to revise the proposal so that it would survive future challenges, we were able to determine from the discussion how the proposal should be amended. For example, while the proposal called for companies to adopt ILO conventions, it did not give the full description and text of the conventions. If we had included the full text, the proposal would have exceeded the 500-word limit allowed by SEC Rule 14a-8 for a shareholder proposal. Yet by not including the full text, the companies were able to argue that the proposal was vague and thus that the shareholders could not know exactly what they were being asked to vote on. As a result of our meeting with the SEC, we understood that by changing the wording of the proposal such that it asked companies to adopt a code of conduct based on the ILO conventions as opposed to adopting the conventions, themselves, the proposal would past muster at the SEC. So in the autumn of 2001, we made a few revisions to the proposal for resubmission in 2002.
Given their success at the SEC in 2001, several companies, upon receiving the revised proposal, rushed to the SEC seeking to omit it from their proxy materials, based on the same arguments. Surprise! Thus far, the SEC has rejected the first request, from Stride Rite. Several more, including Dillard’s, Wal-Mart, Target, Talbots, Revlon, TJX and Men’s Wear House, have submitted letters to the SEC. The battle is on. With the SEC rejection of Stride Rite as our big gun, we are fighting back. I am optimistic that we will do much better this year.
This year, institutional investors are talking to each other and collaborating as never before in presenting issues and concerns to top executives of companies. Group conference calls, group exchange of e-mails, group meetings among investors, and group meetings with the CEOs and chairs of selected companies are substantially increasing. For example, on 4 March, representatives of the Amalgamated Bank’s Longview Funds, American Federation of State, County and Municipal Employees (AFSCME), AFL-CIO, California Public Retirement System (CalPERS), Connecticut Retirement Plans and Trust Funds, New York City Employees’ Retirement System, New York City Teachers’ Retirement System, and New York State Common Fund met with the CEO and chair, and other top executives of Great Lakes Chemical Corporation to discuss reforms. Similar group meetings were held with Amerada Hess and Nextel Communications, among others.
The message to corporate management is clear. These initiatives are not the pursuits of shareholder gadflies and publicity seekers, but are clear indications of the legitimate concerns and interests of the fiduciaries of many institutional investors and individual shareholders. This amassing of investor power is exemplified further in the co-sponsoring of the proposal on renewable energy at ExxonMobil by 46 shareholders, including the New York City Fire Department Pension Fund. Now you have a better understanding of why ExxonMobil clearly does not want this proposal anywhere in its proxy materials.
In rejecting shareholder proposals, some companies justify their position by claiming to have discussed the issue with their largest shareholders – usually money managers. Well, guess what? Increasingly, institutional investors are letting management know that they own the assets that are managed by these so-called largest shareholders. Before meeting management, some institutional investors are first reaching out to these investment managers. Institutional investors increasingly will use the leverage of this alliance as an important early step in pressuring corporations to adopt corporate governance and social responsibility reforms.
There are some other interesting developments in the US. I believe there are clear indications that the demarcation between corporate governance and corporate social responsibility is being steadily erased. Over the past two decades, we saw the misguided separation of corporate governance from social responsibility. Many large institutional investors, while narrowly focused on corporate governance reforms, avoided involvement in or support for social issues with varying degrees of arrogance and contempt. The culprits will remain nameless. Increasingly, institutional investors are broadening their perspectives, understanding that their fiduciary responsibility must include deliberate focus on the social, environmental, and economic impacts of corporate conduct.
For example, last year, the Council of Institutional Investors (CII) in the preamble to its core governance policies adopted new language which states that it “supports corporate governance initiatives that promote responsible business practices and good corporate citizenship. The council believes that the promotion, adoption and effective implementation of guidelines for responsible conduct of business and business relationships are consistent with the fiduciary responsibility of protecting long-term investment interests.”
In February, the investment committee of CalPERS voted to withdraw its investments from countries that do not meet human rights standards for its emerging markets investments. The countries affected are the Philippines, Thailand, Malaysia and Indonesia.
Still another example of the falling corporate governance wall came at the end of 2001, when veteran US corporate governance advocate Bob Monks, the chairman of LENS Investment Management and Ram Trust Services, announced that he filed a resolution at ExxonMobil, calling for the separation of the chair and CEO positions, because ExxonMobil directors are failing to protect long-term value in the company from chair/CEO Lee Raymond’s extreme position and public image. Monks cited dozens of stories that highlighted criticism of the company for its environmental and social positions. He pointed to numerous publications that reported how Raymond’s antagonistic positions are making the company a target and jeopardising its reputation. In his assessment, bad publicity destroys shareholder value.
Perhaps in response to the US administration’s environmental policies, socially responsible investors and stakeholder groups are ramping up their activities around global warming and climate change. The Coalition for Environmentally Responsible Economies (CERES), has embarked on a new initiative – the Sustainable Governance Project – to merge corporate social, environmental, and economic responsibility with corporate governance. CERES is attempting to persuade corporate boards of directors to take specific steps and measurable actions to reduce greenhouse gases; and to build awareness among the fiduciaries of pension funds that taking action on climate change is an important component of protecting the assets entrusted to them.
CERES contends that climate change has introduced new forms of risk into investment portfolios, through severe storm events, damage to coastal property, the spread of tropical diseases, increased political volatility, threats to water resources and droughts, and the potential for drastic government actions that may render some economic activity unprofitable.
The failure of corporate boards to act responsibly on climate change could damage the long-term value of the companies, thereby violating their fiduciary duty to protect the long-term interests of the companies and their shareholders. Accordingly, CERES and its coalition members will engage the trustees of US pension funds and the boards of large companies by challenging them to incorporate policies on climate change in their investment strategies and business plans, respectively. CERES approach is to increase investor and board pressure on CEOs to make corporate commitments to reduce greenhouse gas emissions to levels that meet or exceed targets under the Kyoto Protocol, and by the timetable established under Kyoto.
And last October, Domini Social Investments, joined by the International Center for Technology Assessment, a bipartisan policy group working on science and technology issues, and Sustain, a non-profit organisation working on environmental communications strategies, launched a campaign urging its shareholders to send postcards to the US Environmental Protection Agency (EPA), calling on EPA secretary Christine Todd Whitman to take action against global warming. Domini sent postcards to some 37,000 shareholders, asking them to sign and mail the cards to the EPA chief. The postcards urged the EPA to determine that carbon dioxide (CO2) and other greenhouse gases are pollutants under the Clean Air Act, and request that the EPA uses its regulatory authority to place limits on greenhouse gas emissions from new motor vehicles.
More and more US investors are increasing and strengthening their efforts to advance corporate social responsibility. Whether through social investment screens or the shareholder proposal process, the focus on the social, environmental and economic impacts of business activities is fast becoming a strategic factor for companies and institutional investors.
Kenneth Sylvester is director, pensions policy, office of the comptroller, city of New York. This article is based on a talk to the recent PIRC Socially Responsible Investment Conference in London

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

Begin Your Search Here
<