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Forbes: Mainstream Investors Sharpen Sustainability Focus

Recently, the jam and syrup mogul J.M. Smuckers heard resoundingly from its stockholders on an uncommon topic: climate change and coffee prices.
by Mindy S. LubberForbes Sustainable Capitalism Blog Posted on Oct 03, 2011

Recently, the jam and syrup mogul J.M. Smuckers heard resoundingly from its stockholders on an uncommon topic: climate change and coffee prices.

A shareholder resolution put forward by Calvert Investment Management and Trillium Asset Management asked the company to report within six months on its plans for managing climate change risks to its coffee supply chain.

You see, coffee generates 49.8 percent of Smuckers’ profit (the firm’s family of brands includes Folgers and Dunkin Donuts) and erratic rainfall and hotter temperatures are disrupting coffee harvests worldwide, leading to shortages and a doubling in prices.

The proposal won 30 percent support, or some $1.7 billion in share value — hardly a fringe issue brought forward by activist investors.

That strong vote reflects broadening investor concern about the bottom line impacts of environmental and social issues, and it demonstrates that proxy voting is a key means by which investors are voicing those concerns to management.

At last week’s Council of Institutional Investors (CII) conference in Boston, Edward Kamonjoh, head of specialty research at Institutional Shareholder Services, profiled the rise in sustainability-focused shareholder resolutions for investors at a breakfast meeting. Kamonjoh said that more than 720 resolutions were filed on environmental and social issues with U.S. corporations over the past two years and that average support has grown over the past decade from single digits to over 20 percent.

Recent resolutions address issues ranging from political contributions to hydraulic fracturing to workplace safety and human rights, and all center on the belief that social and environmental concerns are material to investment outcome and that companies ignore these risks at their peril.

The governance and safety resolutions filed this year with five oil majors are a good example, said AFL-CIO Director of Investment Daniel Pedrotty, who also spoke at the breakfast. Pedrotty said the AFL-CIO filed the resolutions in response to the Tesoro explosion that killed five workers, and that two of the resolutions received majority votes. No wonder, when you consider that the explosion spurred a $2.9 million fine, multiple federal and state investigations, and a drop in share value.

But the case for materiality of environmental, social and governance (so called “ESG”) issues isn’t just limited to one-off examples like Tesoro’s explosion and Smuckers’ coffee supplies. A recent review of 36 studies by Mercer Investment Consulting found strong linkages between comprehensive ESG integration by companies and positive investment performance.

Savvy investors are responding with more sophisticated approaches to proxy voting that include developing guidelines to ensure consistent voting on environmental and social issues. Take Florida State Board of Administration (SBA), which manages $150 billion in state pension and other funds.

Mike McCauley, senior officer of investment programs and governance at Florida SBA, told investors at the CII meeting that the board decided four years ago to develop a holistic approach to its proxy voting practices on environmental and social issues. In the past it added guidelines on an ad hoc, as needed basis.

Its guidelines now cover issues ranging from water availability, to climate change to animal feed lots — and that’s made its voting more consistent.
“We’ve come full circle in the past five to six years, from where we were abstaining on pretty much everything to being supportive across a broad umbrella of topics,” said McCauley.

McCauley said Florida SBA supported about half of the sustainability resolutions put before its portfolio companies, and on some topics, like publishing a sustainability report, it supported over 80 percent of the proposals.

Still McCauley said, “We don’t just take an absolute position in favor of a proposal, we look to see how the company stacks up against its peers. Is it a vanguard leader? How transparent is it? “What’s its historical record?”

Other investors like the Connecticut state retirement system, CalSTRS, CalPERS, PaxWorld Management and Northern Trust are taking a similar approach.

Nonetheless, too many mainstream investors are giving this issue short shrift by referring to shareholder-sponsored resolutions addressing climate change and environmental stewardship as “special interest,” “non-routine” or “political.”

Kamonjoh disagrees. “When you look at the level of support these proposals are getting, they are not fringe issues.”

For investors who want to better align their proxy guidelines and sustainability focus, the Ceres Guidance: Proxy Voting for Sustainability is a useful tool. The report lays out four concise sets of principles on governance, social issues, general sustainability and environmental performance to guide investors’ voting, and it includes more than 75 specific best practice examples of proxy guidelines compiled from leading public pension funds, asset managers, socially responsible investment funds, labor unions and foundations.

All investors should exercise their fiduciary duty and vote their proxies on issues that impact a company’s financial return. Investors that continue to ignore sustainability-focused resolutions are missing an important opportunity to promote key reforms at large public companies—including reforms that may have helped avert the recent financial crisis.

As Pedrotty told investors at the CII meeting, “All of the funds in this room were harmed by the financial crisis, some $800 billion in losses for public funds from greed and recklessness.”  Then naming successful shareholder proposals, he said “Do I believe that Tesoro is better off with stronger safety measures in place, or that Massey Energy is better off without Don Blankenship as CEO? Yes.”

Read the post at Forbes Sustainable Capitalism Blog

Meet the Expert

Mindy S. Lubber JD, MBA

Mindy S. Lubber is the president of Ceres and a founding board member of the organization. She also directs Ceres’ Investor Network on Climate Risk (INCR), a group of 100 institutional investors managing nearly $10 trillion in assets focused on the business risks and opportunities of climate change. Mindy regularly speaks about corporate and investor sustainability issues to high-level leaders at the New York Stock Exchange, United Nations, World Economic Forum, Clinton Global Initiative, American Accounting Association, American Bar Association and more than 100 Fortune 500 firms. She has led negotiating teams of investors, NGOs and Fortune 500 company CEOs who have taken far-reaching positions on corporate practices to minimize carbon emissions, water use and other environmental impacts. She has briefed powerful corporate boards, from Nike to American Electric Power, on how climate change affects shareholder value.

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