The shareholders putting sustainability on the agenda
The New York Stock Exchange processes more than 28,000 trades every second. At that rate, you could almost forget that shareholders are partial owners of the companies they invest in. But for long-term shareholders such as institutions and pension funds, there's power in consistent ownership, and it's measured in clear increments. One vote per share.
You might think the only way for investors to express their opinion over a company's performance and practices is to buy or sell their shares. In fact, that's not the case. Since the financial reforms of the Great Depression era, investors have been able to present shareholder proposals that can deeply influence the way a company operates — from how it pays its CEO to how it handles CSR.
Described in the Securities Exchange Act as a "recommendation or requirement that the company and/or its board of directors take action," shareholder proposals — also known as shareholder resolutions — have traditionally been used to address corporate governance issues. Issues such as asking companies to split the roles of board chairman and CEO, and requesting the ability to nominate board members and review executive compensation.
In recent years, however, investors are increasingly using the power of shareholder resolutions to address climate, energy and sustainability — issues that affect long-term performance. This movement has its roots in the campaigns driven by socially responsible investors, like religious institutions who have long made their social, environmental and governance policies a cornerstone of their investment practices.
So, why are shareholders speaking up on sustainability? Institutional investors have a fiduciary duty, which means their investment strategies must serve the collective long-term interests of their beneficiaries or customers. If investing in less sustainable stocks is good for current beneficiaries but undermines the broader economic future for younger ones, are they meeting that standard? Conversely, if they change their portfolios and returns suffer, are they favouring younger beneficiaries over older ones?
That's where shareholder engagement comes in. Each year, my organisation, Ceres, co-ordinates and tracks the number of climate and sustainability resolutions that are filed by investors affiliated with our Investor Network on Climate Risk. Over time, that number has increased exponentially, from 10 climate-related resolutions in 1999 to 109 filed in 2012 (in 2013, investors are on track to keep the same pace). These resolutions cover everything from requests to issue sustainability reports, to highly specific recommendations to address the risks of hydraulic fracturing, limit greenhouse gas emissions or manage water use. A recent analysis by Ernst & Young shows that environmental and social shareholder resolutions led all other major proposal categories on 2012 proxy ballots, accounting for about 45% of resolutions. Just two years ago, environmental and social resolutions made up 30% of proposals.
And it's not just the sheer number of resolutions that's on the rise. Over the past few years, nearly half of the resolutions filed have yielded an agreement in which the company in question commits to take action. In these cases, the investor then withdraws the resolution, and it never goes to vote at the annual meeting.
For those climate-related resolutions that go to vote, shareholders have also become much more supportive. In 1999, the average resolution received 5% support. Since 2007, however, the average affirmative vote has been well over 20%. These resolutions are all "advisory" in the sense that management is not required to act in response to a majority vote, but when you can get more than 20% of shareholders to agree on anything, management is well served to listen to their demands.
Most important, these resolutions are yielding action from companies and changing the way firms do business. Investors in Ceres' network have convinced companies like Avon, Hershey, and Smucker's to source 100% certified sustainable palm oil, an ingredient that is otherwise grown on plantations that displace carbon-capturing rainforests and animal habitats.
Earlier this year, a group of investors pressed oil and gas firms to end the wasteful burning of natural gas in North Dakota's Bakken region, a phenomenon that not only creates greenhouse gas emissions but can also be seen from space. After a shareholder resolution filed by Mercy Investment Services and a productive dialogue with the company, Continental Resources, the region's largest oil producer, set a public goal of achieving "as close to 0% flaring as possible." This commitment is cleaning up one of the oil and gas industry's more wasteful and environmentally destructive practices, and it's encouraging other producers to do the same.
As the impacts of climate change continue to mount, investors will continue to press for improved disclosure and performance on mitigating these risks. Over the course of the week, my colleagues will discuss their ground-breaking achievements on corporate sustainability through their shareholder advocacy efforts in our "Why we file" series.
Rob Berridge is senior manager of Investor Programmes at Ceres, which coordinates the $11tn Investor Network on Climate Risk.