The Motley Fool: Don't Miss This Megatrend
Investors, get ready to examine your stocks through a newly focused lens. A potentially massive new trend could make the difference between stellar returns and spectacular flameouts; how you vote your annual proxies will matter more than ever, too.
Ceres, which leads a coalition of investors, environmental organizations, and other groups that focus on sustainability, recently released the report "Proxy Voting for Sustainability." The report can help investors navigate the environmental, social, and governance ("ESG") issues that increasingly require investors' urgent attention -- and votes on shareholder resolutions.
You snooze, you lose
Investors who shrug off the ESG side of stock ownership are making a major strategic mistake. Sustainability issues will shake up corporate managements and boards, and business as usual will no longer apply. Unaware, apathetic, passive investors could get blindsided as their stocks underperform.
Ceres cites Harvard Business Review's 2010 piece "The Sustainability Imperative." Authors David Lubin and Daniel Esty called sustainability a transformational "megatrend" that's altering the competitive landscape for businesses overall. Many variables are driving this change, including changing geopolitics, globalized workforces, growing public awareness of businesses' effect on environmental and public health issues, and dawning recognition that what were once unfair negative externalities are now hitting real corporate bottom lines.
According to Institutional Shareholder Services, shareholder resolutions that zoom in on sustainability issues have been increasing in recent years; average support for such resolutions has jumped to 20% in 2011. That's significant given the fact that shareholder attention to such issues used to be exceedingly rare.
Risk ripple effects
The sustainability megatrend has everything to do with investment risk versus reward. For example, Ceres said that in 2010 alone, climate-related lawsuits climbed to more than 100 here in the U.S., and the organization described recent year-over-year increases in that kind of legal activity as an "exponential trend."
The dangers of poor corporate governance and oversight were made clear during the financial crisis, in which major financial companies relied on public bailouts to survive. This defines negative externalities: Somebody (like you and me, or your children or grandchildren) is left to foot the bill instead of the actual perpetrators of disaster. A sustainable, responsible marketplace shouldn't let incompetent, irresponsible management teams get free rides for failure at everyone else's expense.
BP's (NYSE: BP ) Deepwater Horizon disaster makes another excellent example of risks of shoddy corporate management structures. Reuters recently reported that BP may shell out up to $42 billion all told to pay costs and settle related lawsuits, but some people who are knee-deep in the Gulf's true economic fallout (lawyers, for example) suspect the costs will rocket even higher.
Even worse, tar balls recently surfaced that matched oil from the Deepwater Horizon disaster, meaning the spill still represents a long-term threat to the Gulf's coastal ecosystems. Given recent reports that also spread blame to BP's fellow contractors Halliburton (NYSE: HAL ) and Transocean (NYSE: RIG ) , existing shareholders have continued risks to fret about.
It's time to care
Although Ceres' report acknowledges that many investors still haven't quite embraced the importance of proxy voting on these issues, the sustainability megatrend's emerging progress is clear. In a marketplace where many still adhere to the conventional wisdom that most if not all investors are apathetic to these issues, some vote tallies tell a different story. This year, some shareholders votes on ESG-related issues reached majority or near majority approvals:
- Layne Christensen (Nasdaq: LAYN ) ; 92.8% of shareholders approved a resolution on sustainability reporting
- Tesoro (NYSE: TSO ) ; 54.3% of shareholders approved a resolution on oil refinery risk
- Ameren (NYSE: AEE ) ; 52.7% of shareholders approved a resolution on coal ash
- Energen (NYSE: EGN ) ; 49.5% of shareholders approved a resolution on fracking
Major shareholders like California Public Employees' Retirement System (CalPERS) are among the first working on awareness of these issues from the business point of view.
According to Forbes contributor Mindy Lubber's recent piece on measuring environmental performance, Jane Ambachtsheer, head of Mercer's Responsible Business unit, recently helped CalPERS' board delve into the business angle of ESG awareness, since climate change and resource scarcity are looming problems that businesses will have to tackle. Furthermore, Ambachtsheer pointed to 36 studies that illustrated correlations between ESG integration and positive investment performance, giving all investors very significant food for thought on the issue.
Missing a megatrend sets the stage for mega-losses
The irrational myth that environment, social, and governance issues are insignificant, nonfinancial concepts that hardly ever impact long-term sales, profits, or economic strength (or lack thereof) is rapidly falling short in the face of real-life proof. Corporate managements who miss the opportunity to address this megatrend before it's too late have a heck of a lot to lose when it comes to their companies' competitive strength; apathetic, passive shareholders have a lot to lose, too.
It's time to pay attention, and address these issues when we vote our proxies.