Using Socially Responsible Investing to Enable Local Action

By Steve Poplawski

Steven Poplawski is a partner in the energy, environment and natural resources group at Bryan Cave LLP, and former leader of the firm's national environmental practice.

Oct 30, 2017 | Economy, Governance | 0 comments


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In 1971, in Rules for Radicals, a book still used to train organizers looking to bring about social change, Saul Alinsky wrote about the use of the shareholder proxy process to influence corporations. Now, forty-six years later in 2017, empowered by the growth of socially responsible investing, two major fossil fuel companies saw their shareholders pass resolutions requiring more disclosure regarding the impact of climate change on their businesses.

First, Occidental Petroleum Corp. shareholders passed a resolution requiring the Company to perform a climate stress test. Then, ExxonMobil shareholders voted to require management to perform an assessment of the Company’s preparations for a low carbon future. The potential for continuing and more effective use of shareholder resolutions to push management has even led to legislative efforts to limit the standing of shareholders to bring such resolutions.

The Financial Choice Act 2.0, passed by the House this summer, contains restrictions on shareholder standing to those owning at least one percent of the Company’s stock, a restriction that would substantially limit the number of people who could bring shareholder resolutions.

How did the idea of using proxy votes to influence corporations to help bring about social change go from the outlier idea of a long time left wing organizer to an idea sufficiently mainstream to garner the votes of a majority of shareholders at two major oil companies? The fundamental answer is that investors controlling trillions of dollars in assets are now looking at a host of corporate social responsibility (CSR); and environmental, social, governance (ESG) issues when deciding where to invest. There are now large pools of capital with an ESG/CSR focus – $8.72 trillion in U.S. alone, and over $21 trillion worldwide.

Such enormous pools of capital focused on ESG and CSR simply did not exist in the early 1970s when Alinsky was attempting to organize people and get churches, foundations and universities to assign their proxies to various groups to advance a political agenda.  Rather than a tool for organizing the middle class, now the ESG/CSR investor agenda is being advanced by large pension funds and major asset portfolio managers. Moreover, corporations are not waiting for shareholder resolutions, which usually do not pass but are voluntarily recognizing their need to speak to and engage this enormous investment constituency. In 2016, 81% of S&P 500 Companies issued Sustainability Reports.

The tremendous growth of socially responsible investing means that, whether corporations are in the S&P 500 or just starting out, they now understand that large pools of investment capital are looking at their performance, not just with an eye toward short term quarterly investment horizons, but with a focus on long term risk issues such as the sustainability of supply chains and long term product viability in the face of disruptions caused by climate change as illustrated by the Occidental and Exxon votes.

Moreover, it is unlikely that if restrictions on standing to bring shareholder resolutions should pass Congress, that such restrictions would substantially stem the tide of impact that ESG/CSR investing is having on private corporations. Last year, the Securities and Exchange Commission issued a concept release asking if the Commission should require publicly traded companies to provide more specific disclosures on ESG issues. NASDAQ in its comments on the concept release stated:

“[W]e believe the proper benchmark for whether disclosure in general is required should be materiality and, therefore, also believe that sustainability disclosure should be mandatory only in cases where it is material to a particular company. In all other cases, disclosure related to sustainability, as well as other public policy issues, is better addressed by other means.”

“Increasingly, it is in companies’ interests for management to focus on sustainability issues and to highlight their sustainability performance and achievements as more investor money flows to sustainability investment strategies. Most companies provide some form of sustainability information, whether in periodic reports, on their websites, in separate sustainability reports, or in response to questionnaires. Because transparency around sustainability is more and more often viewed as a good business practice, Nasdaq believes that market-based forces will result in more optimal sustainability related disclosure by public companies than that driven by a Commission mandate.” (emphasis added)

In other words, the market of trillions of CSR/ESG directed investing dollars is driving companies to persuade these investors that their companies’ (a) focus on, (b) accurate measurement of,  and (c) achievement of those ESG/CSR goals means that their companies deserve those ESG/CSR dollars.

The problem and the opportunity for companies is that, overall, the private sector is not satisfying investors in demonstrating that they are adequately measuring and disclosing their progress (or lack thereof) on ESG issues. For example, take the Sustainability Accounting Standards Board’s evaluation of corporate disclosures on just two categories of climate related risk:

Physical Effects

Disclosures of these risks “are predominately boilerplate across all sectors, perhaps due to the uncertainty of the probability, magnitude, and timing of the physical impacts of climate risk, a lack of sophisticated modeling, and/or a lack of local and regionally specific risk assessments for companies (which would be necessary to fully understand many physical effects).”

 

Transition to a Low-Carbon, Resilient Economy

Despite being the most prevalent type of climate risk” (they affect 89 percent of the U.S. equity market capitalization)”, these risks have the least disclosure – “particularly in services and non-industrial sectors that have many indirect risks and opportunities they may not be accustomed to assessing and disclosing.”

What does the growing influence of CSR and ESG investing mean for the greening of our cities?  It means that CSR investing creates the opportunity for communities to engage their corporate citizens in supporting efforts to make their regions greener. Sustainability reports frequently contain information about the positive impact that corporations are having in the communities where their employees are present. Cities that can package their efforts to make communities more sustainable into tangible projects, can then take those projects to their corporate citizens who, by supporting those projects with personnel and/or money, can take credit for making progress toward their sustainability goals. Moreover, if you can accurately measure how those projects will achieve the goals, you can help your corporate citizens make progress in improving the data and disclosure deficiencies noted by the SASB.

Such efforts should not and are not being confined to established companies. In St. Louis, the start up incubator T-Rex hosts a Sustainability Lab. At its most recent session, the presentation topics included “Sustainability for Startups” which presented sustainability solutions for startups that were developed as part of the St. Louis Green Business Challenge, a joint effort of the St. Louis Chamber and the Missouri Botanical Garden to encourage the spread of greener corporate business practices through friendly competition and information sharing.

The tremendous growth of ESG/CSR investing means that cities and their communities can develop specific opportunities and projects that private entities can own or help implement that will have a measureable positive impact on their communities so that those private entities can use those projects to meet their ESG goals and help attract the trillions of dollars looking to be deployed to bring about positive change. In so doing, our cities and their investment community and private sector partners can refute Alinsky’s statement that “America’s corporations are a spiritual slum, and their arrogance is the major threat to our future as a free society.”

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