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Top Five Socially Responsible Investing News Stories of 2004
January 11, 2005
by William Baue
Shareowner engagement shifted for confrontational to collaborative, sustainability analysis fused with financial analysis, and fiduciary duty expanded to include social and environmental issues.
SocialFunds.com -- Socially responsible investing (SRI) and corporate
social responsibility (CSR) continued to mature in 2004, making significant
gains while also addressing shortcomings. Now in its sixth year, SocialFunds.com
continues its tradition of ringing in the New Year by reviewing the top
SRI stories of the past year.
1. Engagement between shareowners and corporations shifts from confrontation
to collaboration
Things looked grim on the corporate-shareowner-relations front when the
year began: in January 2004, Cintas (ticker: CTAS)
filed a defamation lawsuit against SRI firm Walden Asset Management and its senior
vice president, Tim Smith. The complaint centered on comments Mr. Smith
made at the October 2003 annual general meeting (AGM) introducing a resolution
asking for a report on the efficacy of its Code
of Conduct for Vendors, which he alleged the company violated by sourcing
from a Haitian "sweatshop."
In an amazing turnaround, Cintas not only settled the suit, it also recommended
in its September 2004 proxy ballot that shareowners vote for a
resolution filed by different shareowners but similarly asking for a report
on adherence to its Code of Conduct for Vendors. Any other year, such
a "yes" vote recommendation would be practically unprecedented, but in
the intervening time between the filing of the suit and of the proxy ballot,
three other companies had issued such landmark recommendations.
In late January 2004, Bank of Montreal (BMO)
became the first company in Canadian corporate history to recommend voting
for a social or environmental resolution, which in this instance asked
the company to disclose how it evaluates and manages environmental risks
to its business. In March 2004, Tyco (TYC) backed a
similar resolution asking for a report on its corporate-wide toxic emissions
and environmental management system (EMS), and Coca-Cola (KO) endorsed a
resolution requesting a report on the economic effects of the HIV/AIDS
pandemic on operations. These company-endorsed shareowner resolutions
all received near-unanimous support (91, 92, and 98 percent respectively),
and Coke had already issued its report by October
2004.
While shareowners have for years withdrawn resolutions when companies
comply with their terms, 2004 saw an increasing number of such instances.
Energy companies Cinergy (CIN), American
Electric Power (AEP),
TXU (TXU),
and Southern Company (SO)
agreed to prepare reports on the risks posed by climate change and company
plans to mitigate such risks, and Reliant (REI) agreed to
increase climate risk disclosure. In response to resolution withdrawals,
Ford (F) will issue an
HIV/AIDS report, JP Morgan Chase (JPT) established
an office of environmental affairs, and Occidental (OXY) devised a
human rights code.
Avon (AVP) is both phasing
out phthalates and shifting from staggered to annual board elections,
and Dover (DOV) and Masco
(MAS) amended their
Equal Opportunity Employment (EEO) policies to explicitly bar sexual orientation
discrimination. In its proxy statement, Fifth Third Bancorp (FITB) promised
to abide by the majority vote on a sexual orientation nondiscrimination
resolution, but did not amend its EEO policy even after announcing 63
percent support for the measure; only upon the threat of a boycott did
it finally honor its promise.
"The shift from confrontational relationships between shareowners and
corporate managements to more collaborative ones has been years in the
making, and 2004 saw a sea change in tangible results and innovative solutions
for this new, mutually beneficial approach," said Jay Falk, president
of SRI World Group, which owns and publishes
the SocialFunds.com website.
However, confrontation has not disappeared from shareowner-corporate relations,
as companies continued to take advantage of the non-binding nature of
resolutions to disregard majority votes in 2004. For example, Raytheon
(RTN) ignored 65
percent shareowner support for a resolution asking the company to expense
stock options, while also flouting a 77 percent vote to repeal staggered
boards in favor of annual elections. Seven other companies similarly ignored
majority votes on these two issues, including Intel (INTC) and IBM (IBM) on the former
and Gillette (G)
and Sears (S)
on the latter.
Shareowner action-related articles:
Ford
HIV Report Exemplifies New Shareowner Action Strategy
About Face:
Cintas Settles Lawsuit and Supports Vendor Standards Resolution
Companies
Ignore Majority Votes on Shareowner Resolutions
Tyco Recommends
Vote in Favor of Shareowner Resolution, Joining Three Others
Five Companies
Comply with Terms of Shareowner Resolutions in One Week
2. Sustainability gains increasing acceptance in corporate and investment
communities
The notion of sustainability, which grew out of the term "sustainable
development" coined in the 1987 Brundtland
Commission Report to define the curbing of present resource use to
ensure future resource availability, has been gaining increasing credence
since then. In 2004, the corporate and investment communities made strides
in embracing sustainability, which attempts to reconcile economic growth
with environmental conservation and social equity.
One such stride bridged the gap separating sustainability research from
financial research, as former US Vice President Al Gore and former Goldman Sachs CEO David Blood launched
Generation Investment Management
in November 2004. The new firm grafts sustainability research directly
into its fundamental equity analysis, creating a new hybrid by tearing
down the wall ghettoizing social and environmental research from traditional
financial research.
Another similar stride crossed the chasm between buy-side investment analysts,
who are more likely to be aware of sustainability issues, and sell-side
analysts, whose fixation on short-term financial performance typically
excludes longer-term sustainability considerations. In July 2004, the
United Nations Environment Programme (UNEP)
released an important report compiling 11 sector studies
prepared by sell-side analysts from mainstream brokerage houses examining
the materiality of sustainability issues on financial performance. Piggybacking
the shift of sustainability analysis to the sell side, European institutional
investors launched the Enhanced Analytics Initiative (EAI), which encourages
sell-side analysts to cover sustainability issues by promising them five
percent of EAI-member broker commissions.
The linking of sustainability performance to financial performance gained
support from the 2004 Moskowitz
Prize winning study, awarded annually by the Social Investment Forum
(SIF) to the best empirical research on
SRI. This "study of studies" (all 52 published between 1972 and 1997)
analyzing the link between sustainability performance and financial performance
finds a "positive association . . . across industries and across study
contexts."
"Before 2004, sustainability was lower on the radar screens of mainstream
investors, but with increasing empirical evidence that sustainability
factors impact financial performance, companies and investors now ignore
sustainability at their own risk," said Mr. Falk.
Sustainability-related articles:
Al
Gore and David Blood Graft Sustainability Research into Traditional Investing
Analysis
Sell-Side
Analysts Confirm the Materiality of Sustainability Issues in UN Report
Enhanced Analytics
Initiative Offers Sell-Side Analysts Cash to Cover Intangibles
Moskowitz Prize Study
Removes Doubt Over Link Between Strong Corporate Social and Financial
Performance
3. The definition of fiduciary duty expands to encompass social and
environmental issues
The traditional interpretation of fiduciary duty, which requires acting
"solely in the [financial] interest of the beneficiary" and precludes
SRI on the assumption it underperforms, strains under the weight of the
growing body of empirical evidence of competitive SRI performance. Moreover,
the August 2004 implementation of a new Securities and Exchange Commission
(SEC) rule requiring mutual funds
to disclose their proxy voting records and policies introduces an even
more fundamental shift in the definition of fiduciary duty (a similar
rule went into force in Canada in December 2004). In addition
to illuminating whether funds' votes on social, environmental, and corporate
governance issues match fund shareowners' values, the rule also highlights
mutual fund managers' and directors' fiduciary accountability on such
issues extending beyond the financial realm.
Peter Kinder, founding president of SRI research firm KLD
Research & Analytics, argues that this expanded definition of fiduciary
duty is bound to cross-pollinate to other institutional investors, such
as pension fund trustees, ultimately creating "a new concept of fiduciary
duty."
"Simply put, the SEC's redefinition of fiduciary duties as to equities
will become the general rule" despite the fact that "pension schemes are
not subject to SEC jurisdiction," states Mr. Kinder in a paper
presented in July 2004 at the American Enterprise Institute (AEI), a conservative think tank.
A December 2004 SustainAbility
report
underscores the shifting definition of fiduciary duty, arguing that trustees,
directors, and managers can no longer afford to address strictly legal
liabilities, but rather must expand their scope to encompass moral liabilities.
Alien Tort Claims Act (ATCA) cases illustrate how companies can sometimes evade prosecution
through legal acrobatics but still be held morally accountable in the
court of the marketplace. The out-of-court settlement by Unocal (UCL) of its ATCA
case in December 2004 sets a practical precedent making it even harder
for companies to rely on judge or jury to shield them from legal and moral
liability.
Fiduciary duty-related articles:
Fiduciary
Duty, Undivided Loyalty, and Socially Responsible Investment Performance
Disclosure: How SEC
Proxy Voting Rules May Shift the Definition of Fiduciary Duty
Bhopal, Climate
Change Require Shift From Legal Liability to Moral Accountability
Unocal Alien
Tort Claims Act Case Settlement Boosts Corporate Accountability
Moving From
the Business Case for SRI and CSR to the Fiduciary Case
4. Criticisms and improvements in SRI transparency and standards
An Australian survey of over 400 current or prospective social investors
worldwide conducted in April and May 2004 found over half of the respondents
consider SRI funds' social and environmental information insufficient,
too complex, or not credible, a shortcoming leading to significant sell-off.
Similarly, an October 2004 report
published by Natural Capitalism Institute founder Paul Hawken and his
NCI staff finds significant disclosure
and standards gaps in SRI funds, and recommends increased transparency
on portfolio selection and screening procedures
European SRI advocates have taken a lead in developing standards to help
inform consumers about how SRI firms and funds function. In November 2004,
the European Social Investment Forum (Eurosif)
released SRI Transparency
Guidelines designed for mutual funds. In a related move, the Association
of Independent Corporate Sustainability and Responsibility Research (AI CSRR) was founded by European SRI research
firms to promote standards
for their practice, which provides key CSR information used by professional
investment managers.
On the operational side of SRI businesses, the Calvert Group became the first US-based
SRI firm to publish a Global
Reporting Initiative-based sustainability
report, providing additional transparency into how it conducts its
business. Calvert was one of 17 SRI firms to sign a joint
statement in October 2004 urging publicly-traded companies to report
their social and environmental performance using GRI Sustainability Reporting
Guidelines.
SRI transparency- and standards-related articles:
Global
Survey of Socially Responsible Investment Finds Information Lacking
Paul Hawken
Critiques Socially Responsible Investment: Is He On Target or Off Base?
European Socially
Responsible Investment Firms Let the Sun Shine In
Calvert First
SRI Firm to Issue Global Reporting Initiative-Based Sustainability Report
Memo From:
SRI Analysts To: Companies--Use GRI Sustainability Reporting Platform!
5. Watering down of Community Reinvestment Act adversely affects community
investment
The Federal Deposit Insurance Corporation (FDIC)
and other divisions of the federal government have passed rules that weaken
the Community Reinvestment Act (CRA), the 1977
law requiring banks to support small businesses and individuals in disadvantaged
communities. While the CRA examination traditionally requires banks to
provide development loans, investments, and support services to
low- and middle-income communities, the rule change allows 879 medium-sized
banks to choose one of these three services.
The federal Office of Thrift Supervision (OTS) has proposed new rules
further eroding CRA's effectiveness by extending similar changes to large
banks. The proposed rule change also expands the scope of CRA coverage
in rural communities beyond low- and middle-income categories, diverting
support from these economically disadvantaged communities. OTS is soliciting
public commentary on the proposal through January 25, 2005, and community
investment advocates such as the National Community Capital Association
(NCCA) urge CRA supporters to weigh
in.
"While changes may be required to relieve banks' burden of current CRA
compliance, the federal government's proposed and enacted changes counteract
CRA's original intention of assisting disadvantaged communities, effectively
throwing the baby out with the bathwater," said Mr. Falk.
"Balancing out these negative developments for community investment in
2004 were several positive trends," Mr. Falk added. "The CRA
Fund, formerly available only to institutional investors, is now offered
through retail channels, and the Grameen
Foundation USA issued a $40 million bond, the first and largest international
microfinance bond ever."
Community investment-related articles:
FDIC
Proposes Rule Watering Down Community Reinvestment Act Requirements
Is CRA the Right
Remedy for Race-Based Disparity in Mortgage Lending?
First and
Largest International Microfinance Bond Issued
CRAFund Goes
Retail