A recently published white paper from Ernst & Young asks corporate boards if they are prepared for a focus by investors on sustainability issues.
The results of the 2011 proxy season have set the stage for what will occur in 2012, and the paper states that "a confluence of factors…are working to sharpen attention on the 'triple bottom line' of environmental, social and economic performance."
For the third straight year, the paper continues, proposals addressing sustainability issues "will dominate other major proposal categories." Furthermore, voting support for such proposals is likely to continue to increase in 2012. "Investors will challenge boards to further improve oversight on hot-button environmental and social issues and to enhance stakeholder communication around these topics," the paper states.
A clear example of the extent to which the concerns of sustainable investors have gone mainstream can be discerned by vote totals in support of environmental and social resolutions, which reached 21 percent in 2011. The efforts of investors to pressure companies to focus on the risks and opportunities associated with sustainability issues "reflect the growing belief that a company's environmental and social policies correlate strongly with its risk management approach and financial performance," according to the paper.
The major issues that corporate boards will be pressured to confront this year include corporate expenditures on political spending and lobbying; the sustainability of extractive practices relating to hydraulic fracturing, oil sands development and coal combustion; and sustainability reporting and greenhouse gas reduction strategies.
Warning boards that "institutional investors are likely to continue to push hard on these matters," the paper anticipates that "initiatives could gain greater attention from community groups and other stakeholders, as well as news and social media."
Ernst & Young recommends improved sustainability reporting as a means of enhancing dialogue and bolstering disclosure. Corporate boards should include directors with industry-specific skill sets, and should also consider aligning executive compensation with environmental, social and corporate governance (ESG) performance.
"Investors derive value from executive summaries that directly and concisely communicate governance-related developments and make clear that the board is considering shareholders' perspectives as a factor in its decision-making process," the paper concludes.