How do sustainability-minded investors decide to keep or dump a stock?

When the Netherlands' biggest pension fund, Algemeen Burgerlijk Pensioenfonds (ABP), with more than $300 billion in assets, announced earlier this year that it was blacklisting the largest retailer in the world for noncompliance with the United Nations' Global Compact principles, many sustainability experts may have been shocked. After all, Walmart has become an innovator in evaluating its supply chain and ramping up its commitment to purchase from manufacturers that meet its new sustainability standards.

However, despite its recent efforts, Walmart is still not regarded as an ethical or responsible investment as generally defined by proponents of sustainable and responsible investing (SRI) because of its suppliers’ working conditions, employee wages and benefits, and anti-unionization stance. SRI investors have long known that Walmart employees can’t formally organize, are paid low wages, and are often hired part time so health care and other benefits are not provided. Investor dialogue with the company, possible because of share ownership, has been ongoing for over a decade in the areas of governance and labor, but has thus far been unsuccessful.

As is always the case when institutional investors and money managers with a conscience want to engage management in a dialogue about its practices, a lack of success in this realm results in the need to make a call on whether or not to divest one’s shares. Ultimately, this is not what shareholders want, for divestiture is truly “throwing in the towel” and losing the capacity to influence as owners, but it often the only recourse when advocacy or regulatory measures fail. After noticing the number of lawsuits and National Labor Relations Board complaints against Walmart, ABP spent four years working to improve corporate practices, but concluded that despite the company’s agreement to settle class action lawsuits, its fundamental position regarding labor issues, including unionization, remains unchanged.

ABP’s recent blacklisting reminds us of the importance of social and governance issues as a tenet of shareholder value. A company like Walmart can develop all sorts of environmental initiatives and improve manufacturing standards in many countries as a result, but it’s still not enough. Being a truly sustainable company means integrating environmental, social, and governance (ESG) policies and practices. Just as companies with well-paid and happy employees can still destroy communities or environments in which they operate, so can environmentally sensitive companies put shareholder value at risk by treating employees or communities poorly.

In its Supplier Sustainability Assessment, Walmart includes five “people and community” questions addressing production, managing social compliance, and investing in communities sourcing company products. While the company has increased its purchasing from women- and minority-owned businesses in the past few years, suppliers are still adapting to the new productivity, safety and quality of workplace requirements. The company’s standards nevertheless remain weaker than those of the more globally accepted International Labor Organization (ILO) standards: only 1,100 of its 8,300 supply chain audits used ILO criteria, and revealed major challenges--low wages or inconsistent wage systems, substandard hiring procedures, inappropriate use of contract labor, excessive work hours, poor leave policies, relocation of facilities to lower labor costs, workplace safety, and worker living conditions remain persistent.

Currently, Walmart is still using the carrot more than the stick by continuing to purchase from factories with substandard policies and practices.

Research consistently shows that companies that take care of their most prized asset–employees–are more profitable, but the old paradigm of worker exploitation still persists. According to a 2007 United Nations report, Demystifying Responsible Investment Performance (PDF), a meta-analysis of 30 academic and brokerage studies over a 10-year period, there is either a neutral or positive effect of ESG integration on financial performance.  More recently, Wharton finance professor Alex Edmans’ research indicates that companies that appear on Fortune magazine's annual list of the 100 Best Companies to Work For also earned returns at a rate more than double that of the overall market.

Though its stock price may not reflect non-compliance with ESG best practices, Walmart’s stock price has remained flat for over a decade, having reached its all-time high in 2000. Since treating employees well is known to be good for business, sustainable and responsible investors will continue to encourage companies like Walmart to operate for the benefit of all stakeholders: the environment, communities, customers, and yes, employees.

Image of Thumb up and thumb down by Terrapun, courtesy of Shutterstock. Photomontage by GreenBiz.