How sustainable investors impact industries and corporate policies

The 2012 Report on Sustainable and Responsible Investing Trends in the United States, released last week by U.S. SIF, is the sustainable, responsible, and impact (SRI) investment industry’s primary barometer of the both the growth of professionally managed values-based and community development investments and the important environmental, social and governance (ESG) issues of our time.

What SRI investors have always known is that ESG criteria affects shareholder value in both positive and negative ways. The Trends Report illustrates that even during these troubling economic times, or perhaps because of them, more individuals and institutions are integrating their values into their investments: $3.7 trillion — over 11 percent of all managed assets, a 22 percent increase in two years. The Trends Report has measured the growth and impact of SRI since 1995, then only a $600 billion industry, and the recent influx of conventional firms into the SRI arena — Deutsche Bank, Bloomberg, and MSCI, for example — reflects the mainstreaming of SRI across all asset classes, industries, continents, performance metrics, and investor types.

The key to the industry’s growth is consumer demand. According to the report, 72 percent of the 272 money managers surveyed suggested that the formalization of their internal ESG analysis process was based on investor requests. The financial meltdown a few years ago contributed significantly to investor concerns about risk, which explains the increased interest in assessing such governance issues as executive pay, board issues, CEO/board chair separation, and political contributions. The financial crisis and the resulting “Move Your Money” campaigns also helped the 1,043 community development financial institutions surveyed. Assets in community banks and credit unions, for example, have reached $47 billion, up over 50 percent in the past two years.

Ethical investors are seeing their highest-ever level of shareholder engagement success. Votes by shareholders on ESG resolutions have historically received an average of 15 to 18 percent support, but in the past two years, the report reveals that there has been a pronounced upward trend in vote support on environmental and social issues, with 24 percent or more of such resolutions each year receiving the support of more than 30 percent of the shares voted. While shareholder votes are typically advisory in nature, they send a strong message to management about issues of concern to investors.

It should be noted that most shareholder concerns are addressed successfully via dialogue and do not end up at the resolution stage. For example, earlier this year, investors representing more than $25 billion in assets under management persuaded more than 40 companies claiming to be socially responsible to withdraw from membership in the American Legislative Exchange Council (ALEC) and the Heartland Institute, due to the groups’ denial of scientific evidence of climate change, as well as for promoting Stand Your Ground laws, anti-immigration legislation, and attacks on the U.S. Environmental Protection Agency.

According to the report, disclosure of political contributions and lobbying, in the wake of the Supreme Court’s Citizens United decision became the most popular shareholder concern, and investors concerned about the impact of such contributions on shareholder value filed more than 100 resolutions in each of the past two years to prohibit or require disclosure of political contributions. As a result, more than half of S&P 100 companies now disclose and require board oversight of their political spending with corporate funds.

Other major shareholder engagements pertain to broad environmental issues, such as the impact of hydraulic fracturing on water supplies; sustainability reporting on how companies manage water, energy use and emissions; and the business risks associated with climate change. Institutional investor assets guided by environmental concerns increased 43 percent from 2010, and climate change is taken into consideration by 23 percent of institutional asset owners who use ESG criteria.

Employee discrimination continues to be an issue of significant concern to SRI investors, with proposals regarding sexual orientation and workplace and board diversity continuing to receive high levels of support.

What has become very clear in the past two years is that shareholder engagement by SRI advocates translates into corporations embracing ESG practices, as well as disclosure and integrating these policies into their operations. The emergence of integrated reporting of financial and ESG performance, along with the criteria under development by the new Sustainability Accounting Standards Board, will continue to encourage companies to embrace sustainable and responsible practices and provide guidance on how to measure and report them.

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