Investor Relations | Three Ps | Dix & Eaton

Should Shareholder Resolutions or ‘Shared Value’ Drive Sustainability Efforts?

SustainableBusiness.com reported recently that a record 109 shareholder resolutions were filed during this year’s proxy season to urge U.S. and Canadian companies to address climate change, fossil fuel usage and related sustainability issues. An additional 48 resolutions were withdrawn after the companies made voluntary commitments to address these issues, according to the report on research conducted by the Interfaith Center on Corporate Responsibility.

The most common sustainability-related topics were natural gas fracking, fossil fuel usage for electric power, water scarcity, oil refinery safety, and sustainability reporting (including climate or greenhouse gas reduction strategies).

Among the examples cited in the report was Walden Asset Management re-filing a resolution with Layne Christensen to push the company to issue a sustainability report. Last year’s resolution on the same topic produced a 60.3 percent vote in favor. This year, Layne Christensen of Mission Woods, Kansas, which provides drilling services for water infrastructure, mineral exploitation and energy, recommended a “FOR” vote on Walden’s resolution, which led to a 92.8 percent vote in favor. The company also published its first sustainability report.

Many so-called experts believe the success of such resolutions, and companies’ willingness to at least entertain the possibility of additional sustainability measures, will embolden the activists to be ever more aggressive. But I’m not convinced. I actually think there is an opportunity here for many well-intentioned, communications-savvy companies to get ahead of the activists, who certainly have other, potentially more contentious issues that they are pursuing through shareholder resolutions.

My sense is that even many mid-sized companies are now acknowledging the potential “shared value” (see this Harvard Business Review article for a discussion of this concept) in proactively addressing sustainability issues at the Board and senior management level without being under the high-profile pressure of a pending shareholder resolution or other “hammer.” Implementation will be smoother and the results will be better.

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Making the Case for Sustainability in the Annual Report

The vast majority of transnational companies do not report on their sustainability/corporate social responsibility efforts. Sure, some are inactive and really have nothing to talk about – and they should want to “walk the walk” before they “talk the talk.” 

But there are a lot of others who are active and moving forward, and still not communicative. How and when will they ever get over their “greenblushing”? 

Here’s a suggestion: For public companies, there are already a format and schedule in place just waiting to be tapped for sustainability/CSR reporting. It’s the annual report. 

I hope you will read “All Together Now: Why sustainability reporting and the annual report should be combined,” an article from the March/April issue of Corporate Responsibility Magazine. I am pleased to have the opportunity to co-author this article with Don McGrath of Eaton Corporation, which is a pioneer in using the annual report to communicate its sustainability efforts. This article has just been added to our website for you to download. 

In a nutshell, there are four big reasons for integrating sustainability/CSR reporting into the annual report:

• Transparency – just like financial results, sustainability is becoming an important measure of corporate performance
• Socially responsibility investing – $3.07 trillion and counting
• Business strategy – sustainability, energy efficiency and serving the energy industry are part of the growth story for many companies
• Efficiency and cost effectiveness – one book, one project is better than two

It works for Eaton and it will work for many other companies that are looking for a way to report on their sustainability/CSR efforts. We look forward to your comments.

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Mercer Recommends Investment Shift to 40 Percent ‘Climate-Sensitive Assets’

The convergence between sustainability/corporate social responsibility and investing appears to be accelerating. And, by most indications, it appears investors are more ready for the trend than the vast majority of investable companies are. 

The latest fuel comes from a major new study by the consulting firm Mercer, which recommends that institutional investors shift up to 40 percent of their assets into “climate-sensitive” assets. The rationale is to mitigate environmental costs, which Mercer says could contribute as much as 10 percent to portfolio risk over the next 20 years.

The report noted that the traditional way of managing risk, via a shift to a more conservative asset allocation, “may do little to offset climate risks.” Instead, it suggested increasing exposure to certain “climate-sensitive” asset types, including infrastructure, real estate, private equity, agriculture, timberland and sustainable assets – even though many of these have been traditionally deemed as more risky on a standalone basis.

According to the study, over the next 20 years, investment opportunities in low carbon technologies could reach $5 trillion, and climate change-related policy changes could increase the cost of carbon emissions by as much as $8 trillion.

Mercer recommended that investors begin taking the following measures:

• Introduce a climate risk assessment into ongoing strategic reviews
• Increase asset allocation to climate-sensitive assets as a climate “hedge”
• Use sustainability-themed indices in passive portfolios
• Encourage fund managers to proactively consider and manage climate risks
• Engage with companies to request improved disclosure on climate risks

Of course, it remains to be seen how many companies are really ready for the trend, given that less than 10 percent of multinational companies currently report on sustainability/CSR efforts. And, of those, only a very few make it part of the primary tool for investor communications, the annual report.

The study was based on a survey of 14 leading global institutional investment firms with approximately $2 trillion in assets. The free public report, Climate Change Scenarios – Implications for Strategic Asset Allocation, is available for download on Mercer’s website.

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