Why should companies that provide their traditional institutional investors a strong balance sheet, reliable cash flow, management credibility, an effective business strategy, and growth in earnings per share care about going beyond that to develop a sustainability strategy that attracts socially responsible investors? This column is the first of a two-part series that will answer that, examining what is going on in the world of investor interest in Environmental and Sustainability Governance (ESG) and Corporate Social Responsibility (CSR)—components of a sustainability strategy.
Why should you care? For starters, socially responsible investors have literally trillions of dollars to invest in companies that can demonstrate their commitment to sustainability. In February, more than 400 institutional investors, representing more than $13 trillion in assets, met at the 2010 Investor Summit on Climate Risk to examine how reducing systemic risk translates into a return on investment in companies that are demonstrating better performance through adopting sustainability practices.
The more than 50 sovereign wealth funds around the world that hold trillions of dollars in assets and are now quietly investing in U.S. companies that have adopted demonstrable sustainability practices. Typically, these are not high-profile investors. Instead, the fund managers do their homework on target companies and make their investment decisions often without meeting with company officials.
Various indexes are being developed to rank companies by their sustainability practices and are being used to identify potential investment opportunities. Sustainability asset managers have created the Dow Jones Sustainability Index. Goldman Sachs’ Abby Joseph Cohen oversees a 50-person staff called GS SUSTAIN that identifies the best-managed companies around the globe that are likely to succeed on a sustainability basis and is developing metrics to measure sustainability.
We are also witnessing the growth in socially responsible investing firms like Boston Trust & Management Co., which provides portfolio management services to individual and institutional clients and manages $4 billion in client assets. Walden Asset Management, a division of Boston Trust, is a leader in managing client portfolios whose investment objectives include ESG factors. Timothy Smith, formerly executive director of the Interfaith Center on Corporate Responsibility, heads the Environmental, Social, and Governance Group in Walden Asset Management. Smith has become well known over the years for his shareholder advocacy designed to influence corporate conduct in the area of social responsibility.
The U.S. public pension funds play a major role in promoting sustainability practices among corporations and are now joining hands with their international counterparts. The California Public Employees Retirement System (CalPERS) has joined with the Norwegian Government Pension Fund, the Dutch APG Asset Management Fund (the wholly owned manager of the Dutch ABP civil servants pension fund) and the global investment-consulting firm Mercer on a research project examining the implications of climate change on institutional investment allocation.
The $132 billion California State Teachers Retirement System (CalSTRS) encourages its equity and fixed-income fund managers to incorporate climate risk in their analysis and proxy voting. Indeed, it’s little surprise that in January the Securities and Exchange Commission issued a guidance release to “clarify what publicly traded companies need to disclose to investors in terms of climate-related ‘material’ effects on business operations, whether from new emissions management policies, the physical impacts of changing weather, or business opportunities associated with the growing clean energy economy.”
The not-for-profit Ceres coalition of investors, environment groups, and public interest organizations issued a report last January, “Investors Analyze Climate Risk and Opportunities: a Survey of Asset Managers’ Practices,” after surveying 4,500 money managers representing $4.5 trillion in assets. They found that 71 percent responded that their inquiries did not factor in climate risk when making investment decisions, according to Ceres CEO Mindy Lubber. Yet, CalSTRS CEO Jack Ehnes said in the same report that, “Climate risk is a factor in long-term value.” The Carbon Disclosure Project’s annual request for information identified 2,500 companies globally that made disclosures in 2009 regarding climate risk.
Another emerging trend is the focus on the supply chains of U.S. companies with significant overseas operations. For example, human rights activists have targeted Nike since virtually all of its production comes from offshore suppliers. Walmart faces some of the same issues with its extensive overseas supply chain. Coffee companies are among those targeted in areas of the world where families harvest coffee beans and where children often work alongside their parents in the coffee plantations. So, investors are influencing child labor practices through their investment decisions. Gold and other mining companies are instituting socially responsible best practices dealing with pollution, waste, and safety issues.
Unfortunately, if fund managers are not asking questions about what the company is doing on sustainability issues, IROs tend to believe it’s not important in making their investment decisions.
We are also seeing examples of U.S. companies joining with activists and creating programs to deal with environmental issues. Home Depot is teaming with the Rainforest Alliance to identify alternatives to harvesting mahogany in countries where that practice hurts the environment. The Rainforest Alliance is also working with Scholastic Corp. to establish standards for children’s books where the paper must come from certified forests. Future editions of “Harry Potter” will be printed on paper produced from these approved forests.
Computer manufacturer Dell Inc. has established a “cradle to grave” approach called “Dell Earth” for its corporate responsibility program. Dell not only manufactures the computers but follows them through their life cycle, ending with a recycling program.
Another emerging trend is the creation of a new corporate position: the chief sustainability officer. You will find CSOs in companies like Intel, Dell, Campbell Soup, Sun Microsystems, Georgia Pacific, DuPont, and Monsanto. In some instances, the CSO reports directly to the CEO, particularly in companies that have adopted a “tone at the top” philosophy when it comes to emphasizing the importance of instituting meaningful sustainability practices. The CSO works closely with the corporate communication and investor relations officers to get the company’s sustainability message across to the public and environmental groups as well as to the investor community.
Many companies, however, have a long way to go in this regard. A late 2009 National Investor Relations Institute survey showed that among 20 areas in which IROs wanted more information, sustainability ranked last! Unfortunately, if fund managers are not asking questions about what the company is doing on sustainability issues, IROs tend to believe it’s not important in making their investment decisions.
Companies and their IROs must look beyond their traditional investors to the very significant number of socially responsible investors with trillions in assets to invest in companies that can demonstrate progress with their sustainability programs. For companies looking to engage long-term investors, sustainability is a long-term proposition; beyond that group, the average turnover in domestic stock funds is about 95 percent annually. For international stock funds it’s 75 percent.
The next column will explain what companies can do to attract these long-term investors with a sustainability agenda.
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