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14
INSTITUTIONAL INVESTORS FIND
COMMON GROUND
WITH SOCIAL INVESTORS
Timothy Smith
Walden Asset Management
1
INSTITUTIONAL INVESTORS FIND COMMON GROUND WITH SOCIAL INVESTORS
By Timothy Smith
June 2005
The integration of social and environmental considerations in the investment process was the exclusive
realm of the so-called “social investor” until relatively recently. In addition to more traditional financial
analyses, social or ethical investors evaluate and engage companies on a range of corporate social
responsibility issues that are generally absent from the lexicon of Wall Street. Today, institutional
investors guided by a commitment to fiduciary responsibility are increasingly finding common ground
with social investors, sharing the basic premise that a good record on corporate social responsibility and
governance is good for business. And, what is good for business is also understood to be in the long
term best interests of investors.
This section explores the growth of this new breed of institutional investor and their pursuit of
environmental and social goals. It begins with a focus on shareholder-sponsored proxy resolutions, one
of the more powerful tools of an active investor attempting to influence corporate practices, and
describes the motivation of investors that utilize this form of “shareholder advocacy.” Next, by means
of three specific examples, we examine the business case for good governance and corporate social
responsibility that provides the underpinning for such advocacy. The following section offers evidence,
directly from the business community, that corporate social responsibility and fiduciary responsibility
are compatible goals. Finally, the last section highlights other strategies typically associated with social
investors, and now, albeit to a lesser extent, with investment fiduciaries.
2
Shareholder Resolutions and Investor Advocacy
Since 1971 when the Episcopal Church filed the first shareholder resolution on a social responsibility
issue, with General Motors on its South Africa operations under apartheid, there has been a steady
growth of proactive advocacy by investors with companies in which they are shareowners. In 2004,
according to the Investor Responsibility Research Center (IRRC), there were over 1,100 resolutions on
social, environmental and corporate governance issues, a remarkable year by any standard.1
A primary tool of shareholder advocates is the proxy resolution. Shareholder resolutions allow investors
to petition a company for information or press for a change in company policy or practice. The
Securities and Exchange Commission (SEC) has guidelines stipulating how individuals or institutions
can sponsor resolutions.2 With a minimum of one year of ownership of $2,000 worth of stock in a
company, an investor can participate in the shareholder resolution process. Concerned investors can
work collaboratively and often do, with many resolutions filed by groups of investors with sizable longterm holdings.
Often management, upon facing a resolution, will begin to negotiate with the sponsor(s) and agreements
are struck leading to the withdrawal of the resolution – a sort of negotiated settlement. There are many
examples of successful management-shareholder dialogues that never reach the proxy ballot.
While in the 1970s shareholder resolutions were fortunate to receive as much as a 5% vote, now certain
proxy proposals which urge corporate governance reforms frequently receive majority votes. In 2004,
resolutions on the environmental issue of climate change received up to 37% of the vote, a substantial
outpouring of shareholder sentiment and support.3
3
The resolution process can serve multiple constituencies: alerting the Board and management of an
important shareholder concern; supporting an organized public campaign to influence a company
position or practice; or educating investors and the public on a particular social, environmental or
corporate governance issue. Shareholder resolutions are an effective and thoughtful way for shareowners
to communicate with a company and other like-minded investors. Proponents of these ballot initiatives
are a diverse group including individual investors, religious organizations, social investment managers
and mutual funds, trade unions, foundations and state and city pension funds.
The basic premises that motivate institutional investors to petition companies through the shareholder
resolution process are:

That long-term shareowner value is preserved over time when companies adopt good governance
practices and act as good corporate citizens or socially responsible business entities.

A firm belief that, as a shareowner, investors have a right and responsibility to communicate
with a company’s management and Board and attempt to influence policies or practices
consistent with its long term best interests.
Socially motivated investors also include the fact that a company policy or practice is causing
social injury or environmental harm.
Shareowners with a long-term horizon do not measure the value of a company solely in quarterly
earnings reports. Managements have been under intense pressure by Wall Street’s conventional focus
on ever increasing quarterly results. Managers and Boards facing such pressure may see an
environmental program to increase energy efficiency as a short-term expense, when over a period of
years that expense may in fact save energy and therefore shareholder funds. Likewise, expenses related
to adopting and monitoring a vendor code of conduct can be seen as a short-term drain on capital and
4
time. Alternatively, this commitment can be viewed as a long-term investment, limiting risk to the
company and enhancing its reputation, as well as “doing the right thing.” Long-term owners often look
at the broader health of a company and support a Board and management seeking to provide long-term
leadership.
This shareowner perspective empowers a prudent, far-seeing investor to press companies to pursue “best
practices” on issues like codes of ethics, climate change and vendor standards, and to consider what the
impact on the company may be five or ten years out. Also, there is an emerging group of institutional
investors that make a cogent case for the urgent need to take specific social or environmental issues into
account in their investment decisions to moderate risk. They see it as a necessary component of an
overall, risk based investment strategy.
New voices from major investment firms to government bodies are making the link between
environmental issues and financial performance. In 2004, for example, State Street Global Advisors
(SSgA) released quantitative research demonstrating that a portfolio weighted favorably toward
companies with superior environmental records, while not totally screening out entire sectors or
individual companies, added value over benchmark performance.4 SSgA’s analysis focused on the
Russell 1000 stock universe over a 5-year period ending February 2004. Using this study as support,
SSgA, along with Innovest Strategic Value Advisors, a specialist in environmental analysis, launched
their Core Environmental strategy portfolio service for institutional investors. Buttressing SSgA’s
findings, the United Kingdom Environmental Agency in a 2004 report stated that, “51 out of 60 studies
demonstrated a positive correlation between a company’s financial performance and its environmental
management quality.”5
5
Other Wall Street firms are now providing research on risk factors previously considered outside the
scope of “bottom-line” analysis. As an example, in February 2004 Goldman Sachs published a global
energy investment research report with the summary headline, “Environmental and Social Issues
Count.”6 Goldman Sachs concluded, “While one-off events have limited share price impact,
environmental and social issues will become increasingly important for oil and gas companies seeking to
access the new legacy assets, which we view as the key driver of future performance and valuation.”
Hence, it should not seem remarkable that some pension fund trustees seek portfolio managers with the
ability to evaluate social and environmental risk as a component of the investment decision-making
process.
Obviously, there is no one “true road” to being an active, socially concerned investor. Indeed, many
pension funds do not characterize their work as social investing at all. This may be the language of the
Episcopal Church or the Sisters of Charity, Calvert funds or Domini Social Investments, TIAA-CREF’s
Social Choice Fund or the Dreyfus Third Century Fund, or investment managers such as Walden Asset
Management. But it is neither the language nor the motivation of the Treasurer of the State of
Connecticut, the Comptroller of New York City, the Comptroller of New York State who is the sole
fiduciary for the state’s pension funds, nor the Chair of California’s retirement system known as
CalPERS. Bound by legal and ethical obligations to be responsible fiduciaries, these pension leaders
define their activities in the context of fiduciary responsibility.
William Thompson, Comptroller of New York City put it this way. “The New York City Pension Funds
take the responsibility of stock ownership seriously. They believe that advocacy and activism for
shareholder rights, corporate governance reforms, and corporate responsibility is consistent with their
fiduciary obligations. They understand the interconnectedness and interdependencies of markets and
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societies within the global economy. Accordingly, they expect companies in which they invest to strive
continually to be good citizens in the communities where they do business.”7
At a 2003 meeting of investors and environmental organizations working with companies to promote
greater environmental accountability, William Thompson described the concurrence of governance and
social issues for their New York Pension Funds: “In fact, I believe the time has come to take a broader
view of what we now call corporate governance. We must recognize that a company’s conduct with
regard to areas such as the environment and human rights is just as significant in evaluating overall
corporate governance as the independence of board audit committees and executive compensation.
Corporate irresponsibility of any kind poses risks for the health and the stability of public companies and
their shareholders. There is a simple but persuasive logic to this broader approach. Attempting to
encourage the companies in which we invest to build long-term shareholder value by including in their
business plans responsible economic, environmental and social behavior – the sustainability business
model – is a wise and prudent course of action.”8
These public fiduciaries may indeed have strong personal convictions about some corporate social
responsibility issues, but their obligation is to protect the beneficiaries of their pension funds. They
understand well that they are trustees, bound to act solely in the financial best interests of their plan
participants. These pension fund leaders have set a course to be proactive investors, engaging companies
in the key governance and corporate responsibility issues of our day in a manner consistent with their
fiduciary obligation.
Shareholder engagement has many faces, from behind-the-scenes efforts to full public campaigns
targeting specific companies. The simplest form of engagement is diligent proxy voting. Many
7
institutional investors from Stanford to Harvard, or the Boston Foundation to the Ford Foundation,
thoughtfully vote the proxies they oversee. Some fiduciaries choose more direct involvement in a
nonpublic forum, such as corresponding with companies or private meetings with executives. Others
write public letters appealing for a change in policy or practice, often in an investor coalition that draws
media attention. Sponsorship of shareholder resolutions is among the most public and powerful tools of
an investor. And in unique situations, some fiduciaries are pursued initiatives to nominate new directors
if a corporate board is determined to be unresponsive to the concerns of investors.9 All these actions of
pension funds are motivated by a sense of fiduciary responsibility.
The Business Case for Good Governance and Corporate Social Responsibility
What inspires pension fund activism? The belief that company performance on corporate governance
and social and environmental issues is linked to business success. The sheer size of some large pension
funds often translates into a sort of “universal ownership” (owning virtually the whole equity market),
making shareholder advocacy one of few tools available to add long-term shareholder value. Certainly a
business case cannot be made for all potential corporate responsibility reforms, but good business
practices can enhance long-term shareholder value in a variety of ways:

Helping to avoid costly litigation and future liability;

Reducing costs (e.g. energy conservation);

Fostering a strong corporate culture that helps to attract and retain diverse and high quality
employees, increase job satisfaction and enhance productivity;

Protecting brand identity and minimizing reputational risk; and by

Exploiting new market opportunities (e.g. alternative energy production).
8
Below are three specific examples of corporate social responsibility issues taken on by activist
shareholders because they are seen as good for business.
1. Adopt Equal Employment Opportunity (EEO) Polices and Practices that Prohibit
Discrimination Based on Sexual Orientation. Ten years ago the pursuit of more inclusive
nondiscrimination policies would have been considered a fringe issue. In the last 5 years, however,
most companies have changed their policies and added “sexual orientation” explicitly in their human
resource policies banning discrimination.
Workplace discrimination based on sexual orientation is a reality. According to a September 2002
survey by Harris Interactive and Witeck-Combs, 41 % of gay and lesbian workers in the U.S.
reported an experience with some form of job discrimination related to sexual orientation; almost
one out of every 10 gay or lesbian adults also stated that they had been fired or dismissed unfairly
from a previous job, or pressured to quit a job because of their sexual orientation.10 Conversely,
national public opinion polls consistently find more than three-quarters of the American people
support equal rights in the workplace for gay men, lesbians and bisexuals; for example, in a Gallup
poll conducted in June 2001, 85 % of respondents favored equal opportunity in employment for gays
and lesbians.11
What are the business arguments for explicitly including sexual orientation in human resource
polices? Companies without inclusive policies may lack competitive advantage in recruiting and
retaining employees from the widest talent pool. Employment discrimination on the basis of sexual
orientation may diminish employee morale and productivity, and possibly increase costs through
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increased turnover. More than 80% of Fortune 500 companies, including 98 of the top 100, have
nondiscrimination policies that explicitly include sexual orientation.12
Fourteen states, the District of Columbia, and more than 150 cities and counties have laws
prohibiting employment discrimination based on sexual orientation. Moreover, several major U.S.
cities have adopted legislation restricting business with companies that do not guarantee equal
treatment for lesbian and gay employees, and similar legislation is pending in other jurisdictions.13
Hence, companies without inclusive policies that operate in or make sales to institutions in states and
cities that prohibit discrimination on the basis of sexual orientation may face additional business
risk.
Many companies have amended their policies to include sexual orientation as a direct result of
shareholder advocacy. Wal-Mart amended its EEO policies in 2003 after several years of in-depth
dialogue with a coalition of institutional shareholders. At this writing, Exxon Mobil still opposes this
reform, leading a major proxy advisory firm, Institutional Shareholder Services (ISS), to describe the
company as an outlier in its recommendation to support a shareholder resolution urging this
change.14 In 2005, 29% of Exxon Mobil shares were cast for the proxy resolution, a very broad
demonstration of support.
2. Adopt and Implement Strong Vendor Standards with Independent Monitoring. Driven by
increasing economic globalization and recognition of the power of multinational corporations,
concerns about labor and environmental standards throughout the supply chain grew considerably
through the 1990s and continue today. Investors active on this issue have asked companies to
10
develop strong codes of conduct, to implement independent monitoring and to be transparent about
the process and results of their findings.
Certainly, these investors are motivated by a desire to improve working conditions, end labor abuses
and prevent environmental degradation wherever they exist. Yet they also act to protect the value of
their investments. One doesn’t need to look far for examples. Instances of ugly publicity, lawsuits,
colleges cutting ties with companies that allegedly use sweatshops and other organized boycotts
have had significant financial consequences for some firms. In contrast, companies showing
leadership on supply chain standards can achieve a competitive advantage. A company's reputation
and the value of its brand are among its most valuable assets.
Three separate lawsuits filed in 1999 against 27 well-known retailers on behalf of Saipan garment
workers demonstrate the business risk associated with inadequate vendor standards. Sweatshop
Watch, Global Exchange, Asian Law Caucus, Unite, and Saipan workers sued major apparel
retailers for allegedly violating U.S. labor laws and international human rights standards in Saipan
garment factories that supplied their products in conditions described as “a state of indentured
servitude.”15 An enormous amount of negative publicity about deplorable sweatshop conditions
ensued, encompassing among other companies, Abercrombie & Fitch, Calvin Klein, Gap, LeviStrauss, J.C. Penney, May Department Stores, and Target. By 2002, all but one retailer and 23
Saipan garment factories had settled for $20 million, resulting in vastly improved working
conditions and back payment of wages for over 15,000 workers.16 This landmark case successfully
used litigation to hold companies accountable for practices overseas and led to greater enforcement
of U.S. labor laws.
11
Gap, Nike, Disney, McDonald’s, and Sears are just some of the major companies striving to be
leaders in the area of vendor standards. In 2004, Gap raised the best practice threshold with an
insightful and candid 2003 Social Responsibility Report.17 The publication not only described its
global compliance program with a high level of detail relative to other companies, it also was
revealing in its analysis of the challenges Gap faces.
3. Plan for Risks and Opportunities Related to Climate Change. Emissions of greenhouse gases,
most commonly carbon dioxide and methane, trap in the atmosphere energy radiating from the earth.
This threatens to create disastrous changes in climate and weather patterns. The United Nations’
Intergovernmental Panel on Climate Change has identified the following potential impacts of climate
change: severe storms and floods, reduction in crop yields in tropical regions, drying of agricultural
land in mid-continental areas, loss of freshwater resources, loss of fragile ecosystems and wildlife,
and expanded ranges for “vector-borne” disease, such as malaria.18
Scientific assessment of a human contribution to climate change is now widely accepted. The Kyoto
Protocol, an international treaty ratified by 128 parties including thirty industrialized countries that
will put in place mechanisms to reduce global greenhouse gas emissions, will come into force in
February 2005. Legislation, regulation, litigation, and other institutional responses to climate change
are also foreseeable in the U.S. Increasingly, research suggests that companies taking steps to
address the regulatory, physical, and competitive risks associated with global climate change will
benefit from enhanced shareholder value.19
Investors may look at analyses done by Swiss Re, Munich Re, and other insurance companies
pointing to significant economic risk from climate change that is likely to have a profound effect on
12
certain industries, especially those most responsible for greenhouse gas emissions such as the utility
sector. Swiss Re makes the case that “non-action [on climate change] potentially affects shareholder
value” and considers a company’s response as part of its evaluation of underwriting exposure for
Directors & Officers liability insurance.20 Swiss Re also views climate change as a business
opportunity and in 2001 created a Greenhouse Gas Risk Solutions business unit.21
In November 2003 and May 2005, CERES (Coalition on Environmentally Responsible Economics),
a coalition of investors and environmental organizations promoting fiduciary responsibility and
corporate environmental accountability, convened a meeting in New York at the United Nations to
address climate change and investor responsibility. Institutional investors with over $1 trillion
participated in a discussion of the environmental impact of climate change and its effect on
businesses and the pension funds that invest in them.22 While a comprehensive briefing was given on
climate change and the environment, the major focus of the event, chaired by the Treasurer of the
State of Connecticut, was the responsibility and role of the investment fiduciary to address the issue.
At the end of the 2005 Summit, investors with over $3 trillion in assets issued a “Call for Action” on
climate change.
Here are the words of California State Treasurer Phil Angelides who attended the 2003 meeting. “In
global warming, we are facing an enormous risk to the U.S. economy and to retirement funds that
Wall Street has so far chosen to ignore. The corporate scandals over the last couple of years have
made it clear that investors need to pay more attention to corporate practices that affect long-term
value. As a fiduciary, we must take it upon ourselves to identify the emerging environmental
challenges facing the companies in which we are shareholders, to demand more information, which
we need to spur actions to respond to those challenges.”23
13
Connecticut Treasurer Denise Nappier said, “Companies that fail to adequately disclose potential
liabilities related to climate risk and financial analysts who ignore the potential financial risks of
investments in these companies run the risk of fueling the next governance crisis. As investors, we
can not afford any more casualties of corporate irresponsibility or regulatory loopholes.”24
Underlining the point in a February 2004 press release announcing California’s “Green Wave
Environmental Investment Initiative to Bolster Financial Returns,” Treasurer Phil Angelides
remarked, “Shareholders need to know if the companies they own are going down the prudent path,
by adopting environmental practices that will enable them to survive and thrive in a world of
increasing environmental concern and regulation…Or, whether those companies are taking the path
of denial, risk, liability and cost.”25
The pension funds represented at the Summit meetings did not stop with thoughtful reflection. They
released a “New Call for Action: Managing Climate Change and Capturing the Opportunity” and
agreed to work together to address the issue as fiduciaries. Among the signatories of the call to
action were state treasurers of California, Oregon, Maryland, Maine, Vermont and New Mexico; the
comptrollers of New York State, State of California and New York City; President of the
Rockefeller Brothers Fund; the Executive Director of National Industry Pension Fund, Service
Employees International Union (SEIU), American Federation of State, County and Municipal
Employees (AFSCME), Chair of the Board of Trustees of Communication Workers’ CWA/VTU
Negotiated Pension Plan, and General Secretary Treasurer of the International Brotherhood of
Teamsters Trustee, representatives of the California Teachers & Public Employees pension funds
and Illinois State Board of Investments, as well as several United Kingdom pension funds.
14
The points articulated in the call to action were the following:
“ Managing Climate Risk and Capturing the Opportunities: A Renewed Call for Action
Recognizing that climate change embodies risks and opportunities of a significant magnitude for
investors and our economy and represents one of the greatest challenges facing our planet, we are
compelled to seek improved approaches in responding to the fiscal ramifications of climate risk for
institutional investors, fund managers and financial advisors, companies and others. Therefore, we call
on each of these sectors to respond, affirmatively and definitively, and state our intention to move
forward to implement this essential agenda.
Institutional investors:
1. Call to Action: Support for and success of appropriate shareholder resolutions and company
engagement to improve corporate disclosure and governance on climate risk…..
2. Call to Action: Adopt a reliable and generally accepted global standard for disclosure of climate
risk…..
3. Call for Action: Promote information sharing among the growing number of institutional and
organizations around the world concerned about climate risk.
Fund managers and financial advisors
1. Call to Action: Improve capacity to assess climate risk….
Our Commitment: We will require and validate that relevant investment managers, seeking to
manage our fund assess, describe the resources, expertise, and process that they use to assess the
risks associated with climate change.
2. Call to Action: Improve mutual fund engagement in addressing climate risk.
15
Our Commitment: INCR will publish an annual scorecard showcasing how mutual funds votes
on climate change shareholder resolutions.
Companies
1. Call to Action: All publicly-held companies in the auto, electric power, and oil and gas sectors
should follow the lead of some companies and report within a year how likely scenarios for
climate change, future greenhouse gas limits, and dwindling access to inexpensive energy will
affect their businesses and competitiveness, and to identify steps they are taking to reduce those
financial impacts and seize new emerging market opportunities.
2. Call to Action: Help investors assess climate risk.
Our Commitment: Through INCR, we will produce the “Corporate Governance Score Card on
Climate Risk”, an annual corporate governance scorecard of 100 large emitters of greenhouse
gases. We will distribute this scorecard throughout the investor community by the end of 2005.
This report will inform them of the efforts that companies and their boards of directors are taking
to consider and address climate risk.
Government
1. Call to Action: The Securities and Exchange (SEC) to require that companies disclose the risk
associated with climate change as part of their securities flings.”
Climate change risk is among the environmental issues most actively addressed by U.S. pension funds.
Clearly, on this, many other corporate governance, and social responsibility issues, a compelling
business case can and has been made to persuade pension fiduciaries to invest in a proactive manner.
16
Business Leaders Give Credence to Active Fiduciary Involvement
To an extent, proactive shareholder engagement for better governance and corporate responsibility
reflects trends in businesses. There is growing evidence that many global business leaders believe good
corporate citizenship is also good for business, and conversely, that a poor record can hurt a company
and shareholder value. This view buttresses pension fund activism.
What are some of the indicators of this trend?

Companies are increasingly endorsing codes of conduct such as the United Nations Global Compact.

Hundreds of corporate citizenship reports are being published, including many that use the
comprehensive Global Reporting Initiative sustainability guidelines. In June 2005 KPMG reported
that 50% of the top 250 companies in the Fortune 500 published stand alone sustainability csr
reports.

The proliferation of statements by CEO’s endorsing the importance of corporate responsibility.

Awards given to corporate, social and environmental leaders in the business community.

The growth of Business for Social Responsibility (BSR), and other organizations like it, that act as a
clearinghouse and resource to member companies on best practices.

Traditional business groups like the Conference Board regularly convene meetings on corporate
social responsibility for the business community.

Academic leadership is blossoming in this area including the Harvard University Program on
Corporate Social Responsibility and Boston College’s Center for Corporate Citizenship.
The following remarks by Niall Fitzgerald, Chairman of Unilever, are from a 2003 speech at the London
Business School. “Business is part of society, not outside it. Business has a responsibility not just to
17
make profits for its shareholders, but also to create long-term sustainable business for its stakeholders.
So when we talk about corporate social responsibility, we don’t see it as something business ‘does’ to
society, but as something that is fundamental to everything we do…Not just philanthropy or community
investment, but the impact of our operations and products as well as the interaction we have with the
societies we serve…Corporate social responsibility is not a soft issue or a nice to do activity on the
fringe of business. It is central to doing business. It is challenging to manage and it is a hard edged
business issue.”26
This business philosophy has been mirrored time and again by corporate leaders from companies such as
BP, Royal Dutch/Shell, IBM, Intel, Novartis, Pfizer, Procter & Gamble, and Bank of America.
Certainly, the ultimate test of their convictions is in how these executives translate words into company
practices. The driving point is that these are not standard fluffy statements about “giving something back
to society.” These executives articulate a strong and convincing business case that corporate social
responsibility is in the best interest of corporations and their investors. They do so in a public forum in
which they are accountable.
If the positive appeal of company leaders is not sufficiently convincing, can we learn something from
the costs to businesses from questionable corporate conduct? Citigroup, parent of Citibank, was ordered
by Japan to close its private banking unit there for, among other things, failing to guard against money
laundering. CEO Charles Prince was forced to make a public apology in Japan, dismiss some top
executives and start an ethics crusade at the bank. He also stated Citibank executives “were pretty
conscious over a long period of time about doing things that were simply violative of the rules.”27 This
was described as a business and ethical crisis, a tainting of Citigroup’s reputation, one requiring a major
program of re-educating Citibank executives in acceptable corporate ethics.
18
Charges of scandals in the insurance industry and specifically at Marsh McLennan and AIG made by
New York Attorney General Elliot Spitzer have harmed their reputation, possibly requiring years to
rebuild, as well as costing shareholders in significant settlements and turning the management upside
down. While some of the practices criticized by Mr. Spitzer were well known in the industry, they
seemed to be unexamined by the company from an ethical perspective. Suddenly when investor and
public opinion turned negative, they faced a crisis.
Merck is a pharmaceutical company with an admirable reputation among social investors on many
fronts. Yet when Merck announced the withdrawal of its Vioxx painkiller for safety reasons at the end of
September 2004, and allegations surged forward that the company had withheld information on the
dangers of the drug, the stock plummeted by more than 40% in a six-week period and public doubt
soared. Merck now faces a significant lawsuit that is sure to drain resources and cause additional
damage.
Just one incident can have a profound effect on corporate reputations and long-term shareholder value.
The general lesson to be learned is that lapses in business ethics or a poor record on an important
corporate social responsibility issue can and do come back and bite. Sometimes that bite can be deep and
painful. The point is not so much that investors can always identify early on the ethical shortcomings of
companies, but that active investors can encourage managements to put ethical standards at the top of
the agenda.
Imagine then that you are an executive of a pension fund or a trustee listening to the case made by
business leaders, or observing the negative impact on companies of alleged unethical practices. Doesn’t
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the prudent fiduciary have strong motivation to support good corporate responsibility as part of his or
her fiduciary duty? Without a doubt, the forward-looking business community helps make this case and
the consequences of corporate misconduct seal it.
Beyond Shareholder Advocacy
Some investment fiduciaries utilize social investment strategies that our outside of the realm of
shareholder advocacy, the focus of this chapter thus far. These may include portfolio screening, public
policy initiatives, and direct investment in community development.
Portfolio Screening
Many institutional social investors avoid companies or industries that violate their organizational
mission, values, or principles. For example, a healthcare agency may not wish to invest in tobacco
stock, a religious group may avoid investing in a handgun company, an environmental organization may
shun the worst polluters, and a Roman Catholic diocese may exclude companies producing
abortifacients. But portfolio screening can be positive too. In this case, screening requires investment
managers to seek companies with good records on employee relations, environmental stewardship,
community involvement and corporate governance in addition to the financial characteristics they
traditionally seek.
There is not one universal model of social principles for socially concerned investors. These are decided
by the individual or institutional investor. At present, the most common social screen applied to
investments is avoidance of tobacco stocks. Social investors generally do not argue that avoiding
20
companies can directly affect stock price or company conduct, except perhaps in rare cases where a
broad-based divestment groundswell exists.
Very importantly from the standpoint of a fiduciary, there is strong evidence that commonly used social
screens do not impair long term financial performance.28 This has been true for many mutual funds and
investment managers who apply social screens in the investment process. They achieve competitive
returns relative to their benchmarks and portfolio managers with similar investment styles.
Portfolio screening, however, is sometimes an unsatisfactory option for many pension funds that, by
virtue of their large size, tend to own broad stock universes, particularly if passive investment
management strategies are favored. For these funds, identifying and selecting investments using
comprehensive social or corporate governance criteria would be a difficult challenge. Thus, few pension
funds rush to add portfolio screens to their investment policy statements, and instead focus their efforts
on shareholder advocacy.
Public Policy
Pension fiduciaries and other concerned investors often advocate for reforms in government policy or
legislation that they believe are consistent with their mission. For example, stung by the wave of
business scandals, many investors supported Sarbanes-Oxley and other new SEC regulations mandating
reforms in corporate governance. Other investors have supported regulations requiring additional
corporate disclosure of environmental liabilities in company 10K statements. Public policy advocacy is
increasingly utilized by fiduciaries that want their voices to be heard on important policy debates that
affect them as investors.
21
Community Development Investing
Social investors may also seek opportunities to invest directly in the empowerment of poor communities
through a variety of vehicles, from market rate instruments to ones intentionally issued at below market
rates. Examples include buying a Certificate of Deposit in a community development bank or credit
union, extending a loan to a community development loan fund, making market rate investments in lowincome housing or through a venture capital investment in a start up company dedicated to the solution
for specific social problem. This blossoming area of investment accounted for $14 billion in assets
according to the Social Investment Forum (SIF) 2003 Trends Report.29
Summary
Institutional investors, acting in a fiduciary capacity, are increasingly using their leverage as
shareholders to influence corporate behavior on social responsibility and governance issues. While some
of them may utilize portfolio screens or devote a portion of their funds to community development
investing, these investors tend to focus on shareholder advocacy – selectively engaging portfolio
companies to help strengthen social, environmental and corporate governance performance. Indeed,
there are numerous examples of successful engagement, as measured by changes in company practices,
policies or increased transparency on issues of concern. These institutional investors are motivated by
the belief that long-term shareholder value is enhanced by their actions. In their own words, gradually
more corporate leaders are giving credence to the belief that fiduciary responsibility and corporate social
responsibility are related and compatible goals.
###
22
Tim Smith, SVP, is Director of Socially Responsive Investment at Walden Asset Management, the social
investment division of Boston Trust & Investment Management Company. Tim is also President of the
Social Investment Forum, a national membership organization promoting socially responsible investing.
This article was adapted from a chapter written by Tim Smith for the book “The Accountable
Corporation,” Marc J. Epstein and Kirk O. Hansen, Westport, CT: Praeger Publishers, 2005, Volume 3,
Corporate Social Responsibility. The information contained herein has been prepared from sources and
data we believe to be reliable, but we make no guarantee as to its adequacy, accuracy or completeness.
We cannot and do not guarantee the suitability or profitability of any particular investment. No
information herein is intended as an offer or solicitation of an offer to sell or buy, or as a sponsorship of
any company, security, or fund. Opinions expressed herein are subject to change without notice.
1
Investor Responsibility Research Center, Corporate Social Issues Reporter, June 2004
Securities and Exchange Commission, www.sec.gov.index
3
Investor Responsibility Research Center, Corporate Social Issue Reporter, June 2004
4
Innovest and State Street Global Advisors, Joint Press Release, September 23, 2004
5
United Kingdom Environmental Agency, Corporate Environment Governance 2004 Report www.environmentagency.gov.uk/business
6
Goldman Sachs, Global Energy: Energy Environmental and Social Report, February, 24 2004
7
William Thompson, Comptroller of New York City, www.comptroller.nyc.gov/bureaus/bam/faq
8
William Thompson, Comptroller of New York City, CERES conference speech, April 2003,
www.comptroller.nyc.gov/press/speeches/ceres-4-10-03
9
Phyllis Plitch, “Despite Disney, Proxy Wars Were Few,” Wall Street Journal, C3, December 13, 2004
10
Gays & Lesbians Face Persistent Workplace Hostility, Witeck-Combs Communications / Harris Interactive survey,
September 13, 2002, www.harrisinteractive.com
11
Ibid
12
Human Rights Committee Website, www.hrc.org
13
Ibid
14
Institutional Shareholder Services, Exxon Mobil Corp. Proxy Analysis, May 2004
15
Saipan Sweatshops Lawsuit Ends with Important Gains for Workers and Lessons for Activists, January 8, 2004,
www.cleanclothes.org/legal
16
Ibid
17
Gap Social Responsibility Report 2003, www.gap.com
18
United Nations Intergovernmental Panel on Climate Change, www.ipcc.com
19
Investor Network on Climate Risk, www.incr.com, see in particular, Forward: Investor Guide to Climate Risk, CERES, July
2004
20
Chris Walker, Swiss Re Financial Services Corporation, Climate Change and Financial Risk: A Re-insurer’s Perspective,
Presentation delivered at Harvard University, September 23, 2004
21
Ibid
2
23
22
CERES, Report on Institutional Investors Summit on Climate Risk, www.ceres.org
Phil Angelides, California State Treasurer, Investors Summit on Climate Change at United Nations, November 21, 2003
www.ceres.org
24
Denise Nappier, Connecticut State Treasurer, Investors Summit on Climate Change at United Nations, November 21, 2003
www.ceres.org
25
Phil Angelides, California State Treasurer, Treasurer Phil Angelides Launches ‘Green Wave’ Environmental
Investment Initiative - To Bolster Financial Returns, Create Jobs And Clean Up The Environment, Feb. 3, 2004
26
Institutional Investors Summit on Climate Risk, May 2005, A New Call to Action, www.incr.com
27
Niall Fitzgerald, Chairman, Unilever, Presentation at London Business School Rebuilding Trust in Business, October 2,
2003
28
Timothy L. O’Brien and Landon Thomas Jr., “It’s Cleanup Time at Citi,” New York Times, Business Section, November 7,
29
www.sristudies.org/bib_frameset.html
30
Trends Report, Social Investment Forum, January 2004, www.socialinvest.org
23
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