It’s illogical – and quite myopic – that many of the nation’s largest institutional investors refer to shareholder-sponsored resolutions addressing material topics such as climate change, resource constraints and environmental stewardship as “special interest,” “non-routine” or involving “special circumstances.”
The opposite is in fact the case. We strongly agree with David Lubin and Daniel Esty’s contention in a recent Harvard Business Review article that sustainability is a core driver of competitive business strategies. Sustainability issues present both opportunities for competitive advantage and risks that, left unmanaged, will cause a company to lag its sector. If companies aren’t addressing sustainability they won’t be producing long-term value for their shareholders.
The financial numbers back this up: A review of 36 studies by Mercer Investment Consulting shows strong linkages between ESG (environmental, social and governance) integration and positive investment performance. “Eighty-six percent of the studies are neutral or positive,” Mercer’s Jane Ambachtsheer told the CalPERS Board of Directors in August.
With this in mind, Ceres recently unveiled the new and detailed Ceres Guidance: Proxy Voting for Sustainability to a Council of Institutional Investors breakfast in Boston. Our guidelines are a tool. But more importantly, they launch a serious effort to get mainstream investors moving now – immediately – to assert their prerogative, as part of their fiduciary duty, on these issues. Ceres, which coordinates the $10 trillion Investor Network on Climate Risk, has the partners in its network to leverage this initiative.
The guidance includes:
– Ceres’ set of Proxy Voting Sustainability Principles covering governance, social issues, environmental issues and general sustainability topics like “Management Accountability for Sustainability Goals” and “Adoption of Specific Environmental Performance Goals and Measurements.”
– Accompanying guidance on how to cast votes on particular sustainability resolutions. For example, when faced with a resolution that proposes independent directors, the guidance advises voting for this proposal applying the Proxy Voting Sustainability Principle of “Loyalty” to shareowners. When faced with a resolution calling for a link between executive compensation and sustainability performance, the guidance advises voting for this proposal applying its “Management Accountability for Sustainability Goals” principle.
– A compilation of sustainability resolutions from recent proxy seasons and the vote counts on these resolutions from the 2010 season. Surprising examples indicative of sustainability trends include a 60.7 percent vote at Sprint on a resolution requiring the company to account for both its direct and indirect political spending and a 53 percent vote requiring coal producer Massey Energy to set greenhouse gas emission reduction targets.
– A compilation of sample proxy voting guidelines already being used by leading investors around the world. Guideline language from big pension funds like Florida’s State Board of Administration on water scarcity and proxy access are highlighted next to guideline examples from the AFL-CIO on performance based equity compensation, TIAA-CREF on charitable contributions, SRI funds like PaxWorld on workplace health and safety and more.
Investors who adopt the Proxy Voting Sustainability Principles will be better positioned to vote consistently and responsibly on the 700-plus sustainability resolutions now being filed with US companies each year. They can adopt these principles as a policy to guide their proxy voting consultants or as a supplement to other proxy guidelines. Pensions funds and other asset owners can similarly press their asset managers to use these principles in voting their proxies. For those developing proxy guidelines for the first time, these principles can provide the framework for shaping a comprehensive set of corporate governance guidelines.
The resolutions are categorized so that investors can determine whether their existing proxy voting guidelines are sufficiently specific to create consistent voting outcomes on these resolutions. The list of common resolutions can also be used as a checklist for investors who wish to ensure that their existing or new proxy guidelines will comprehensively cover sustainability and governance issues arising in the future.
Lastly, and perhaps most importantly, the Ceres Guidance includes more than 75 leading examples of proxy guidelines that asset owners and asset managers can consider as they re-visit their own guidelines and policies. The sample language from public pension funds, asset managers, socially responsible investment funds, labor unions, and foundations covers key sustainability topics such as climate change, water availability, broad environmental risks, ESG-driven executive compensation and board of director governance.
Our message to asset managers, asset owners and voting fiduciaries who have yet to incorporate specific mention of the various sustainability issues into their proxy voting guidelines is clear: Now is the moment to act. You cannot defer to the opinion of specific management bodies in deciding how to vote on issues that will help determine business success or failure and significantly impact long-term value creation in the coming years.
And if you fail to specifically address these issues in your guidelines, you run a serious risk of breaching your fiduciary duty by voting inconsistently or failing to vote on resolutions of critical importance to the companies you own and the shareholders or beneficiaries to whom you owe your fiduciary duty.
Sustainability will not wait. Climate change, water constraints, human rights and labor issues, new rules for corporate behavior or for governance and stakeholder treatment will simply not be ignored in a globalized economy where environmental, economic and social developments move at lightning speed – along with news of corporate failure and its attendant bottom-line and reputational damage.
The opportunity to promote key governance and sustainability reforms at large public companies – including reforms that might have helped avert the ongoing financial crisis – is a key competitive opportunity for those with their eyes open. Investors are increasingly watching – the rise in both the number and vote percentages of recent sustainability resolutions is testament to that. With our new guidance we’re confident they’ll be watching even more.
Kirsten Spalding is the California Director for Ceres. She works with members of the Investor Network on Climate Risk on their initiatives and represents Ceres on the West Coast for all Ceres programs. Prior to joining Ceres, she served as Chief Deputy Treasurer under California Treasurer Phil Angelides and Director of the Treasurer’s environmental financing authorities.
This article was first published on the Harvard Law School Forum on Corporate Governance and Financial Regulation and is re-published with the author’s permission.