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January 11, 2005
Top Five Socially Responsible Investing News Stories of 2004
by William Baue
Shareowner engagement shifted from confrontational to collaborative, sustainability analysis fused
with financial analysis, and fiduciary duty expanded to include social and environmental issues.
SocialFunds.com --
Socially responsible investing (SRI) and corporate social responsibility (CSR) continued to mature
in 2004, making significant gains while also addressing shortcomings. Now in its sixth year,
SocialFunds.com continues its tradition of ringing in the New Year by reviewing the top SRI stories
of the past year.
 1. Engagement between shareowners and corporations
shifts from confrontation to collaboration
Things looked grim on the
corporate-shareowner-relations front when the year began: in January 2004, Cintas (ticker: CTAS) filed a
defamation lawsuit against SRI firm Walden Asset Management and its senior vice president,
Tim Smith. The complaint centered on comments Mr. Smith made at the October 2003 annual general
meeting (AGM) introducing a resolution asking for a report on the efficacy of its Code of Conduct for
Vendors, which he alleged the company violated by sourcing from a Haitian "sweatshop."
In an amazing turnaround, Cintas not only settled the suit, it also recommended in its
September 2004 proxy ballot that shareowners vote for a resolution filed by different
shareowners but similarly asking for a report on adherence to its Code of Conduct for Vendors. Any
other year, such a "yes" vote recommendation would be practically unprecedented, but in the
intervening time between the filing of the suit and of the proxy ballot, three other companies had
issued such landmark recommendations.
In late January 2004, Bank of Montreal (BMO) became the
first company in Canadian corporate history to recommend voting for a social or environmental
resolution, which in this instance asked the company to disclose how it evaluates and manages
environmental risks to its business. In March 2004, Tyco (TYC) backed a similar resolution
asking for a report on its corporate-wide toxic emissions and environmental management system
(EMS), and Coca-Cola (KO) endorsed a resolution
requesting a report on the economic effects of the HIV/AIDS pandemic on operations. These
company-endorsed shareowner resolutions all received near-unanimous support (91, 92, and 98 percent
respectively), and Coke had already issued its report by October 2004.
While shareowners have for years withdrawn resolutions when companies comply with their terms,
2004 saw an increasing number of such instances. Energy companies Cinergy (CIN), American Electric Power (AEP), TXU (TXU), and Southern
Company (SO)
agreed to prepare reports on the risks posed by climate change and company plans to mitigate such
risks, and Reliant (REI) agreed to increase climate
risk disclosure. In response to resolution withdrawals, Ford (F) will issue an HIV/AIDS report, JP
Morgan Chase (JPM) established an office of
environmental affairs, and Occidental (OXY) devised a human rights code.
Avon (AVP) is both phasing out phthalates
and shifting from staggered to annual board elections, and Dover (DOV) and Masco (MAS) amended their Equal
Opportunity Employment (EEO) policies to explicitly bar sexual orientation discrimination. In its
proxy statement, Fifth Third Bancorp (FITB) promised to abide by the
majority vote on a sexual orientation nondiscrimination resolution, but did not amend its EEO
policy even after announcing 63 percent support for the measure; only upon the threat of a boycott
did it finally honor its promise.
"The shift from confrontational relationships between
shareowners and corporate managements to more collaborative ones has been years in the making, and
2004 saw a sea change in tangible results and innovative solutions for this new, mutually
beneficial approach," said Jay Falk, president of SRI World Group, which owns and publishes the SocialFunds.com
website.
However, confrontation has not disappeared from shareowner-corporate relations,
as companies continued to take advantage of the non-binding nature of resolutions to disregard
majority votes in 2004. For example, Raytheon (RTN) ignored 65 percent shareowner
support for a resolution asking the company to expense stock options, while also flouting a 77
percent vote to repeal staggered boards in favor of annual elections. Seven other companies
similarly ignored majority votes on these two issues, including Intel (INTC) and IBM (IBM) on the former and Gillette (G) and Sears (S) on the latter.
Shareowner action-related articles:
Ford HIV Report Exemplifies New
Shareowner Action Strategy
About Face: Cintas Settles
Lawsuit and Supports Vendor Standards Resolution
Companies Ignore Majority Votes
on Shareowner Resolutions
Tyco Recommends Vote in Favor
of Shareowner Resolution, Joining Three Others
Five Companies Comply with
Terms of Shareowner Resolutions in One Week
2. Sustainability gains
increasing acceptance in corporate and investment communities
The notion of
sustainability, which grew out of the term "sustainable development" coined in the 1987 Brundtland Commission
Report to define the curbing of present resource use to ensure future resource availability,
has been gaining increasing credence since then. In 2004, the corporate and investment communities
made strides in embracing sustainability, which attempts to reconcile economic growth with
environmental conservation and social equity.
One such stride bridged the gap separating
sustainability research from financial research, as former US Vice President Al Gore and former Goldman Sachs CEO David Blood launched Generation Investment Management in
November 2004. The new firm grafts sustainability research directly into its fundamental equity
analysis, creating a new hybrid by tearing down the wall ghettoizing social and environmental
research from traditional financial research.
Another similar stride crossed the chasm
between buy-side investment analysts, who are more likely to be aware of sustainability issues, and
sell-side analysts, whose fixation on short-term financial performance typically excludes
longer-term sustainability considerations. In July 2004, the United Nations Environment Programme
(UNEP) released an important report compiling 11 sector studies prepared by
sell-side analysts from mainstream brokerage houses examining the materiality of sustainability
issues on financial performance. Piggybacking the shift of sustainability analysis to the sell
side, European institutional investors launched the Enhanced Analytics Initiative (EAI), which encourages sell-side
analysts to cover sustainability issues by promising them five percent of EAI-member broker
commissions.
The linking of sustainability performance to financial performance gained
support from the 2004 Moskowitz Prize winning
study, awarded annually by the Social Investment Forum (SIF) to the best empirical research on SRI. This "study of
studies" (all 52 published between 1972 and 1997) analyzing the link between sustainability
performance and financial performance finds a "positive association . . . across industries and
across study contexts."
"Before 2004, sustainability was lower on the radar screens of
mainstream investors, but with increasing empirical evidence that sustainability factors impact
financial performance, companies and investors now ignore sustainability at their own risk," said
Mr. Falk.
Sustainability-related articles:
Al Gore and David Blood Graft
Sustainability Research into Traditional Investing Analysis
Sell-Side Analysts Confirm the
Materiality of Sustainability Issues in UN Report
Enhanced Analytics Initiative
Offers Sell-Side Analysts Cash to Cover Intangibles
Moskowitz Prize Study Removes Doubt
Over Link Between Strong Corporate Social and Financial Performance
3. The
definition of fiduciary duty expands to encompass social and environmental issues
The
traditional interpretation of fiduciary duty, which requires acting "solely in the [financial]
interest of the beneficiary" and precludes SRI on the assumption it underperforms, strains under
the weight of the growing body of empirical evidence of competitive SRI performance. Moreover, the
August 2004 implementation of a new Securities and Exchange Commission (SEC) rule requiring mutual funds to disclose their
proxy voting records and policies introduces an even more fundamental shift in the definition of
fiduciary duty (a similar rule went into force in Canada in December 2004). In addition to illuminating
whether funds' votes on social, environmental, and corporate governance issues match fund
shareowners' values, the rule also highlights mutual fund managers' and directors' fiduciary
accountability on such issues extending beyond the financial realm.
Peter Kinder,
founding president of SRI research firm KLD Research
& Analytics, argues that this expanded definition of fiduciary duty is bound to cross-pollinate
to other institutional investors, such as pension fund trustees, ultimately creating "a new concept
of fiduciary duty."
"Simply put, the SEC's redefinition of fiduciary duties as to equities
will become the general rule" despite the fact that "pension schemes are not subject to SEC
jurisdiction," states Mr. Kinder in a paper presented in
July 2004 at the American Enterprise Institute (AEI), a conservative think tank.
A December 2004 SustainAbility report underscores the
shifting definition of fiduciary duty, arguing that trustees, directors, and managers can no longer
afford to address strictly legal liabilities, but rather must expand their scope to encompass moral
liabilities. Alien Tort Claims Act (ATCA) cases illustrate how companies can sometimes evade prosecution through legal
acrobatics but still be held morally accountable in the court of the marketplace. The out-of-court
settlement by Unocal (UCL) of its ATCA case in December
2004 sets a practical precedent making it even harder for companies to rely on judge or jury to
shield them from legal and moral liability.
Fiduciary duty-related
articles:
Fiduciary Duty, Undivided
Loyalty, and Socially Responsible Investment Performance
Disclosure: How SEC Proxy Voting Rules
May Shift the Definition of Fiduciary Duty
Bhopal, Climate Change Require
Shift From Legal Liability to Moral Accountability
Unocal Alien Tort Claims Act
Case Settlement Boosts Corporate Accountability
Moving From the Business Case
for SRI and CSR to the Fiduciary Case
4. Criticisms and improvements in SRI
transparency and standards
An Australian survey of over 400 current or prospective
social investors worldwide conducted in April and May 2004 found over half of the respondents
consider SRI funds' social and environmental information insufficient, too complex, or not
credible, a shortcoming leading to significant sell-off. Similarly, an October 2004 report published
by Natural Capitalism Institute founder Paul Hawken and his NCI staff finds significant disclosure and standards gaps
in SRI funds, and recommends increased transparency on portfolio selection and screening procedures
European SRI advocates have taken a lead in developing standards to help inform consumers
about how SRI firms and funds function. In November 2004, the European Social Investment Forum
(Eurosif) released SRI
Transparency
Guidelines designed for mutual funds. In a related move, the Association of Independent
Corporate Sustainability and Responsibility Research (AI CSRR) was founded by European SRI research firms to promote
standards for their practice,
which provides key CSR information used by professional investment managers.
On the
operational side of SRI businesses, the Calvert Group became the first US-based SRI firm to publish
a Global Reporting Initiative-based
sustainability
report, providing additional transparency into how it conducts its business. Calvert was one
of 17 SRI firms to sign a joint
statement in October 2004 urging publicly-traded companies to report their social and
environmental performance using GRI Sustainability Reporting Guidelines.
SRI transparency- and standards-related articles:
Global Survey of Socially
Responsible Investment Finds Information Lacking
Paul Hawken Critiques Socially
Responsible Investment: Is He On Target or Off Base?
European Socially Responsible
Investment Firms Let the Sun Shine In
Calvert First SRI Firm to Issue
Global Reporting Initiative-Based Sustainability Report
Memo From: SRI Analysts To:
Companies--Use GRI Sustainability Reporting Platform!
5. Watering down of
Community Reinvestment Act adversely affects community investment
The Federal Deposit
Insurance Corporation (FDIC) and other divisions
of the federal government have passed rules that weaken the Community Reinvestment Act (CRA), the 1977 law requiring banks
to support small businesses and individuals in disadvantaged communities. While the CRA examination
traditionally requires banks to provide development loans, investments, and support services
to low- and middle-income communities, the rule change allows 879 medium-sized banks to choose
one of these three services.
The federal Office of Thrift Supervision (OTS) has proposed new rules further eroding
CRA's effectiveness by extending similar changes to large banks. The proposed rule change also
expands the scope of CRA coverage in rural communities beyond low- and middle-income categories,
diverting support from these economically disadvantaged communities. OTS is soliciting public
commentary on the proposal through January 25, 2005, and community investment advocates such as the
National Community Capital Association (NCCA) urge CRA supporters to weigh in.
"While changes may be required to relieve banks' burden of current CRA compliance, the federal
government's proposed and enacted changes counteract CRA's original intention of assisting
disadvantaged communities, effectively throwing the baby out with the bathwater," said Mr. Falk.
"Balancing out these negative developments for community investment in 2004 were several
positive trends," Mr. Falk added. "The CRA
Fund, formerly available only to institutional investors, is now offered through retail
channels, and the Grameen Foundation USA issued
a $40 million bond, the first and largest international microfinance bond ever."
Community investment-related articles:
FDIC Proposes Rule Watering
Down Community Reinvestment Act Requirements
Is CRA the Right Remedy for Race-Based
Disparity in Mortgage Lending?
First and Largest International
Microfinance Bond Issued
CRAFund Goes Retail
©
SRI World Group, Inc. All Rights Reserved.
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