Sustainability Grows on the Shareholder Agenda

Social and environmental issues continue their upward march in importance to shareholders, comprising nearly half of all shareholder proposals filed this proxy season so far, according to proxy advisory firm Institutional Shareholder Services.

Even if not all of those proposals will come to a vote—and many surely will not—they indicate that the wellspring of interest in such issues is not flagging. Environmental and social proposals constituted 40 percent of all proxy resolutions last year, ISS says, and the topics have clearly reached a new level of attention to the investor's mind.

Sustainability “is getting a lot more play in the proxy,” says Steve Starbuck, leader of Ernst & Young's climate change and sustainability services practice in the Americas. Proposals within the category can vary wildly, he admits, but they have a common core. “It's really about transparency: reporting what you're doing so that investors can decide if they agree with it or not,” he says.

Collectively, traditional governance items such as urging a company to adopt an independent board chair or to offer shareholders the right to call a special meeting still fetch the greatest number of proposals. But sustainability-related proposals—which this year include improving oversight of corporate lobbying expenditures, sharpening greenhouse gas emissions goals, and tracking human rights practices along the supply chain—are now a close second.

While socially responsible investors have long pushed for changes to environmental, social, and governance policies, experts say the levels of support that ESG issues are receiving indicates that mainstream investors are getting behind them too. Average shareholder support for such proposals reached 21 percent last year, with five resolutions garnering more than 50 percent of shareholder votes, according to E&Y's data.

Early indications are that they will get greater support this year. A recent E&Y survey of more than 250 sustainability executives at large companies found that 66 percent of them report seeing an increase in sustainability-related inquiries from investors in the past year.

Larger numbers of traditional investors now view sustainability in pragmatic ways, directly connected to financial results. “It's beginning to be more understood that scarcity of natural resources is becoming a bigger risk factor,” says John Wilson, director of corporate governance for TIAA-CREF; he cites the rise in the price of many commodities as one of those risks. While TIAA-CREF has not filed shareholder proposals of its own, its managers look for “reasonable ones” to support, Wilson says. “We're not prescriptive; we're not going to tell [companies] to invest in renewable energy, but we are looking for more information about how they're managing those risks, and some performance data,” he says.

Political Spending

Resolutions related to corporate political contributions, a topic that straddles the social and governance realms, are by far the hottest single category this season. ISS counts 109 such proposals as of April 1, with 69 still pending at companies (the balance was omitted or withdrawn). The Supreme Court's 2010 Citizens United decision is driving this trend, say proxy advisers, since Citizens United reversed previous longstanding law that restricted corporate giving to political causes.

“People are afraid because this is the first chance companies have had to spend a ton of money. The question is, are companies putting corporate funds to the best possible use?”

—Courteney Keatinge,

Senior Environmental, Social & Governance Analyst,

Glass Lewis & Co.

While companies still can't give unlimited amounts directly to individual campaigns, they are now allowed to help fund them indirectly, including through super PACs and other funding mechanisms. “People are afraid because this is the first chance companies have had to spend a ton of money,” notes Courteney Keatinge, senior environmental, social & governance analyst at proxy advisory firm Glass Lewis & Co. “The question is: Are companies putting corporate funds to the best possible use?”

Most resolutions ask companies to improve board oversight of their lobbying and political giving practices and to provide better data on their contributions in the form of regular reports. JPMorgan Chase, Lowe's, and R.R. Donnelly are among those that are seeing such proposals for the second year in a row, according to ISS.  Several proposals, however, are asking for a shareholder advisory vote on such spending, and three proposed by social investors want Target, Bank of America, and 3M Corp. to stop spending on political causes completely.

Shareholder resolutions urging better governance of contributions are even popping up at companies that aren't particularly politically active, Keatinge says. An investor owning 1,000 shares of Sunrise Senior Living, for example, is asking the $1.3 billion nursing home operator to provide semi-annual reports to the board on all political contributions, including payments to trade associations.

As with many resolutions, peer pressure also plays a role. Adopting the proposal “would bring our company in line with a growing number of leading companies, including Exelon, Merck, and Microsoft that support political disclosure and accountability and present this information on their Websites,” the resolution at Sunrise Senior Living reads.

ENVIRONMENT – CLIENT CHANGE

Below is an excerpt from ISS's 2012 Proxy Season Preview regarding climate change resolutions:

One of the notable aspects of this year's E&S proxy season is how few resolutions focus purely on climate change, though many other filings, including those in the Sustainability category later in the report, relate to it at least tangentially.

Among the proposals specifically on climate change, the New York State Common Retirement Fund submitted a newly phrased resolution to Duke Energy and Ameren that raises basic issues from climate change proposals in earlier proxy seasons. The resolution asked that a committee of independent directors "assess actions the company is taking or could take to build shareholder value and reduce greenhouse gas and other air emissions by providing comprehensive energy efficiency and renewable energy programs to its customers" and report by Sept. 1, 2012. Duke Energy argued successfully at the SEC that its cur-rent reporting made the resolution is moot, so it will not come to a vote there.

As usual, some companies are receiving the familiar proposal asking them to "adopt quantitative goals, based on available technologies, for reducing total greenhouse gas emissions from the company's operations." This resolution, originally conceived by the Sisters of St. Dominic, a pioneer in climate shareholder activism, has received some of the highest levels of support for climate-related proposals. This year, it is pending at DTE Energy for the first time. It has been resubmitted to Berkshire Hathaway, ConocoPhillips, Dynegy, ExxonMobil, and GenOn. In addition, the Nathan Cummings Foundation reached a withdrawal agreement at DR Horton, where the goals resolution had received 34 percent support last year, and New York State withdrew a new filing after an agreement at CMS Energy. An individual named John Capozzi also proposed a resolution along those lines to Pepco Holdings, but it has been withdrawn. The company had challenged it as be-ing moot, and also on technical grounds.

Calvert Investments proposed a resolution asking companies within six months of the annual meeting to adopt public policy principles on climate change and issue a report on how the principles are to be implemented. Last year, Calvert pro-posed the resolution to six companies and reached withdrawal agreements at all of them. This year, the proposal was submitted to Safeway, where it has already been withdrawn, and to AT&T, where it has been omitted. The SEC staff agreed that AT&T could omit the proposal under section (i)(6) of the shareholder proposal rule, which allows omission of resolutions beyond the power of the board to implement, because the proponent had apparently accidentally referred to the 2011 an-nual meeting, rather than the 2012 annual meet-ing and the date six months from the 2011 annual meeting had already passed.

Calvert has also resubmitted a resolution to Amazon asking the company to report on the impact of climate change on its operations. That resolution got 20.4 percent support there last year.

Members of the Rockefeller family again submit-ted a proposal to ExxonMobil on the risks of car-bon-based fuels that had come to a vote two years ago. The resolution asked the company to "consider in its strategic planning process the risk that demand for fossil fuels in developing countries could be significantly lower" than projected. They have withdrawn the proposal this time, after the company agreed to continue discussing the issues.

The Capuchin Fathers have a history of submitting resolutions on climate change to ExxonMobil. This year they proposed and have now withdrawn a new one that asked the company to "create a Climate Future Task Force including outside climate change experts to study how, like the insurance industry, ExxonMobil, at all levels, will 'factor climate change into their models for measuring, pricing and distributing risk.'" The company had challenged the proposal with the argument that it is too similar to other recent resolutions from the Capuchins, the last of which failed to receive enough support for resubmission. The Capuchins withdrew in the face of the challenge and after the company agreed to meet with the proponents to discuss their concerns.

Climate skeptics: Shareholders associated with two conservative groups—the National Legal and Policy Center and the National Center for Public Policy Research—continue to submit a few resolutions reflecting their skepticism about global warming and concern about the costs associated with implementing climate change mitigation strategies.

A new resolution has already appeared in Apple's proxy statement. On its face, it asked for a report on board members' compliance with Apple's Business Conduct Policy. The underlying issue was whether former Vice President Al Gore, an Apple board member, is profiting from financial interests in companies that benefit from regulation of greenhouse gases, which the NCPPR op-poses. The resolution got 1.9 percent support at Apple's annual meeting.

A resolution asking Duke Energy to report on its global-warming lobbying activities was omitted following precedents allowing the omission of shareholder resolutions on ordinary business grounds that relate to lobbying on specific issues as opposed to lobbying generally.

A resubmitted resolution that was also omitted asked General Electric to "report on the business risk related to developments in the scientific, political, legislative and regulatory landscape regarding climate change." The SEC staff accepted the company's argument that it should be able to omit the proposal because it was very similar to three proposals it had received in the past, the last of which failed to receive the 10 percent needed to qualify for resubmission.

Source: ISS.

In its proxy statement Sunrise countered that “making contributions to political parties or candidates is not a significant part of our business strategy.” Based on accounting records “we do not believe our company made any political contributions during 2011,” the proxy reads, and “we have no plans to make any in the future.”

Best practice ultimately depends on the company's situation, Keatinge says. “We take it on a case-by-case basis. If a company is concerned about revealing its top priorities for competitive reasons, that might be a legitimate reason not to disclose,” she says, “but for us, board oversight is paramount.Proxy resolutions on ESG topics are also becoming far more specific. Resolutions that are directly related to general sustainability issues, like climate change, are waning, though proposals centering on highly specific issues such as the composition of fracturing fluids at energy companies and animal slaughter conditions at food companies are gaining ground. “Investors have gone from simply asking for corporate sustainability reports to getting into very in-depth issues,” says Keatinge.

In some cases, resolutions aren't as much about what the company is doing, but how well it is tracking its suppliers. Partly in response to investor pressure, several technology giants (most notably Apple) have recently detailed the working conditions at their suppliers' plants, including human rights violations, use of toxic chemicals, and other ethical lapses. Eighty percent of respondents to E&Y's survey say they are already working with suppliers to get reports from them on environmental metrics.

Other investors are looking for better board oversight of the issue. The New York State Common Retirement Fund, for one, is asking Chevron, Freeport McMoran, and Occidental Petroleum to appoint one board member each with environmental expertise.

Playing Offense

Responding to such investor proposals requires a fair degree of art, Starbuck says. He considers the sustainability reports to be “a good offensive mechanism,” in that they may allow companies to avoid responding directly to new requests.

Take a recent proposal at Dr. Pepper Snapple from activist group As You Sow. The activists' filing berated the beverage company for failing to set “public quantitative goals” for using recycled material in its products and for incenting consumers to recycle. Citing Coca-Cola and Pepsi, the resolution asked the board to adopt a recycling strategy and goals, and then publish a progress report by Sept. 1, 2012.

Dr. Pepper's response? That it was essentially doing this already, because it had established a corporate sustainability department when it spun off from Cadbury in 2008, and had been releasing corporate social responsibility reports since 2010. “Implementation of this proposal will not further the company's environmental or recycling goals in any meaningful respect,” its proxy reads.

Companies are trying new ways to make the sustainability reports more robust, including having their financial auditor sign off on the environmental metrics as well. While only about 15 percent of companies that produce sustainability reports have gotten third-party audits historically, Starbuck suspects that number is now climbing “driven by the C-suite and boards paying a lot more attention to these issues.” Others are also considering integrated reporting, wrapping the environmental data in with financial performance

All well and good, but investors aren't likely to be fooled by glossy brochures, Wilson says. With wide variations in how companies assign values to items like carbon usage, “assurance is helpful, but there's still a lot of unpacking to do,” he says.

In fact, Wilson's biggest concern is that companies may interpret the “sustainability” category as broadly as investors do. “Many companies are still trying to throw everything but the kitchen sink into their CSR reports,” he says. “We want to see that companies can edit out the stuff that doesn't really matter in their particular cases and focus on the stuff that does.”