While the concept of screening bad corporate actors out of socially responsible investment (SRI) funds dates back to the early 1970s, the latest tactic involves actually investing in companies with spotty track records in order to affect change from within via “insider” tactics. SRI fund managers, frustrated by the weak impact of traditional screening, are increasingly turning to shareholder activism to jolt companies into behaving better. Funds like Green Century, Calvert, Trillium and others are boasting of dramatic victories, thanks to persistent and often coordinated shareholder advocacy efforts.
This past spring, for instance, Green Century Funds, a group of SRI mutual funds owned by nonprofit environmental groups, used its shareholder status to persuade Whole Foods to label all its in-house branded products with the presence of any genetically engineered ingredients. Green Century had filed repeated shareholder resolutions calling on the company to disclose such information, and apparently the pressure finally paid off. Another triumph came a few months later when Apple Computer launched a free recycling program for obsolete iPods—a move initially suggested by a Green Century representative at the company’s annual meeting.
Green Century is currently working on several other insider campaigns, such as persuading Ford Motor Company to voluntarily improve the fuel economy of its fleet and forcing ChevronTexaco and ExxonMobil to publicly publish corporate policies on drilling for oil and gas in sensitive ecological areas.
Meanwhile, Calvert Funds, one of the granddaddies of the SRI universe, reports that 20 of the shareholder resolutions it filed this year alone have led to positive changes in corporate behavior. Recent victories include getting four companies to report on their financial risks from global warming. Three others agreed to begin discussing how to tie executive compensation to specific social and environmental goals. Calvert also used shareholder advocacy tactics to convince 10 of its portfolio companies to increase diversity among board members and staff.
Coming Clean on Chemicals
Trillium Asset Management, which invests in a wide range of companies that abide by SRI principles, has also embraced shareholder advocacy in recent years. The firm is currently engaged in a campaign to force Dow Chemical to report on mounting liabilities from its emissions of environmental toxins. Additionally, Trillium has led the charge among SRI funds to force investment banks to eliminate funding for environmentally destructive projects. “I think there’s a legitimacy to the whole corporate social responsibility movement that wasn’t there 10 years ago,” explains Trillium’s Shelley Alpern. “The movement has gained more legitimacy and definitely more corporate buy-in.”
Alpern cites the recent case of Wal-Mart announcing new environmental policies (and the opening of energy-efficient stores made with recycled materials, using used fryer oil for heating) as an example of how corporate priorities are changing as a result of pressure from investors. “The very fact that a company like Wal-Mart has come out with environmental goals reflects an overall shift in expectations that other companies can’t ignore,” Alpern says.
Garvin Jarbusch, the director of sustainable investing at Sierra Club Mutual Funds (SCMF), attributes much of the recent success of shareholder advocacy campaigns to teamwork among various SRI-oriented firms. SCMF, for example, maintains memberships in the Interfaith Center on Corporate Responsibility and the Global Warming Shareholder Campaign launched by the Coalition for Environmentally Responsible Economies (CERES), a partnership between leading environmental groups and institutional investors. Both file shareholder resolutions on behalf of their respective institutional members. “A goal of this approach is to create a critical mass of capital and interest group participation to gain management’s attention to the issues,” says Jarbusch.
But despite all of these victories, some influential environmentalists remain unimpressed. A 2004 report by Paul Hawken’s Natural Capital Institute (NCI), for instance, criticizes SRI funds engaged in shareholder activism for essentially endorsing the behavior of bad actors through ownership of stock. “What does it matter if one fast food company is singled out as “best in its class”,” writes Hawken in the report. “As a friend once put it, if you are going the wrong way, it doesn’t matter how you get there.”
But SCMF’s Jarbusch doesn’t see it that way: “Even if a fund invests in only the very best corporate citizens, one can always find areas in need of improvement. To fail to use our leverage as shareholders would be to neglect the most powerful lever at our disposal, and would be contrary to one of the core missions of the funds.”
RODDY SCHEER likes his investments screened.