Trends In Financial Activism

Adapted from “Corporate Greening 2.0: Create & Communicate Your Company’s Climate Change and Sustainability Strategies” by E. Bruce Harrison

Shareholder Pressure

Roots of Current Activism

Uphill Challenges

Sustainability Investing

FTSE’s Climate Change Criteria

Climate Change Among Rising Factors

Corporate Response

Corporate communications to engage the true power brokers in the climate change arena will be aimed at the financial community. Investors have coupled with the interests of an expanding universe of players — social-issue groups, free marketers, environmental and energy businesses, as well as major players in the investment community — to question corporate performance, commitments and risks related to global warming. For the publicly held company, and its communicators, this is an area of troubling uncommon change.

If your company is vulnerable because of legacy issues such as power supply or generation, if you’ve bought into business areas that bring new carbon accountability, if you’re associated with a business group that puts you into play with new stakeholders or offends some of your traditional base, if — in short — you’ve exposed investors to uncommon change, more risk, or even the perception of it, you can expect investor activism tied to global warming.

The level of confrontation will vary from company to company, depending on the interests of established investors and those drawn to the company with a social activist agenda. Pressure on the company and its board may be relatively modest: request for time to express views at annual meetings, public statements critical of companies either joining or failing to join certain groups or coalitions, blog mentions that put the company in a negative light, references at conferences and panels, mentions in financial coverage and comments on radio talk and cable TV shows.

Ratcheting up, the global warming activism can, and will, include shareholder resolutions, demands for board representation, and the possibility of personal and professional surprises of the type we saw in the early years of green activism. I recall the Wilmington, Delaware billboard with DuPont’s top executive demonized in the chlorofluorocarbon/ozone issue. And I saw a group of shocked executives of another company when activists stood up in the annual meeting and handed a “dirty globe award” to the CEO, taking photos for the newspapers (which today of course would be a cell phone video clip for the Web).

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SHAREHOLDER PRESSURE

Citigroup, JP Morgan Chase, Morgan Stanley and Merrill Lynch have all published research reports analyzing the financial performance of the carbon markets, with preliminary evaluation of corporate leaders and laggards in their various sectors. Some encourage investment, such as Merrill Lynch’s spotlight on companies best position to capitalize on “the clean car revolution”; while others note vulnerabilities.

Shareholder resolutions, putting pressure on company management to address both the risks and market opportunities associated with global warming, are on the rise. In the 2007 proxy season, a record number of 39 climate-change proposals (up from 30 the previous year) were filed. This rising trend is likely to escalate as news about global warming, government action and reports from companies escalate. According to the nonprofit Social Investment Forum, “concern over climate change — and whether companies are preparing strategies for the geophysical, regulatory and litigation risks it poses — constitutes a top and closely watched category of shareholder proposals.”

Survey estimates show more than 100 companies in 2006–2007 were asked by investors for information about, action regarding and proof that management’s business decisions take into account the relevance of uncommon climate change. Investor questions most often focus on energy efficiency measures, greenhouse gas emissions reduction and the development and use of renewable energy sources. Three of the proposals in 2007 were aimed at ExxonMobil, occurring as activist investors rode on the wave of criticism that was rolling when Congress began its session and Senator Barbara Boxer, chairing the Senate environment committee after the Democratic takeover in the 2006 elections, blasted Exxon for prolonged support for scientists skeptical of the cause and effects of global warming.

Some companies headed off proposed global warming resolutions. SIF observed that “pressure from concerned stakeholders has produced significant victories,” and offered ConocoPhillips as its case in point, noting that the company had announced it was joining the U. S. Climate Action Partnership, the group of large companies advocating early government action to reduce global warming. ConocoPhillips’ funding of an eight-year, $22.5 million biofuels technology research program at Iowa State University was the sign needed for an SIF member, Trillium Asset Management, and its co-filers to withdraw a proposal demanding company action on renewable energy alternatives.

The Service Employees International Union also withdrew a resolution proposed for the Wells Fargo 2007 annual meeting when Wells Fargo agreed (after the proxy statement had been printed) to do a climate assessment in three key sectors of its lending portfolio and to share the findings with SEIU. The drafted resolution asked the company to formulate “comprehensive greenhouse gas emissions reduction goals for its own operations and those of its corporate borrowers.”

Wells Fargo, one of the country’s leading purchasers of renewable energy offsets, has staff specialists studying the implication of climate change on its businesses. The employees union sought the shareholder resolution, a spokesperson said, because “we want them to rethink their business, and set themselves up to take strategic advantage of climate change.” The group wanted to know if Wells Fargo was lending money to companies that could be forced into bankruptcy because of greenhouse gas regulations, if the bank was financing new technologies for alternate energy or offering climate-change consulting services to customers.

General Motors shareholders considered a proposal from the Connecticut State Treasurer’s office and more than a dozen members of the Interfaith Center on Corporate Responsibility (275 faith-based institutional investors), calling for GM to set greenhouse gas reduction goals for its operations and vehicles, and to deliver to shareholders the plan agreed on by management to reach the goals. The unsuccessful shareholder proposal was put into an altered perspective by the time of the GM annual meeting; the company had joined the USCAP and was associated with its carbon constraint goals.

Other companies and their recent shareholder challengers include Bed Bath & Beyond, pursued by the Sierra Club Mutual Fund; ACE Insurance, by the Calvert Group; and Dominion Resources, the electric power and natural gas company, by New York City Comptroller’s Office. “It is incumbent on us as trustees of pension funds,” commented a representative of the New York comptroller, “to find out how companies are mitigating risk to our investments from climate change.”

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ROOTS OF CURRENT ACTIVISM

Ceres is a predominant player in investor action on climate change, continuing its long-term function as a spark igniting corporate environmentalism. An organization of investors originally known as the Coalition for Environmentally Responsible Economies, Ceres has since the late 1980s been a watchdog of corporate social awareness. In the 1990s greening years, the group’s Valdez Principles were used to prod business management to improve environmental conduct. The 10-point code, pressed on dozens of companies, was linked to the famous case of the Exxon tanker Valdez, whose accidental release of crude oil in Alaska’s Prince William Sound in 1989 was blamed for environmental damage. With its touch of irony, the name of the proposed code of behavior signaled Ceres’ confrontational stance and had the effect of putting companies in a reactive, if not defense, mode. Some companies, mostly smaller companies with established green-market orientation, such as The Body Shop and Ben & Jerry’s, immediately signed on to the Valdez Principles. They exemplified the enterprises that saw the pledge as a marketing advantage, using it competitively, while the added value of protection from other environmental activists’ demands because they were on Ceres’ list, validated as greening companies. Other company managements perceived a pragmatic opportunity to make a commitment to a cause with political implications, seeing in Ceres a group allied with both investors and consumers with the potential for extended influence on public perceptions and public policy.

Ceres found a different story when they took their principles to the management of larger companies, especially those who had been on the front lines of green battles that began in the 1960s. were not ready to sign on to the Valdez principles — which included “wise use of electricity” and “environmental risk reduction” as well as the appointment of “environmental directors” — for several reasons. Chemical, oil, mining, automotive and other manufacturers were by 1990 making considerably progress. Environmental management was methodically addressing clean-up, process and waste minimization, and regulatory burdens laid during the two decades of focus by Congress, state and federal government agencies led by the Environmental Protection Administration, established in 1970. Companies were working with trade associations, environmental organizations and government to develop general as well as industry- and company-specific guidelines. Green mission statements were issued by several companies. And, in anticipation of the 1992 U.N. earth summit, when the world’s spotlight this would shine on American problems and progress in environmental issues, corporate executives were getting ready to announce a global commitment — the idea that would become the World Business Council on Sustainable Development. Executives of companies like DuPont, Procter & Gamble, Dow, AT&T and Royal Dutch Shell were developing an evaluation method that would enable companies, as well as government and NGOs, to set benchmarks and to chart progress in controlling manufacturing process emissions. Corporate America was, in short, moving toward a green, sustainable system that would satisfy government requirements and stakeholder expectations. With this internal focus and collaboration of companies devoted to greening, the pressure from external evaluators was deemed as untimely and largely unwelcome. Companies in dialogue with Ceres pointed to their individual commitment, their initiatives, their efforts to establish volunteer emission goals, guidelines and measurement.

Corporate communications were not enough to fend off the first strong thrusts of green shareholder proposals, however, and Ceres led the environmental groups in the early rounds of shareholder proposals and annual meeting challenges. At several companies’ annual meetings, stockholders raised the issue and asked management to support the Ceres pledge or to explain their resistance. Most of the company votes for the original Ceres proposals were predictably small, but at the mineral development firm of Kerr-McGee in 1990 the total shareholder vote in favor of Ceres in reached a significant 16.7 percent.

For any number of companies, responding to direct contact from Ceres or merely anticipating the possibility of shareholder interest in the new green challenges, environmental communication was kicked into high gear. Companies began communicating heavily about their green commitment, with and without reference to the proposed standards in the growing green community, and made sure the subject was covered before and after the annual meeting season.

In 1993, following more than a year of negotiations with Ceres, the oil and chemical company Sunoco became the first Fortune 500 company to accept the Valdez (soon-to-be-renamed Ceres) Principles. Sunoco’s leadership triggered a new round of discussions leading to endorsements by other large companies, including GM, Ford, American Airlines, Bank of America, Catholic Healthcare West and Northeast Utilities. Ceres today states that more than 70 companies have endorsed the principles formerly known as Valdez, and Ceres has worked with numerous other companies to adopt environmental policies and issue performance reports. Ceres’ “partner companies” submit annual green reports, engage with investors and others put together by Ceres to work on social responsibility, and advance sustainability in business practices and reporting.

Ceres now takes to the media its list of 10 companies that are not, in the group’s opinion, protecting investors through adequate global-warming strategies. The group’s Ceres’ corporate hit list was weighted in 2007 toward large energy companies, including ExxonMobil, Allegheny Energy, Consol Energy, ConocoPhillips and TXU.

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BOTTOM LINE: UPHILL CHALLENGES

Groups like Ceres demonstrate the busy bridge that now connects social activism with Wall Street, bringing uncommon change to the once relatively small and often lightly regarded social-investment funds. Mindy S. Lubber, Ceres president, indicated to reporters in 2007 interviews that investor pressure about climate change is different from social investment evaluations of the past, where company economics were not heavily considered, if at all, in demands for environmental cleanup. “This has nothing to do with social investing,” Lubber said. “These investors are owners who want the companies to stop being laggards when it comes to minimizing risk and taking advantage of opportunities.”

As in the early greening years, some of the companies on the global warming list expressed surprise, or confusion as to the reason they had been negatively tagged, while others acknowledged they were probably not communicating their commitments, and actions to address risks, as well as they might. Mary S. Wenzel, vice president of environmental affairs for Wells Fargo, said the company had invested $125 million in renewable energy projects during a previous six-month period and had lent $750 million in recent years to developers of green buildings. “We are demonstrating that we are addressing risk” she said, but acknowledged that company communicators “have not issued the kind of public policy statements that shareholders seem to want.”

The option of conforming to a coalition’s objectives and guidelines may well be considered as a means of extending both awareness of a company’s global warming actions and accountability, and its stakeholder support, avoiding some shareholder concerns and proposals. Certainly, as a coalition open to companies willing to conform, Ceres is a worthy consideration. The group has grown steadily over the years to a reported alliance of more than 85 organizations, including the AFL/CIO, National Wildlife Federation, Friends of the Earth and the Union of Concerned Scientists, as well the investor links to the Interfaith Center on Corporate Responsibility, Calvert Group and Trillium Asset Management.

However, whether contemplating activist or ordinary business groups, companies will need to understand fully the value as well as the possible downside of linkage. Joining business coalitions that are outside the usual industry trade associations can mean compromises that can come back to sting some stakeholders.

While Caterpillar was not a target for a global warming shareholder proposal in 2007, CEO James Owen got a clear signal of investor activism after the company joined the USCAP, the coalition of companies and NGOs agreeing on the need for a mandatory cap on greenhouse gas emissions. Prior to the company’s annual meeting in 2007, Owens received a well-publicized open letter from a conservative business coalition, the National Center for Public Policy Research and allies including the Competitive Enterprise Institute and the American Conservative Union, charging that the unintended outcome for Caterpillar shareholders, should such a GHG cap occur, would be lower returns on investments in CAT. NCPPR’s David Ridenour, who organized the letter to Caterpillar, told reporters that the company’s success depends on coal industry success, since the Peoria, IL-based firm is a major producer of mining equipment. “If you have caps that result in less coal production, what’s that going to do to (Caterpillar’s) orders?” He cited a report from the Congressional Budget Office concluding that a cap on carbon emissions by 23 percent would lower stock values by 54 percent for companies in the coal sector.

Among those signing the letter to Caterpillar was Murray Energy Corporation, the privately-held coal-mining company whose CEO testified before Congress and gave media interviews opposing cap-and-trade and other potential limits to coal mining. Murray Energy notified Caterpillar that it would stop purchasing mining equipment from Cat in protest of its support for cap-and-trade. A representative of Project 21, a conservative organization supporting African-American owned businesses, and one of the 60 signers of the letter to Owens, expressed dissatisfaction with Caterpillar at the 2007 annual meeting, saying that carbon caps would increase costs.

At the annual meeting, the CEO explained the economic pragmatism in the company’s stand. “We believe that some climate change legislation is likely,” Owens commented during the annual meeting. “Clean air and less carbon dioxide in the air are going to cost money. We just want to get it done in the most economical way.” He said the cap-and-trade system offers a degree of flexibility and cost controls that will help businesses remain competitive. Owens also made a pitch for free trade, warning that Caterpillar, along with other American companies, would be harmed by restrictive legislation. “There’s a tremendous anti-trade sentiment and anti-global sentiment, which concerns us,” he stated. “The biggest risk to global prosperity is turning inward. You can’t build a wall to the year 2050, you've got to build a bridge.”

Mr. Owens said he was “disappointed that (Murray’s) not going to buying our products anymore,” but stressed that businesses can no longer simply refuse to go along with emissions reduction strategies.

Ridenour said that one of the signers of the letter against Caterpillar’s stand, the Free Enterprise Action Fund, planned to file a resolution opposing participation in the USCAP, at the next Caterpillar shareholder meeting.

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SUSTAINABILITY INVESTING

The Dow Jones Sustainability Index (DJSI) is North America’s premier standard, using a systematic corporate evaluation to identify the leading sustainability-driven companies in the various industry sectors. Criteria include climate change strategies, energy consumption, human resources development, knowledge management, stakeholder relations and corporate governance. Of the largest 600 North American companies on the Dow Jones global index, the DJSI picks the top 20 percent in terms of sustainability, adjusting for general as well as industry-specific sustainability trends. Recent top holdings have included GE, Citigroup, Microsoft, Bank of America, Procter & Gamble, Pfizer, Johnson & Johnson, Chevron, Cisco and IBM.

“Corporate sustainability” means a company creates long-term shareholder value by managing risks and using opportunities related to economic, environmental and social developments. These aspects of sustainability have become the three-legged stool popularized by corporations and management consultants, in strategies and communications that appeal to investors and other economic stakeholders, as well as to NGOs and social activists.

While “social” and “environmental” were in earlier greening years pretty much in the same bucket, developments over the years — such as Sarbanes-Oxley regulations and events raising public skepticism about corporate responsibility — have led evaluators like Dow Jones to the view that the terms should be differentiated.

Social developments embrace transparency and accountability in such issues as living standard, public health, equal rights, fair trade and the rich/poor gap, in the DJSI equation, and have become the guide to companies seeking clues to evaluations that compare them to competitors in the financial marketplace.

Environmental developments are the more traditional eco-factors. The DJSI looks at the company’s pollution control and waste management, its awareness of and reaction to its ecological risks, and its global warming strategies. Other elements that can factor into evaluation are risks and opportunities related to population growth, availability of natural resources and bio-diversity.

Economic developments push companies to determine management’s grasps of and strategies addressing risks and rewards in technology and innovation, speed and flexibility, product life-cycles, organizational learning, intellectual capital and the increasing matter of “virtual” living and working, where outsourcing and employee location/working flexibility come into play.

The bottom line for corporate sustainability in the DJSI perspective is greater value generated for shareholders. DJSI and the great number of companies that follow DJSI guidance have the basic belief that if a company is able to stand tall on the three-legged stool of social, environmental and economic issues, it will get respect. Communications and an ongoing focus on strengthened reputation are considered critical in building and delivering the sustainability value cycle.

Working with the SAM sustainability research group (an arm of SAM Group Holding in Zurich), DJSI weeds out companies perceived as “not sustainable” and uses peer group input — surveying others in the industry sectors — along with rules-based comparisons to choose best-of-class firms. In addition to the influence of SAM’s proprietary online survey in picking the best, there is a very strong impact of communications. DJSI says it depends on solid information derived from news media and shareholder analysis, company documents and policies available to investors and the public, and company interaction with the evaluators including personal visits.

The SAM survey sets a maximum number of points for each of the questions, depending on the level of relevance to sustainability. The points are totaled, weighted, and compared with other companies within the same business sector to arrive at the company’s overall sustainability rating. Criteria weighting has been standardized. There are two buckets, each totaling 100%. In bucket one, the three stool-legs each get up to 33 percent. Bucket two gives general information and sector-specific information equal, maximum 50 percent weights. Examples of sector assessment criteria might include, for the automotive sector, the carbon intensity of each maker’s cars; for banking, the integration of sustainability criteria into project finance; for pharmaceutical companies, access to markets and products in development countries; and for the food sector, commitment and success in healthful products and lifestyles.

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FTSE’S CLIMATE CHANGE CRITERIA

In Europe, FTSE is attempting to raise the standards for corporate climate change strategies, systems, disclosure and performance. Working with the Carbon Trust, the Institutional Investors Group on Climate Change, Forum for the Future, World Wildlife Fund and Ethical Investment Research Services (EIRIS). A 2006 benchmark to evaluate companies on their climate change risk was established after consulting with investor and environmental groups. FTSE selected 250 companies as having a high impact on climate change, to be evaluated for inclusion in the FTSE4Good index series. Europe’s leading provider of research into the social, environmental and ethical performance of companies, EIRIS, based in the UK with offices in the U.S. and Japan, manages the global research and analysis to cover the eligible universe for the FTSE index.

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CLIMATE CHANGE AMONG RISING FACTORS

Company stock evaluators all agree that there is a dramatic rise in investor and company interest in climate change risks and rewards. “More companies recognize that climate change will have a major impact on their future operations and product offering,” the SAM group stated in announcing the results of its 2006 review for the Dow Jones Sustainability Indexes, in which it named 46 companies as new global sustainability leaders. “Climate change continues to attract increased attention,” according to SAM, citing the increased inclusion of climate-change impact assessments in merger-and-acquisition due diligence. SAM found top financial institutions leveraging their climate change know-how, gained for internal assessments, to market new products and services that go beyond carbon emission trading, into risk management systems and impact assessments of potential investments.

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CORPORATE RESPONSE

Why do green activists go after a company? What do they hope to achieve? And how can and should companies respond? Climate change or alternative energy activists, who use shareholder standing (meaning they own one or more shares of company stock) to challenge company management with proposed resolutions, are basically seeking three outcomes: recognition of the cause, embarrassment of the company, and some level of impact — commitment, buy in or, to state it crudely, payoff from the company.

Recognition. Global warming has become so high profile, and has so uniquely linked environmental and energy issues, that it’s an attractive way for various social groups to get in on the action. NGOs with climate change on their continuing agenda now compete — or in some cases cooperate — with others who find a way to get recognition for their causes by finding a link to corporate positions on climate and carbon. Proposing or openly supporting a shareholder resolution on this subject is a way to be recognized as a player in a big game with apparently a very long runway.

Embarrassment. While cause-related marketing by a company is a positive campaign, activists seeking recognition for causes in the governance setting tend to go negative. The annual meeting is a venue for executive embarrassment — a resolution implying social neglect, an impromptu speech from the audience or surprise photo-worthy event, like the “dirty globe” thrust into the hands of a CEO in a Canadian company several years ago. By putting the company in a bad light, social activists play to their base, increase public awareness and leverage their position to the next outcome:

Impact. For social activists, it’s the cause, not the cash. Unlike investor activists such as hedge fund owners, social activists are not trying to get control of the company, not looking for bigger, quicker cash returns on their investments. They are less apt to threaten a proxy fight, take legal action or try to acquire board seats than the aggressors from the financial and investment community. Make no mistake, however; they want some reaction beyond the publicity value they get by raising their profile, and this is most often accomplished by going on the offense by putting the company on defense. Their best achievable outcome would to be able to state, to their supporters, “We took our cause to company ABC. Their action is the direct result of our action.”

As for what companies — and especially company communicators — might or should do in the interest of the company and its reputation, we can take pages from the many guidebooks on investor activist communications. As an example, Jim McGregor of the Abernathy MacGregor Group consultancy has advised clients that activist investors follow predictable patterns and that corporations can predict their vulnerability to attacks, and prepare to ward off or defend against bad outcomes for the company.

Corporate communicators play a critical role in climate change challenges from investors. Taking charge of the communications starts with a sustainability mission statement or record that is pro-active, clear and credible to investors (the sustainability or corporate climate change strategy protects and creates value) and to social stakeholders (the strategy addresses the human or civil need). Engage with all stakeholders on an ongoing basis to make sure they understand your strategy. When social investor activists present a challenge, respond with facts, acknowledge the concern and express confidence in the outcome of the company’s commitment. If a proposed resolution conforms to the company’s strategy, step up moves that communicate your performance and strategy execution. Shore up communications with major shareholders who are watching this challenge. And, as Arthur W. Page counseled many years ago when his company, AT&T, was under the gun, remain calm, patient and good-humored. Cool heads communicate best.

E. Bruce Harrison, Envirocomm International
October 15, 2007

For more about Arthur W. Page and the Page Principles, see the Arthur W. Page Society website.

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