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Jun 12, 2020

Influential proposal providers face uncertainty

Values-based investors have counted many recent proxy season successes in ESG matters, achieved through engagement and litigation, but that could be about to change

On May 21, 1971, shareholders at General Motors’ (GM) annual general meeting voted on an unusual resolution put forward by the Episcopal Church. Shareholders were asked to consider whether GM should withdraw its workforce from South Africa entirely, given that ‘many potential GM customers, employees and dealers here and abroad’ would be offended by the policy of apartheid. The resolution received support from 1.29 percent of the company’s shareholders – including one board director.

Several other religious groups took note, however, and supported the Episcopal Church’s antiapartheid campaign, leading to the creation of the organization that is known today as the Interfaith Center on Corporate Responsibility (ICCR).

‘[The groups] were very much motivated by their commitment to social justice – it wasn’t financial at all,’ recalls Tim Smith, who led ICCR from 1971 to 2000, before joining Boston Trust Walden as senior vice president of ESG and shareholder engagement. ‘Companies said, We understand your moral passion but we’re responsible to shareholders.’

Unfazed, ICCR ramped up its shareholder advocacy throughout the 1970s and 1980s. By 1986 the organization had filed anti-apartheid resolutions at 185 companies. That year, 50 US corporations – including GM – announced that they would be withdrawing their businesses from apartheid South Africa.

ICCR’s work on apartheid demonstrates the iterative process required to influence a broader investor base, garner public momentum and – eventually – emphasize that an issue can be material from an ethical and financial perspective. For shareholder advocates today, the journey is strikingly similar – and may be about to get harder.

Working with passive investors

On the face of it, the investment community is more united than it has ever been in asking corporations to consider material ESG issues. BlackRock, Goldman Sachs, Citigroup and Bank of America all signed the Business Roundtable statement last year that called for a shift from shareholder capitalism to stakeholder capitalism. The average support for ESG resolutions from the 50 largest asset managers during last year’s proxy season was 46 percent, up from 27 percent in 2015, according to Morningstar.

That should bring them much closer to the SRI investors that have seen their assets under management increase from $639 bn in 1995 to $12 tn in 2018, according to data from US SIF. But this year BlackRock, Goldman Sachs, Citigroup and Bank of America will all face shareholder resolutions – filed by shareholder advocates As You Sow and Harrington Investments – that ask how they will apply the Business Roundtable’s statement to their own businesses.

For many shareholder advocates, there exists a paradox: gaining the support of large passive institutional investors can make a big difference to a resolution building momentum, but it doesn’t mean those institutions get a free pass for their own corporate ESG performance, portfolio construction or proxy voting.

For Mindy Lubber, president and chief executive of sustainability non-profit organization Ceres, this isn’t too much of a concern. She has seen ‘radical change’ from the ‘days when we were almost laughed at by the largest money managers.’

Ceres brings together more than 175 institutional investors, representing $29 tn in assets under management, in eight working groups and on campaigns such as Climate Action 100+, a five-year initiative to target greenhouse gas emitters and bring them in line with the Paris Agreement.

‘There are still some topics – like guns, nuclear weapons or any number of sin stocks – that are values-based,’ Lubber says. ‘But the largest investors couldn’t have been brought into the broader ESG debate if it was just about values. For them, it has to be about material risk and opportunity.’

Both Ceres and ICCR have seen a significant uptick in year-round engagement between valuesbased investors and large passive funds that have increased the size of their stewardship teams in recent years. ‘There’s a group of natural allies – such as CalPERS, CalSTRS, the New York State Comptroller and others – that we have engaged with and worked with for many years,’ says Josh Zinner, CEO of ICCR, which now has more than 300 members. ‘But we’re also trying to engage the large fund managers as a key part of our strategy. Once you get that support, it really turns the tide.’

ICCR has noticed a particular uptick in engagement between large passive funds during the last two years, a spokesperson confirms.

This is an extract from an article that appeared in the Summer 2020 issue of IR Magazine. To continue reading, click here to open the full digital edition of IR Magazine

Ben Ashwell

Ben Ashwell was the editor at IR Magazine and Corporate Secretary , covering investor relations, governance, risk and compliance. Prior to this, he was the founder and editor of Executive Talent , the global quarterly magazine from the Association of...