By Cydney Posner
This article from The Economist, discusses the prevalence of increased disclosure about environmental impact and vulnerability to green regulation. In some cases, the enhanced disclosure is designed to head off shareholder proposals. Until recently, there was not much discussion of environmental exposure; however, according “to CDP, a group that collects environmental data on behalf of investors, more than half the companies listed on the world’s 31 largest stock exchanges publish some environmental data, either in earnings reports, as part of stock market listings or voluntarily to CDP itself. In some markets, including the London Stock Exchange and Deutsche Börse, over 80% of large firms publish this sort of data, ranging from their greenhouse-gas emissions to the return on investment of projects which aim to reduce pollution.”
While some companies that offer a number of green products are happy to provide this type of information, other companies may need more prompting, such as by SEC rules requiring disclosure of material risks related to climate change. But the article suggests that “by far the biggest influence on firms comes from investors.” CDP , which works for investors with $92 trillion in assets, regularly distributes “questionnaires to 5,000 firms asking things such as, ‘Does your company have emissions-reduction targets?’ and ‘If you do not have any emissions-reduction initiatives, please explain why not.’ A network of investors called Principles for Responsible Investment has over 1,000 members with $34 trillion of assets under management. Investors’ main concern is that climate change—or policies to avert it—will damage the firms they invest in, whether they be energy companies with stranded assets, food companies exposed to droughts in Africa or chemicals producers suffering regulatory risk in Europe.”
Unfortunately, the article observes, because the SEC gives companies a wide berth on principles-based disclosure and companies do not want to disclose more than their competitors, the information that is provided is not standardized, consistent or comprehensive. For example, the article contends that less than two-thirds of insurance companies made any climate-change disclosures in SEC filings in 2012 and much of that disclosure was “sketchy.” However, the article advocates that more “good environmental information would be hugely beneficial. True, it is a burden on public companies which private firms would not have to bear. But that burden is not onerous: most green data are cheap to collect, since emissions (for example) are tied to energy usage, which companies track anyway. Better information would help the environment by steering investment away from polluters. And it could be good for companies, too. A study published by Harvard Business School in 2011 looked at 180 firms over 18 years and found that those which paid the most attention to environmental matters also did best when measured by share prices and earnings. This does not prove that greenery causes good performance—more likely, well-run firms pay attention to both—but at least they are not in conflict. The implications are that there ought to be generally accepted accounting principles for the environment, and that policymakers should pay more attention to efforts under way to create them. The basic framework would not be hard to set: companies should publish assessments of climate risks and opportunities…; disclose their greenhouse-gas emissions; and explain how they are seeking to cut them. Investors would benefit; so might the planet.”
As noted above, if regulations are not altogether effective, investors often seem to be. This article from the WSJ, discusses the impact of shareholder pressure on corporate policies and disclosures. According to the article, companies are being driven to make disclosures that were “unthinkable a decade ago, on issues ranging from protecting rain forests to human rights. Even the threat of a proxy vote can be enough to bring company executives to the negotiating table. So far this year, environmental and social issues have accounted for 56% of shareholder proposals, representing a majority for the first time, according to accounting firm Ernst & Young LLP. That is up from about 40% in the previous two years, and means shareholders are increasingly voting on things like greenhouse-gas emissions, political spending and labor rights.”
Proponents of these types of proposals are often effective in persuading companies to agree to much of the substance of the proposals before they come to a vote. (And in those cases, the proposal is usually withdrawn.) For example, the New York comptroller who oversees the $160.7 billion New York State Common Retirement Fund had submitted about 65 proposals this past year. Before the vote, he was able to persuade one large grocer to make certain products in ways that do not harm rain forests and one large communication company to publish a “transparency report” on requests from the NSA and law-enforcement agencies for customer data and phone records. According to EY’s review of 700 proposals, proposals to report their political spending and lobbying efforts were the top two shareholder proposals this year. By contrast, last year, more traditional corporate governance topics predominated.
And these proposals have apparently had some effect. The Center for Political Accountability reports that “[n]early 80% of companies in the S&P 500 index now disclose at least some information about their political-spending policies, a practice virtually unheard of a decade ago. Some 53% now publish sustainability reports, according to the Governance and Accountability Institute, addressing such matters as their energy efficiency and labor standards. And, about 22% have human-rights policies, according to the Conference Board, a private research group.” Proponents “hope peer pressure will convince others to follow suit.” The article speculates that one of the “reasons for this year’s surge in social and environmental proposals is the strong stock market, which has left shareholders little room for complaints about performance.” The article notes that these shareholders “aren’t agitating for higher returns…, but rather are long-term investors at pension funds, unions and coalitions of socially conscious shareholders.”
Environmental and social resolutions are not generally binding and are rarely successful when submitted to a vote. According to EY, the typical environmental and social proposal receives favorable votes from holders of about 21% of the shares, compared with 33% for shareholder proposals overall. However, “even failures can have an impact, especially if investors target an issue that resonates with a company’s customers.” And some of these resolutions do win majority votes. Last year, shareholder proposals asking a public fertilizer maker to disclose political contributions and publish a sustainability report each received more than 65% support. Even though the proposals were precatory, the company produced the information after the shareholder votes. And some proponents actually believe that companies are starting to comply because they think it’s the right thing to do. According to one shareholder, “’[w]e’re getting to the point where companies are not just listening to a squeaky shareholder, but doing this because they believe it is a good thing to do for the company.”