Late last year, after discovering that their school’s $854-million endowment held shares of Exxon Mobil Corp. (NYSE: XOM), a group of students at Middlebury College in Vermont joined three asset management funds and five Catholic orders in calling for the company to reveal potential financial risks from the environmental impact related to Canadian tar sands oil extraction.
After months of legal wrangling, the Securities and Exchange Commission ruled against the students, saying that Exxon’s tar sands development is part of the company’s normal business operations and need not be treated as an out of the ordinary activity that requires special disclosure. But although they lost, the students put Exxon on notice that they are watching the oil giant’s environmental policies closely and are ready to use their leverage as shareholders to ensure that the company protects the regions it drills in.
“This was a great example of (shareholders) getting involved to change corporate behavior,” said Dan Apfel, executive director of the New York-based Responsible Endowments Coalition.
This incident exemplifies how far socially responsible investing, or SRI, has come since the end of the 20th century. Once the domain of boutique funds catering to small groups of investors opposed to profiting from weapons, gambling, tobacco or alcoholic beverages, today SRI has a much larger presence thanks to the growing number of individuals that care about whether their investments reflect their values. One result of this increased scrutiny is that SRI is having a substantial impact on the way companies go about their business.
According to the Washington D.C.-based Forum for Sustainable and Responsible Investment, growth of U.S. assets under SRI management, where publicly listed companies are screened not just for capital growth prospects but also for their environmental impact, social sensitivity and governance policies, has ballooned to $2.5 trillion in 2010 from $162 billion in 1995. That figure amounts to roughly 10 percent of all U.S. equity mutual fund assets. Consultants Booz & Co. estimates that SRI could account for as much as 20 percent of U.S. mutual fund investments by 2015.
"People who choose SRI-focused mutual funds believe that when you're investing in a company you're actually backing the practices of that company," said Marc Lane, a Chicago-based lawyer who handles $50 million in SRI assets.
There are dozens of SRI funds that run the gamut from the Calvert Funds, which screen for positive labor relations and human rights policies; to the Gabelli green funds that focus on environmentally conscious companies; to Pax World’s Women Funds, which won’t invest in, among other things, companies that do animal testing; to more niche funds like the Timothy Plan, which avoids companies involved in abortion, pornography, anti-family entertainment or alternative lifestyles.
Perhaps the greatest evidence that SRI is making a difference, experts say, can be found in the way companies increasingly embrace social and environmental concerns as part of their so-called core values. Virtually every company, mindful of the power that angry investors have to hurt an organization’s reputation by protesting allegedly bad behavior, has set aside a section on its Website to convince potential investors how important being a good corporate citizen is to the business.
For example, Wal-Mart Stores (NYSE: WMT), which has faced allegations in the past of buying products from sweatshops in undeveloped countries, has published a 13-point set of standards for its suppliers to follow that include fair wage and collective bargaining practices and above standard work conditions. Moreover, most SRI investment experts say that Wal-Mart is doing a much better job recently of responding to complaints of environmental or labor abuses in its supply chain.
And just twelve years ago, General Electric (NYSE: GE) was seen as one of the worst corporate polluters for the tons of PCBs its factories dumped into the Hudson River in the prior decades. But today, GE is not only spending $490 million to clean up the waterway mess but it has also become a worldwide leader in green technology.
"GE’s not doing that because CEO Jeff Immelt cares about the environment," said Bennet Freeman, senior vice president for sustainability research and policy at Bethesda, Md.-based Calvert Investments Inc., which has $11.5 billion under management. “He's more like Willie Sutton who robbed banks because he knew where the money was. GE saw a demand in renewables and found growth.”
“This is what SRI asset managers salivate at,” he added.
And while environmental and social behaviors still tend to be of interest to a minority of investors, good corporate governance (once also a limited concern) has become standard criteria for investments, even among non-SRI funds. Attorney Lane says evaluating how company decisions are made, the executive board structure, the transparency of company reports and internal checks and balances are “now part of normal financial screening.
"We look at those issues first before we even go into social and environmental screening because if we can't trust management or its system, or trust the numbers, it's not a company we're going to want to invest in regardless of its behavior," said Lane.
Indeed, the emphasis on good governance, initially by SRI funds, has propelled a rising tide of shareholder activism by small and large investors, whose expectations for how companies should be run have been heightened by the availability of more information about corporate activities from money managers, bloggers and SRI activist organizations.
For instance, at the June 8 shareholder meeting of Oklahoma City-based Chesapeake Energy Corporation (NYSE:CHK), a slew of angry investors delivered a sharp rebuke of the energy giant’s management and board, withholding support for two directors up for re-election and voting down the compensation plan for the company’s top executives.
This came in the wake of revelations that CEO and company co-founder Audrey McClendon took out personal loans from Chesapeake’s lenders, driving the nation's second largest natural gas producer into debt obligations that prevent it from selling assets to raise capital. In the days following the meeting, McClendon was stripped of his board chairmanship, although he remains CEO. One large Chesapeake investor called the meeting the “high-watermark and one of the biggest protest votes ever registered at a U.S. annual meeting.”
Describing the event, Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware told DealBook: "Years ago, it was really just the large pension funds and labor funds. Today you're seeing a very wide mix of people."
One observer called SRI stockholders the most demographically diverse group of investors of all fund categories. And while there’s no clear data to show whether that remark is true, one thing is certain: companies that try to get away with deleterious social and environmental policies anymore will find themselves navigating protests from investors (or would-be backers) that they paid little attention to before.