Socially responsible investing has gone mainstream, if you haven’t heard. Recent reports show that the total amount of professionally managed money invested with social and or environmental criteria has topped $11 trillion. This hasn’t gone unnoticed by a myriad of large and small investment companies and advisors. It is now more important than ever for committed conscientious investors to understand the various shades of socially responsible investment options in the marketplace. Much of what passes for environmental, social and governance (ESG) investments end up as merely a fund of typical companies which have been run through a screener to weed out the worst of them, known as “avoidance investing,” and their work is done. That’s it, pretty thin soup for investors aspiring to improve the world.
Some providers are using this novel ESG approach in luring well-intentioned investors to this very sort of low-impact investment product. Such providers do not understand or care that the very essence of today’s socially responsible investment movement is Shareholder Activism. Shareholder activists pressure companies to disclose practices or take action on company procedures directly related to environmental protection, climate issues, political transparency, human rights, racial equality, health issues and more. Shareholder activism is an essential feature of any meaningful socially responsible investment plan.
While avoidance investing is indeed a component of most comprehensive ESG investment approaches, it does not go nearly far enough alone. While we may feel better knowing that our money is not invested with the worst actors, the practice itself otherwise plays a small role in encouraging positive change and disrupting “business as usual.” Avoidance of buying shares in Exxon Mobile is not going to move the company in the direction of renewables.
Enter shareholder activism. Shareholder activism is a way that stock owners can influence business practices and help corporations move in positive directions in regard to a company’s environmental impacts, fair pay, diversity, community relations, and more. Because stock ownership represents partial ownership in a publicly traded company, stock owners are in a position to engage company management in discussions about improving business practices.
The shareholder activism toolbox includes a variety of useful methods including engagement, shareholder proposals, voting on proxy initiatives, approval of board members, and weighing in on “say on pay” issues of executive compensation. Engagement: ESG activists spend time talking with company management in an effort to negotiate consensus around proposals intended to improve environmental or social performance. Shareholder proposals: Stock holders (owning a sufficient number of shares) may submit official proposals to be brought before all shareholders at the annual shareholder meeting for discussion, consideration and vote. Approval of board members: Shareholders can support the election of sustainability-oriented board members, or members adding diversity to the body, and can withhold support for members who may oppose “best practice” sustainability initiatives.
While this may all sound a little wonk-ish, this is where the rubber meets the road when it comes to improving how business gets done in the world. These are tools that can influence real-world change and improvements in the operations of corporations large and small. Because private sector companies are so impactful and hold such an enormous sway on the way our society operates and our collective impact on the environment, including climate change, influencing their performance in these areas is a key point of leverage for positive change. Shareholder activism is indeed a lever of power.
Well managed investments are a necessity to meeting important life financial goals. In order to enjoy competitive investment returns, while at the same time deploying our money into the economy to create positive impact, it is necessary to select investment vehicles with strong management characteristics as well as a commitment to and record of meaningful shareholder activism. In constructing a successful ESG investment portfolio, a keen eye and deep research into the investment fundamentals is necessary for long-term investment success, and meaningful positive impact.