Socially responsible investing
Socially responsible investors -- who base their investments on companies’ social and environmental behavior -- are no longer rare. Although socially responsible investing is still a niche market, it is growing rapidly. It is being adopted by mainstream investors -- typically stock market investors -- as evidence mounts that good social and environmental performance translates into better overall business performance (WBCSD 2002:9). (See Box 6.7 The growth of socially responsible investing.)
Socially responsible investing is a powerful lever for corporate accountability because it offers a direct route to the ear of corporate managers and boards of directors -- those with the power to make company practices more responsible. Shareholders have access and economic leverage: they can meet with management, sponsor shareholder resolutions at annual company meetings, and divest their stock if they are not satisfied with management’s response.
A common approach to SRI is to positively or negatively "screen" companies. In negative screening, an individual investor or mutual fund manager avoids investing in companies whose practices are perceived to be harmful to people or the environment, such as tobacco or alcohol producers, munitions manufacturers, or businesses that don’t provide healthcare for employees. Positive screening involves deliberately seeking out companies that offer solid financial returns and yet are leaders in social and environmental performance.
Another approach is to marshal shareholder power to actively press for change at the highest level of corporate decision-making. Shareholders can provide constructive criticism of corporate practices and suggest alternatives by filing what are known as "proxy resolutions." For example, they can file a resolution asking an oil company to promote renewable energy sources, or a mining company to analyze and report the impacts of its operations on biodiversity. Technically, shareholders “own” the company, so if enough shareholders vote in favor of the resolution, the company must act.
This tactic has become more popular and effective in recent years. In 2001, shareholders filed 261 resolutions on social issues (SIF 2001:16). Although these resolutions rarely receive a majority vote, the pressure they bring from shareholders -- often in conjunction with work done by NGOs, citizen activists, and consumers-- has convinced some of the biggest companies to change their practices:
- In 2000, socially responsible shareholders convinced several Fortune 500 companies, including Ford Motor Company and Nike, to endorse the CERES Principles—a ten-point code of conduct that commits companies to improvements in environmental performance and reporting (SIF 2001:17).
- Shareholder pressure helped convince General Elec tric to make its new line of washing machines 20 percent more efficient in water and energy use by 2004, and 35 percent more efficient by 2007. GE’s move led to major improvements in energy- and water efficiency across the appliance industry (Domini 2001:87).
- Fifteen institutional investors (investors owning large blocks of shares) joined an environmental coalition in 2000 that convinced Mitsubishi Corporation to abandon plans for a salt factory in the Gulf of California, Mexico that would have destroyed a calving site for grey whales (SIF 2001:15).
- Shareholder pressure in 2000–2001 helped convince the top five pharmacy chains in the United States, as well as other retailers, to phase out distribution or production of mercury-filled thermometers, which can release mercury when disposed of (SRI World Group Inc. 2001b:56).
Among the successes enjoyed by socially responsible investors in the 2002 proxy season were a record 19 resolutions filed with major companies on the topic of climate change. Shareholder resolutions to coax companies to address global warming are the fastest-growing category of socially motivated resolution (Innovest 2002:12).