Socially Responsible Investing: An Ineffective Struggle or a Powerful Tool?

Barbara Krumsiek, President and CEO of Calvert Investments, has led the company for 15 years.

Two summers ago, I had the pleasure of working at Calvert Investments, a Bethesda-based socially responsible investing (SRI) firm. The words “socially responsible investing” would often raise eyebrows as I attempted to concisely describe to other hotelies at Cornell what exactly Calvert does. Socially responsible investing is broadly defined as a holistic approach to investing that considers both the economic and social/environmental returns of your money. Although SRI accounts for less than five percent of all general investment funds, it is a growing field with potential. Cornell’s business school has had some interesting takes on this asset class.

So what does SRI look like? There are many different approaches, so I’ll just describe what Calvert tries to do. From Calvert’s view, it is an extensive process of research, indexing, and investing. First, we perform research on firms that we potentially want to invest in or that our clients are asking us to invest in. The research is comprehensive and looks primarily at environmental, social, and governance (ESG) issues for a specific company. For example, imagine that we’re considering to invest in BP. Some of the research we might do would ask these types questions (again, these are hypothetical, and they only skim the surface):

  • Environmental factors: How many oil spills have there been in the past year? What environmental remediation plans are in place? Is in-depth environmental training provided for employees? Does the firm mine/drill in high-risk areas?
  • Social factors: Are workers paid a living wage? Does the firm employ child labor overseas? What human rights violations has the company committed?
  • Governance factors: What proportion of women make up the board of directors? Has the company been investigated for anti-competitive activities? Has the firm been investigated by the SEC for trading violations? Have there been attempted hostile takeovers?

SRI firms develop comprehensive, rigorous sets of performance indicators to evaluate every industry. In other words, the questions that we ask and actions that we look for will vary; every industry has its own criteria. After we perform our research, we look at the extent to which the firm has met or failed to meet our criteria and then decide whether or not to invest. Calvert has developed a well-known stock market index called the Calvert Social Index. Calvert only includes a firm in this index (and only invests in a firm) if a firm meets all of the rigorous requirements. In fact, it’s not uncommon for a company to be dropped from a Calvert portfolio if it no longer meets ESG indicators.

So how does SRI makes its case for driving forward sustainability in the business world? At Calvert, the major method is through shareholder advocacy. When you invest in a company (e.g., through buying stocks, bonds, etc), you become a part-owner of the company. And as a shareholder, you have the right to attempt to influence that actions and direction of the company. When a group of shareholders are displeased with the acts of a company–or lack thereof–they typically first contact the firm’s investor relations department to initiate a dialogue about it. The hope is that extensive communication about shareholder concerns will cause the corporation to take action. If no action is taken, shareholders can then threaten to file a shareholder resolution.

A shareholder resolution is a proposal that shareholders submit for a vote at a firm’s yearly meeting. For example, one resolution for BP could be asking the company to measure and report in-depth data on their carbon emissions, since they do not. Or for Nike, a resolution might tell the company to pay its overseas factory workers fairly. Company management is typically against whatever the proposal happens to be. At the meeting, shareholders vote on the resolution (either for or against it). But take note: shareholder resolutions are non-binding and cannot compel a corporation to do anything.  How then can these toothless resolutions have any effect? Primarily through media coverage and public relations. When a shareholder resolution is filed, a corporation will often try to negotiate with the filer in order to have the resolution withdrawn. A vote on a resolution tends to be bad PR.

If negotiations come to naught and a shareholder resolution is indeed voted on, it becomes unfavorable press for the company. It becomes even worse PR if the resolution garners a significant proportion of votes. And the worst case scenario is when–even with a majority of votes–the corporation does not act upon the resolution. Media coverage of such events raises public awareness about important social- and sustainability-related business issues and could represent an overall win, even if the firm fails to act. Shareholder resolutions are therefore effective at times but don’t always result in the desired change.

From the consumer side, putting your money into a socially responsible investment portfolio can be satisfying because you know that your money is only going toward responsible corporations that meet strict criteria of ESG performance. The main selling point for Calvert is to “know what you own.” Interested in learning more about socially responsible investing? Check out this recent report.

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