Fiduciary Duty

Investors Seek More Disclosure by US Chamber of Commerce Members: Secrecy of Trade Groups' Political Spending at Issue

Earlier this month, a coalition of investors filed resolutions at four corporations whose members sit on the Board of the US Chamber of Commerce. The filers called for Accenture, IBM, Pepsi, and Pfizer to “review their policies and oversight of political expenditures, especially through trade associations,” according to a release by coalition member Walden Asset Management.

The Supreme Court’s January 2010 Citizens United decision explicitly permitted unlimited, anonymous political spending by private organizations, including unions and corporations. This decision has already sent waves of undisclosed money through the US political system. In the November elections, out-of-state oil companies spent millions on a California ballot proposition, while the Chamber spent almost $30 million on campaigns nationwide, according to BusinessWeek:
 

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Q&A with a 'Quant': A Pro's Perspective on ESG Integration into Mathematical Modeling

In a November 2 Wall Street Journal article, reporter Carolyn Cui wrote that “math geeks and altruists are forging unlikely alliances in the quest for better investment returns.” “Quants and Do-Gooders Unite” provided recent examples of the integration of environmental, social and governance (ESG) data into mathematical modeling of possible portfolio performance.

ESG factors are conventionally understood as “qualitative” attributes of a given business, rather than as comparative data that could tell investors how that business’s stock may perform. For example, a traditional socially responsible investor (SRI) might seek to avoid holding any companies that produce military weapons. For that investor, the only numbers needed are binary; a company either passes their “no weapons” screen or not.

Over the past 20 years, SRI/ESG research firms have sought to enable more subtle and granular analysis of corporate ESG performance. MSCI ESG Research progenitors Innovest and KLD developed comprehensive frameworks to generate comparative data across a spectrum of ESG indicators, from carbon emissions to executive compensation practices. IVA, Global Socrates, and the KLD Indexes (now MSCI ESG Indices) support both qualitative and quantitative approaches to portfolio construction.

While Ms. Cui’s article highlights the novelty of “math geeks and altruists” working together, such détente isn’t without precedent. In 2005, KLD worked with Barclays Global Investors to create an exchange-traded fund based on what is now called the MSCI KLD 400 Social Index.

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WSJ Takes on CSR, But Who Are They Talking About? The Problem of Agency in Parsing Punditry

On August 23, the Wall Street Journal published an editorial by Dr. Aneel Karnani that questioned the value of corporate social responsibility (CSR). His argument was directed against “pleas” and “appeals” for executives to “act voluntarily in the public interest and against shareholder interests.” He called CSR “irrelevant or ineffective,” an “illusion, potentially a dangerous one.” A reader unfamiliar with the term might surmise that CSR is actually a dangerous chemical, like DDT.

The socially responsible investing (SRI) community, as expected, took issue with Dr. Karnani’s column. Social Investment Forum (SIF) CEO Lisa Woll wrote to the Journal, countering the polemic with real-world evidence about the positive impact of corporate sustainability efforts. (With permission from SIF, Ms. Woll’s letter is printed in full at the bottom of this article.)

Besides its empirical shortcomings, Dr. Karnani’s case also betrays a methodological flaw that is both common, and instructive: While we can tell what he takes issue with, it’s never quite clear who he’s talking about. Here is the plainest statement of his thesis about corporate social responsibility:

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What Dodd-Frank Could Mean for SRI: A Recap from SIF's Peter DeSimone

[Ed. Note – The Dodd-Frank financial reform bill could significantly reshape the American economic landscape. Some of its provisions will affect core activities of the socially responsible investing (SRI) community, such as proxy campaigns involving executive pay and corporate environmental, social and governance (ESG) practices.

The Social Investment Forum (SIF), of which RiskMetrics is a member, has coordinated the SRI community’s input on what became the Dodd-Frank bill. SIF Director of Programs (and RiskMetrics alum) Peter DeSimone wrote a succinct summary of Dodd-Frank for the SIF listserv, and he has graciously permitted us to repost his letter here. If you have further questions about the implications of the bill for investors, please contact SIF.]

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The 2010 Ceres Conference: Oil & Water Will Never Mix

Tuesday evening, the Ceres coalition’s annual conference began in Boston. The group formed in 1989 in response to the Exxon Valdez’s grounding on March 24, 1989. The backdrop to its 2010 conference could not be more dramatic, more urgent.

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Dan DiBartolomeo and Lloyd Kurtz on the KLD400 Social Index: 20 Years of "SRI as a Free Good"

The FTSE KLD 400 Social Index (KLD400) celebrates its 20th anniversary this month. The world’s first benchmark index constructed using environmental, social and governance (ESG) factors, the KLD400 sparked a new era of responsible investing, helping transform the field from a small niche into today’s $6.7 trillion global market. [Source: Eurosif 2007] Since 1990, the KLD400 has outperformed the S&P 500, proving that a portfolio constructed using ESG criteria can, over the long term, deliver competitive risk-adjusted returns.

Dan DiBartolomeo and Lloyd Kurtz, who was one of the original KLD employees apart from the firm's founders, have studied the risk and return characteristics of socially screened portfolios over the past two decades.

Dan and Lloyd spoke to us about the KLD400’s contribution to mainstream investing, how SRI has evolved over the past 20 years, and some of the challenges that remain. [Ed. Note – Biographical info for Dan and Lloyd can be found at the end of this interview.]

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2010 Proxy Season: SEC Reveals its Reasoning on ESG Proposals

During this proxy season, the Securities and Exchange Commission (SEC) has been shedding more light on the reasons for its rulings on no-action petitions to exclude shareholder proposals from corporate proxy statements. In many cases, the staff of the SEC's Corporation Finance Division has been including nuggets of information that provide some enlightenment on why the agency made a particular decision.

Before this season, the ruling letters had been limited to largely unadorned comments that companies either must--or need not--include disputed resolutions under specified sections of SEC Rule 14a-8, the shareholder proposal rule. These opaque rulings made it more difficult for proponents to revise their omitted proposals to survive future challenges.

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ESG 'Active Owners,' Like Norway, Have Better Control of Investment Horizons

Responsible Investor has reported that Norway’s sovereign wealth fund is stepping up its engagement with the companies whose shares it owns. In some cases, Norges Bank’s Global Pension Fund will opt for “active ownership” of a company that violates its ethical norms, rather than avoiding the stock entirely. Engagement “might reduce the risk of continued violations of ethical norms better than exclusion, which leaves the fund with no influence once shares are sold,” wrote RI’s Hugh Wheelan.

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Too Much Information on Publicly-Traded Corporations?

US disclosure-based regulation ... suffers from two critical failings. First, it lacks coherence in that shareholder rights are presently too weak to compensate for the hands-off regulatory approach. Second, disclosure has been deployed excessively as a regulatory tool, resulting in inundation of information.¹

So wrote Simon Wong, managing director at Governance for Owners and Adjunct Professor of Law, Northwestern University School of Law, in the Financial Times on Feb. 28.

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Investors, Legislators Respond to Citizens United Ruling

In response to the U.S. Supreme Court's Citizens United v. Federal Election Commission decision, investors and lawmakers are mobilizing to obtain more disclosure on corporate political spending.

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