By Michael Kramer This article first appeared in the April 2008 edition of the Natural Investing newsletter
As you may know, our company, Natural Investments LLC, constantly monitors the field of socially responsible mutual funds and evaluates them with our NI Social RatingSM. This puts us square in middle of an ongoing dialogue among SRI professionals about different approaches to being “socially responsible”. Two of the main schools of thought are “avoidance screening” and “best-in-class”. The first seeks to avoid entire industries that are viewed as harmful, while the second includes companies in problematic industries but invests only in the companies that are judged to be the best in their sector for environmental and social performance. The appropriate approach, it seems, depends on one’s personal and societal goals.
Kinder, Lydenberg & Domini (KLD) is a leading corporate social research firm that has created numerous SRI indices that represent both approaches. Their flagship Domini 400 Social Index practices avoidance screening. But their newer products, such as the KLD Global Sustainability Index, include the industries’ best companies in most sectors rather than exclude them. Since indices typically put more emphasis on larger companies, the results can bring about odd situations where, for example, Royal Dutch Shell is the second largest holding of the Global Sustainability Index.
As you’re reading this article, go ahead and cross your arms as you usually would. If you notice, you can accomplish this effortlessly, without really thinking about it. Now, release this position and cross your arms again, only this time put the other arm on top. How awkward was that?
Human behavior is full of habitual practices, which is why doing something as simple as crossing your arms a different way isn’t a simple task. We have similar habits in many aspects of our lives, from how we brush our teeth, cook our food, and study for tests to how we treat people, dress, and shop. We also have very different tendencies when it comes to moving beyond our comfort zone and embracing change.
During the recent SRI in the Rockies conference in late October 2009, the leading social investment professionals in the industry heard from the chief legal counsel to SEC Commissioner Luis Aguilar about an exciting ruling that allows the filing of shareholder resolutions that address the financial risks of corporate activities in environmental and social areas. This is a huge victory for the SRI industry, which organized an extensive campaign to reverse the Bush Administration’s SEC decision to disallow such resolutions on ESG issues. The social investment industry wrote a December 2008 letter to the incoming Obama Administration that “effective disclosure of these issues through the proxy process can lead to better anticipatory action by corporations such as the control of greenhouse gases and the development of safer alternative materials.”
While most shareholder resolutions, particularly those that address issues surrounding climate change, merely ask companies to conduct analyses of the risks associated with global warming, the Bush Administration saw this as interfering with management. But in a stark reversal, the SEC stated, “We have recently witnessed a marked increase in the number of no-action requests in which companies seek to exclude proposals as relating to an evaluation of risk,” but “our application of the analytical framework may have resulted in the unwarranted exclusion of proposals that relate to the evaluation of risk but that focus on significant policy issues.” As such, the SEC stated, “The fact that a proposal would require an evaluation of risk will not be dispositive of whether the proposal may be excluded.” What still needs to be determined, however, is whether the particular issue contained in a given shareholder resolution meets the threshold for consideration under the new ruling. In the absence of specific criteria, SEC staff will be left to make subjective determinations of what is appropriate or not within the social policies suggested in shareholder resolutions.
Michael Kramer is a Managing Partner of Natural Investments LLC and the Director of Social Research