Wisdom from SRI Veteran Tim Smith

Fifty years is a long time to be active in any field. For Tim Smith, his five decade career has been defined by leadership in the socially responsible investment industry. Smith co-founded the Interfaith Center on Corporate Responsibility (ICCR), which is celebrating its 50th anniversary this year, in 1971 and served as Executive Director from 1976 to 2000. The Episcopal Church, one of its members, was the first organization to file a shareholder resolution with a corporation; the resolution to General Motors in 1971 addressed its investment in South Africa’s apartheid regime. Smith joined the ICCR after graduating from Union Theological Seminary, where he did his thesis on the role of corporations in South Africa. He has spent the last few decades conducting shareholder advocacy at Boston Trust Walden Company (formerly known as Walden Asset Management).

Smith has received numerous lifetime achievement and service awards, and he still co-chairs the Policy Committee of US SIF: The Forum for Sustainable and Responsible Investment (on which I also sit). And he continues to be a leader and mentor to many in this field. Although he has no plans to retire, his unique perspective on Sustainable and Responsible Impact Investing (SRI) is valuable during this time of rapid growth and change. The following is an edited version of our recent conversation.

Michael Kramer: What led you to this work?

Tim Smith: I attended seminary in NYC and did field work with the United Church of Christ, which focused on South Africa, including challenging banks that were lending to the apartheid government. There were also other social issues in those early days that were important to the faith community besides apartheid, such as the Vietnam War, diversity and women’s rights, and the environment.

Initially it started with the simple sense that we were living in a contradiction. These faith-based investors clearly had social values motivating them as well as official policy statements on social issues. Yet our investments did not reflect this, and many felt we were living a “schizophrenic existence,” an uncomfortable ethical dilemma.

Looking at banks lending to the South African government, we realized we owned shares and had accounts in these banks. This was a business connection that opened the possibility of influencing their decisions.

Many faith-based investors already had ESG screens in place for decades, even centuries, given their stance on alcohol, tobacco, weapons, and slavery, so the denominations had a history of ethics in investing to build on.

MK: As I recall, at that time there were debates about the value of divesting from companies versus owning them in order to engage their management.

TS: Indeed, and this debate continues today––with fossil-fuel companies, for example. In these early days, faith-based organizations, pension funds, foundations and others decided to use our leverage with these companies to apply pressure. So we were a voice in the marketplace, a critical advocacy approach we continue to use today.

MK: When you came out of seminary, is this what you thought you were going to be doing?

TS: Well, my thesis on corporations in South Africa got some attention. It was even published in the Congressional record when I spoke before the House Africa Committee.

I wasn’t looking to go into a local parish. I was more interested in what we could do in the faith community to be a force for change. Initially there was a research group in the National Council of Churches working on corporate responsibility. Eventually six Protestant denominations came together to coordinate their work on issues like South Africa, including shareholder actions. I became the first member.

MK: When did you expand to other issues?

TS: We started using the same tools to address strip mining in Appalachia, diversity and equal employment opportunity disclosure, human rights, and environmental issues. We also worked on the role of companies in the Philippines and Dominican Republic, pointing to how companies should conduct themselves in their overseas operations.

MK: After 10 years of leading the faith community’s filing of shareholder resolutions, you started engaging with emerging socially responsible investment firms.

TS: I joined the advisory board for Calvert Group, a remarkable group founded by Wayne Silby and John Guffey. Calvert was the first mutual fund to take a position on South Africa. At the same time, some pension funds like New York City and New York State also started filing resolutions on South Africa, as well as TIAA-CREF, an early expansion of investor advocacy.

MK: You’ve seen the entire arc of this history to date from its very nascent state. Did you ever think you’d see this way of investing going mainstream, as it is now?

TS: Even the most optimistic of us wouldn’t have guessed back then it would evolve to this extent. I would never have guessed that we’d someday be debating what positions BlackRock and Vanguard are going to take on shareholder resolutions or the types of ESG funds they would be publicly selling.

MK: One of the concerns of SRI industry veterans is how some of these more conventional firms might weaken the long-held industry standards. What are your views?

TS: The traditional leaders of our industry are passionate about their social and environmental commitments, which led them to this work. Today, paying attention to ESG (environmental, social, and governance issues) has become a “best practice,” because these issues can affect the financial value of your portfolio.

Whether investors are motivated by this strong business case or a sense of mission, at the end of the day they take similar actions on issues like climate change and racial diversity. If a pension fund or investment firm says it’s going to vote against boards that don’t have enough women and people of color on them based on the business case, I say “that’s great. I’m glad you’re there. Thanks for having your voice heard.”

MK: Back in the day, making the ethical case was not good enough, especially when the financial performance of ESG investing didn’t always match that of conventional investing. Now some firms are doing this based on the solid financial returns and not primarily for social or ethical reasons.

TS: For many years, ICCR and its members were described as “social activists” rather than investors. But now, whether it’s investor members in US SIF, the Council of Institutional Investors, or Ceres, investors may be driven by different motivations but speak with strong common voices.

MK: To some extent one could say we’re fortunate because it was difficult to project the business case for sustainability or social responsibility back then, because there wasn’t early evidence or data to support that claim. We had to wait for years of research to prove it. Now we can say, “Look, here’s the data.”

TS: Also, there are business leaders who have acted on social and environmental issues due to the ethical imperative and also saw the strong business case for doing so, including reputational risk, stakeholder concerns, and keeping up with peers. There are many companies whose leadership is willing to do something because it’s right, not because just because it’s going to make more money next quarter.

MK: Which brings us to the purpose of investing, since many say this sort of investing breaches their fiduciary duty. Whose responsibility is it ultimately to expand the definition of fiduciary responsibility to include ESG factors? Is it ultimately a regulatory agency that redefines it?

TS: I’ve read multiple studies now on the relationship between ESG and financial performance. Acting on issues like climate is a fiduciary responsibility because it’s likely to affect the companies in your portfolio, their bottom line, and the markets. So the case for acting as responsible fiduciary agents is being made. And it’s also very helpful that the SEC recently stated we need more company disclosure on climate because it’s material for investors.

MK: Wouldn’t it be interesting if someday we could get to a place where it would be considered a breach of fiduciary responsibility to not consider these issues?

TS: I think we’re close on some issues. When you have major investment firms and pension funds issuing research papers about the threats of climate change and declaring that racial diversity is good for long-term shareholder value, people take notice. I remember during a conference held at TIAA-CREF in the 1980s, Ira Millstein, one of the conference’s respected leaders, got up and said something to the effect of: “Corporate governance is not rocket science. It has a significant impact on shareholder value, and we don’t need more research to prove that. It is demonstrably so.” And he had such stature that those words rippled outward in the room and the industry. So when the mainstream pension funds and the largest financial firms start affirming the importance of ESG factors in the investment process, it is compelling.

MK: It’s interesting to see how people are defining investment risk now. What had before been considered immaterial to financial performance is suddenly considered material. When did that crossover happen?

TS: The concern about violating fiduciary duty is still heard in boardrooms and from trustees of pension plans. But there are now hundreds of companies who detail how these ESG issues have a significant impact on their reputation and bottom line, and this has a cascading effect. Senior executives also describe the business case when they talk about how their ESG record affects their employees, attracts new college graduates, and responds to changing consumer purchasing habits.

MK: And they also do consumer market research and they know that if they want to capture a certain kind of customer, they’ve got to shift or they’re going to miss this huge and growing market for their product or service.

TS: Few companies ignore this anymore. Leading profitable companies certainly worry about their reputation, trajectory for growth, and evolving consumer trends.

MK: For a long time, our industry has set its sights on mandatory corporate ESG disclosure as the game-changer for investors’ having a more complete picture of a company’s corporate responsibility record. Do you think we stand a chance at achieving that with the SEC in the next few years?

TS: I do, and not just because the leadership of the SEC is moving in that direction. There is now a critical mass of investors who have embraced this and are talking about how climate is material. They publicly argue this sort of disclosure is urgently needed, and an increasing number of companies agree they’re willing to do such disclosure whether it’s required by regulators or not. Having a “common rule of the road” with all companies following suit will be vital for investors.

MK: Is climate change the watershed issue that could lead to disclosure on all the other issues? Or do you think it could just be limited to climate change disclosure?

TS: I think it is a watershed issue that has brought so many investors together. And I’ve also seen expanding affirmation of the need for disclosure on diversity, human rights, and other issues because companies are talking about how these issues are important and material for them. Of course, the debate is about how deep to get into the details. But we’ve won this battle conceptually. Now the conversation is focused on how to implement it.

DISCLAIMER: The views, information, or opinions expressed in this interview are solely those of the individuals involved in their individual capacity and do not represent those of Boston Trust Walden Company and its employees. Boston Trust Walden Company is not responsible for and does not verify the accuracy of any of the information presented. The interview is based on personal opinion and is for educational purposes only and it should not be considered as financial, investment, legal, or tax advice. The ideas discussed should not be considered without first assessing your own personal financial situation, and only after consulting with your financial, legal, or tax professionals. Views and opinions are subject to change at any time, without notice, and without obligation to update.

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Michael Kramer

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