ENVR 610 BY KEVIN MCMAHON MONTREAL NOVEMBER 29TH 2010 Socially responsible investment: true solution or snake oil?

Outline Socially responsible investment definition Research questions Corporate control Shareholder voting SRI investment techniques Main SRI funds in Canada Recommendations

Socially responsible investment definitions Integration of non-financial concerns, such as ethical, social or environmental, into the management of investment portfolios. Most popular activities  Positive screening  Negative screening  Proxy voting

Research question Are positive screens, negative screens and proxy voting effective ways to use the capital market to promote more responsible corporate behaviours in regards of environmental problems? How could SRI better encourage environmentally responsible corporate behaviours?

Corporate control 20th century: separation between ownership and control (managerialist corporation) Ownership dispersed among thousands of individual shareholders Lately, individual shareholders chanelled their savings in the hands of institutional investors (pension funds and mutual funds) Institutional investors influence corporate governance practices

Pension funds and mutual funds Major player in Canadian equity market In 2000, 30,9% of Canadian-based companies on TSX Institutional investors are intermediaries managing savings of individuals according to fiduciary duties Looking for long-term profitability 54% of pension fund beneficiaries want investments in socially responsible firms

Shareholder voting process Shareholders can submit a resolution asking for a general vote by the company's shareholders at the AGM. Executives decide if they circulate the proposal to shareholders. Proposal filer and executives can decide to withdraw the proposal. Before 2001, Canada Business Corporation Act, shareholder proposals of social nature were not allowed. Social proposals by shareholders = social, environmental and governance topics

Shareholder voting in Canada 2000 – shareholder proposals Main topic: executive compensation (35,1%) Environmental proposals = 1 on 10 social proposals (2 on 10 in the US)

Environmental shareholder voting in Canada 2000 – 2010 Three most targeted industries: Energy (36,7%), banks (26,6%), Food (11,4%) Seven companies = 40,5% of proposals Five filers = 79,7 % of proposals GHG report: 40%, Sustainability reports: 19% GHG targets, monitoring and auditing: 12,7%

Environmental shareholder voting in Canada 2000 – 2010 How many proposals were voted on or withdrawn? 79 How many obtained more than 50% of the votes? 1 How many obtained more than 20% of the votes? 12

Problematic shareholder voting process in Canada No third partie to judge eligibility of shareholder proposals Dual class shares & concentration of ownership Disconnection between institutional fund managers and beneficiaries Passivity of many institutional investors Many companies do not allow confidential voting

Positive screens Negative screens Choose stocks from companies with superior social and environmental performance Based on legal conformity, certifications (e.g. ISO 14001), internal policies, GHG plan, emergency plan and employee education Compromise = Best-in-class SRI using positive screens represent a negligible market share (5,5 billion in 2008 vs 1279 billion for TSX) Exclude or limit investments in sin industries (alcohol, animal testing, gambling, weapons, nuclear power, tobacco) Sin stocks historically showed high returns and a high demand Compromise = choose companies with no more than a certain % in the proscribed industry SRI using negative screens represent a negligible market share SRI investment techniques

Canadian SRI mutual funds Canadian SRI funds support 88% of shareholder proposals in opposition for 33% for conventional funds. Do not provide much information about positive and negative screens they use. Ethical funds (filed 24 proposals, supports 94% shareholder proposals) Inhance investment management (filed 15 proposals, supports 100% shareholder proposals) Investors (filed no proposal, supports 22% shareholder proposals) Desjardins environment fund (filed no proposal, supports 50% shareholder proposals)

Recommendations Not Specialized funds, but mainstream funds to join the movement Environmental proxy voting policy Mecanism to consult beneficiaries of pension funds and mutual funds to vote on AGM proposals Major reconfiguration of the proxy voting apparatus Direct dialogue with companies Private investments Improvement of environmental disclosure

A good example: Investor Network on Climate Risk (INCR) 90 institutional investors with assets exceeding $9 trillion Influenced a decision (February 2010) by the SEC mandating corporate disclosure on climate change that pose a material risk to investors, through a multi-year educational effort with the SEC. Persuaded more than two-dozen Fortune 500 companies to improve their climate policies, practices and disclosure. Encouraged investment of more than $1.2 billion in renewable energy and other clean technology.

CONCLUSION Limited impact of SRI Solutions  Regulatory changes to the shareholder voting process  Private investments  Direct dialogue with companies  Collective action by institutional investors