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The Color of Money

By: Jon Lukomnik

March 01, 2007

You've probably seen GE's ecomagination campaign. Love it or hate it, that's up to you. But don't ignore it, because the history of how the entire idea came about contains a lesson — and potentially a strategy — for all of us who believe that corporations can be both profitable and environmentally responsible.

In 2002, concerned religious investors, led by Catholic Healthcare West, asked GE to report on its greenhouse gas emissions. Although the investors owned only a tiny percentage of GE stock, they leveraged that fractional ownership into a formal agenda item at the GE annual meeting, through the use of the shareowner proposal process, whereby investors can place resolutions on corporate proxy statements.

Having an environmental resolution on the agenda was nothing new to GE; for years the issue was the clean-up of PCB's in the Hudson River. In the past, however, the typical environmental resolution garnered little management or shareholder support, and the company went about its business-as-usual. In this, GE was no different than the majority of US companies.

So there was no reason to think GE expected anything different this time. But it was different — despite the company's recommendation against the proposal, 23% of shares voted for it. Stunned by that result and emboldened by new leadership (Jeffrey Immelt had replaced Jack Welch as CEO not long before), GE decided to re-examine the issue. This is not to suggest that GE is more environmentally responsible than any other multi-national corporation. But, like other corporations, it does tend to react when a large percentage of its owners say they want the company to do something. What they wanted here was straightforward — for GE to examine the business case for reducing its greenhouse gas emissions. And that's just what shareholders got.

What the corporation's careful analysis revealed was stunning. Making energy efficiency a core mission not only would burnish GE's reputation, but add at least $10 billion to the company's revenues in just five years. Even to GE, that's real money.

So what changed? Certainly GE's reaction was different this time. But what precipitated the response was the vote total. Large, bottom-line oriented investors rallied to the cause of a small, socially responsible shareowner. For decades, environmental concerns had been marginalized in the corridors of Wall Street as "social issues" — the not-too-subtle semantic implication being that they couldn't also be bottom line issues. But that perception is rapidly changing. Environmental concerns are being embraced by global capital as having financial impacts. In other words, owners of the world's corporations are starting to harness their power and use it to promote sustainability, rather than short-termism.

Want further proof? Consider the following:

Carbon Disclosure Project
CDP coordinates the world's largest business cooperative project on climate change. How large? More than 1000 major corporations report on their greenhouse gas emissions through CDP. How did CDP get so many corporations to participate? Simple; it first got major institutional investors to sign on to the project. In February 2007, 280 major institutional investors, with aggregate assets of more than $41 trillion (yes, with a "T"), wrote to some 2400 companies asking them to join CDP. Those signatories ranged from "A" to "Z". Literally. The list began with "Aachener Grundvermogen Kapitalanlagegesellschaft mbH" and ended with the Zurich Cantonal Bank. The 278 names in between included some of the largest asset managers in the world. Perhaps more importantly, the corporations who have responded to earlier inquiries are, if anything, even larger and more global. Responses to the latest questionnaire are scheduled to be posted on the CDP website ( in September 2007.

Enhanced Analytics Initiative
Begun in October 2004 by a group of large European investors, the members of this collective dedicate at least 5% of their research dollars to brokerage firms and other researchers which focus on "extra financial" issues, including environmental sustainability, in their financial analyses. Five percent may not sound like much, but EAI has grown like wildfire, and, in less than three years, now boasts institutional investors with assets aggregating some $2.4 trillion. Members and associates include money managers like AXA, AGF and BNP Paribas (France), Robeco and SNS REAAL (Netherlands), Hermes and Generation (UK), and Calvert (US), as well as major pension funds from Australia (Unisuper), Canada (Batirente), the US (CalSTRS), Germany (MetallRente), the UK (BT), the Netherlands (ABP and PGGM); and, a Swedish foundation. These are far from fringe players in the global economy. Moreover, the entire idea is that the research induced by EAI will be used by non-EAI members as well, thereby leveraging the entire project across the global financial marketplace. Here is more about EAI.

The fact that CERES can be considered a respected elder of the environmental/investor collaborative action movement after only 17 years in existence shows just how quickly environmentalism has entered the mainstream of the global capital markets. The Boston-based coalition of 80 environmental, investor and public interest organizations has continuously pioneered new engagement tactics, from some of the first environmental resolutions on corporate proxies, to the first standardized environmental reporting template for corporations, to serving as mid-wife for the Global Reporting Initiative which is now the global standard for companies reporting on their environmental, social and governance activities, to launching the Investor Network on Climate Risks. It continues to innovate. In February 2007, CERES coordinated concerned investors in their efforts to file resolutions at ten "climate watch" companies. It identified those companies as lagging their industry peers in responding to climate change issues. You can track the progress of those resolutions, and 32 other climate-related resolutions, at CERES.

Why are these hybrid investor/environmentalist groups gaining currency today? After all, neither EAI nor CDP even existed at the turn of the millennium. One reason is the unprecedented change in the ownership of the world's largest companies. In 1970, mutual funds, pension funds and other commingled investment funds owned just 19% of America's largest companies. By 2005, that number stood at nearly 70%. As dramatic as that change is, the cold numbers mask a key fact. The Fidelities and Vanguards of the world are not the ultimate owners; You and I are.

When I served as investment advisor to the New York City pension funds, I was very aware that the beneficiaries of those funds were the teachers, firefighters, office workers and other City workers. Multiply that dynamic across the thousands of commingled investment funds, and you realize that the owners of most public companies are not some few rich industrialists and financiers, but, increasingly, a wide swath of society. That phenomenon has broad implications which my co-authors and I explore in our book, "The New Capitalists". One of the most basic implications is that the actions of a company inevitably now affect the owners of the company. For example, consider water or air pollution. On purely economic grounds, it may make sense for a company to act irresponsibly if it can make others pay for those actions. If, for example, a company could pollute without affecting its owners, those owners would have no economic incentive to stop polluting (leaving aside morality, societal responsibility, etc.). Economists call this the ability to externalize costs. However, with an ownership base that resembles society at large, externalization is no longer an option. Owners affected by pollution (whether directly in terms of a degraded environment or indirectly in terms of higher taxes needed to remediate the problems) have an economic incentive to suggest that their companies behave responsibly in the first place. And, through their ownership rights, they have the ability to influence corporate behavior. In other words, if a company's ownership base starts looking like society at large, then the desires of the owners start to resemble the desires of society at large. Let's not overstate the case: Convergence is not the same as being identical. The societal obligations of companies are not unlimited, and the first obligation is to make money. After all, that's why we invest. Nevertheless, the dispersion of corporate ownership through commingled investment funds means that some number of societal demands and constraints upon corporations now are exercised through ownership rights, not merely through regulation and law.

Organizations like CDP and CERES take this ownership phenomenon one step further, by aggregating corporate owners around environmental and sustainability agendas to achieve critical mass. Prompted by that critical mass of owners to examine the effects of major environmental concerns (particularly global warming) companies have come to understand that sustainability and responsibility are not disjointed from creating shareowner value, but integral to it.

This is progress but not nirvana, or even generalized success. As CERES highlighted two weeks prior to this posting, there are innumerable laggards amongst the corporate community. Still, CERES, CDP and EAI have pointed environmental activists towards a very powerful tool some didn't even know was in the toolbox: Money.

So what can you do to harness this newest green tool? Here are several effective strategies. On a personal level, remind the intermediaries managing your money that you care about how they act as environmental stewards. Own a mutual fund? Belong to a 401(k) plan? Write to the fund manager(s) and ask them to vote for the various environmental issues on the upcoming corporate proxies. Suggest they become signatories to CDP. If you're about to invest in a new mutual fund, or want to check out one you already own, review its environmental scorecard. Mutual fund companies are required to report how they vote on the various proxy issues at the companies they own. You can ask for a report from your mutual fund company, or find it on-line through the SEC's search engine. Just type in your mutual fund complex and look for form N-PX.

If you work for an environmental or other NGO, or you belong to a defined contribution pension program, you have organizational options as well. Suggest to management that they explore membership in CERES. As the coalition states, membership "offers, direct access to key corporate decision-makers and the chance to advance environmental and social objectives by establishing long-term relationships between advocacy organizations and some of the most influential and economically significant corporations in the world."

Whatever your method of engagement, remember that making a compelling case for the bottom line results of environmental responsibility is critical. Bottom line arguments attract non-environmentally-centered institutional investors to the cause. That, in turn, gets corporate attention, since it increases the number of owners who support any particular course of action. The good news is that more than ever, those traditional investors are listening, and becoming convinced that there's a reason green is the color of money.

Jon Lukomnik is co-author of The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda (Harvard Business School Press, 2006). It is available at either Harvard Business Publishing or Powell's Books.
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