Conscious Choice Seattle: Fair Share

Illustration by Richard A. Huston

June 2004

Fair Share

Local shareholder activists are making sure Big Business heats up to the threat of global warming. Our climate and company profits hang in the balance

by Ellie Winninghoff

Two summers ago, Larry Dohrs climbed Mt. Olympus. It’s a rigorous trip with challenging segments of rainforest, glacier, rock and snow. The highest point is just under 8,000 feet and stands above all else on the Olympic Peninsula.

“We went four miles across the glaciers,” says Dohrs.

Dohrs thinks about that rainforest and those glaciers every workday — and frets about them.

“Those glaciers are disappearing [because of global warming],” says Dohrs. “You think, well, who depends on that? Washington State agriculture. That’s where we get our summer water. The fisheries depend on it...”

Dohrs’ voice trails off.

“I am appalled we don’t see this stuff taken more seriously, the connections between human behavior and climate change,” he says. “We have to. We just have to.”

Dohrs and his business partner, Bruce Herbert, are indeed taking the company-climate connection seriously. They operate the Seattle-based Newground Social Investment, a shareholder advocacy and investment asset firm. They and other local community leaders are helping mutual funds and big investors such as the state of Washington to realize they can be part of proxy shareholder voting efforts to persuade big companies to go big-time into protecting our environment.

Like it or not, the solution to global warming has to include big business and big institutional investors. One reason is that the federal government is not demanding and regulating the necessary manufacturing changes to protect our planet. The European Union, for instance, is significantly more progressive.

“Where there’s a will, there’s a way,” says Herbert, president of Newground Social Investment. “Whenever a larger pool of money takes a stand, then obviously you are multiplying your effect. If institutions like the state of Washington were to make a move in that direction, it becomes another nail in the coffin of global climate change.”

There’s another reason that will stoke the proxy movement for years to come. Institutional investors are motivated to act because it is good for their investments. A lack of disclosure on potential environmental and global-warming liabilities in effect promotes an ecological bubble — one that will be clearly felt from Wall Street to farmers and fisheries of Washington state and back again.

For big investors, global-warming resolutions and proxies are not about being good citizens who care about the environment, or at least not primarily so. What it’s about is being people who care about money and make a living being responsible for growing it.

On the bubble

Does global warming represent the next stock market bubble?

Listen to Denis Hayes, president of the Bullitt Foundation and highly respected mentor in this country’s environmental movement:

“The fraudulent accounting behind the ecological bubble is more audacious — and of vastly greater scope — than anything Enron ever dreamed of,” Hayes said last fall at a major annual socially responsible investing conference in the Rockies. “Refusing to include these costs in our national income accounts and financial statements is every bit as misleading — and even more guaranteed to produce a catastrophe — as surreptitiously shifting debts to offshore corporations in the Cayman Islands.”

Hayes, of course, was referring to the so-called environmental “externalities” hidden or, well, excluded from financial statements. His fear is shared by a growing number of — get this — pension funds. No, not environmentalists or people affiliated with religious denominations or even socially responsible investors. Fiduciaries. The folks charged with protecting the retirement assets of their beneficiaries.

Led by Connecticut state treasurer Denise Nappier, a group of public pension funds including New York City and New York State, California, Oregon, Maine, Vermont, New Mexico and Vermont, as well as a couple of private groups, last November formed an Investor Network on Climate Risk. (Visit www.incr.com). The goal is greater transparency and full disclosure by corporations of the risks — legal and climatic — related to global warming.

“Half a loaf of reform is not enough,” Nappier says. “The consequences for companies that do not act responsibly today and take steps to assess and mitigate the risk associated with climate change can be just as devastating [as Enron]. For example, companies could face the prospect of losing their competitive edge, incurring litigation costs or being saddled with unforeseen capital expenses.”

Gas emissions from afar

Washington State is not one of the great emitters of the carbon dioxide that causes greenhouse gas emissions, which is a highly visible hot-button issue between shareholder proxy movements and corporate boards. But according to Herbert, that doesn’t matter.

“Here [in the Northwest] our power is generated by hydropower,” says Herbert, referring to the Washington State Investment Board, which invests nearly $56 billion for 33 separate state retirement and public funds. “But we may well have investments in generation companies all around the country. So asking these companies as shareowners to report on the potential ramifications of the production on global warming and of global warming on production makes sense for our state whether or not we burn coal.”

Moreover, other Washington investors are joining planet proxies to demand full disclosure of climate risk and a switch to renewable energies. Sister Judy Byron heads up the Northwest Coalition of Responsible Investment, whose 18 members include religious communities, mostly of women, and health-care groups. Byron’s group is part of the Interfaith Center on Corporate Responsibility (ICCR), a coalition of 275 religious institutional shareholders representing over $100 billion.

In l991, individual members of ICCR began looking at global warming. By then, the insurance industry reserve (a reserve that takes years to build) already had been depleted by one third due to climatic incidences, according to Sister Patricia Daly, executive director of the Tri-State Coalition for Responsible Investment, another ICCR member.

“[Insurance executives] understood right from the beginning what was going on,” Daly says.

A subtle but powerful fact: These days, she says, when assessing companies for directors’ liability insurance, re-insurers Munich Re and Swiss Re now specifically ask them if their boards have considered the liability of climate change and what they are doing to mitigate the risk.

“The question that a company needs to respond to is out there,” Daly says, “regardless of what industry the company is in.”

Not until the late ‘90s did ICCR as a group set up a task force to look at which firms might be contributing to climate change. Members broke into working groups to focus on major companies in key sectors. In 2001, global warming became a prominent shareholder campaign coordinated by ICCR. It works closely with the Coalition for Environmentally Responsible Economies (CERES), a group of investors, environmentalists, labor and public interest groups. Members of the campaign belong to ICCR, CERES or both. It includes socially responsible mutual funds such as Progressive Asset Management and Portfolio 21, an investment advisory headed up by Leslie Christian, with offices in Seattle and Portland. The public pension funds are the first mainstream investors to join the join the proxy fights on global warming and climate control.

The coalition has “primary” filers who lead the “engagement,” or dialogue, with a particular company regarding a climate issue. Daly, for instance, is ICCR’s point person for global-warming resolutions at ExxonMobil, Ford, Southern, ChevronTexaco and General Motors. Joe Connellan, treasurer of the Washington province of the Sisters of the Holy Names of Jesus and Mary in Spokane, is his organization’s point man for global-warming resolutions at ChevronTexaco and General Electric. Engagements often involve ten or 15 people, some linked in by conference call. They can occur as often as twice in a month.

The companies are noticing and paying attention.

“Working in community” has boosted ICCR into a potent force, says Connellan. For her part, Daly said shareholders will be acting together with companies and their boards to make sure the global-warming liability numbers are correct.

“We’ve been working with the companies to design the studies and agree on a variety of consultants so that there are legitimate reports and the liability numbers are correct,” Daly says.

To understand just how affected corporate America must be, consider ExxonMobil’s annual meeting in 2003. Rather than allowing a line to form so shareholders could speak freely, the company set the stage so those speaking in favor of a resolution lined up at one microphone and those against at the other. According to several reports, the company flew in people from as far away as Africa so they could speak “against the shareholders,” as Daly puts it.

At the Exxon meeting, Daly interrupted her own speech on global warming to tell the company it should be ashamed. “You have made a mockery of this process,” she said. “This is the only time all year we’ve got, what, two and a half hours to speak before this company? We own the company!”

That said, ICCR and its colleagues do most their work behind the scenes on a confidential basis. In fact, it’s only when they’ve hit a wall that they file shareholder resolutions. Even then, though, if negotiations over an issue continue and advocates are pleased with their progress, they withdraw the resolution — something that happened this year with five of six electric companies, the largest emitters of greenhouse gases.

Consider it power of the proxy — or even the prospect of one.

“For many years, I’ve always said the most successful resolution is the one shareholders don’t see,” Daly says, “because there’s been an agreement. Last year, Ford broke that model. We had withdrawn the resolution because of some plans they had put on the table. Part of the withdrawal agreement was they went ahead and published the resolution in the proxy anyway and we together issued a statement regarding what was going on. So now I say the best shareholder resolution is the one that we’ve withdrawn but shareholders see it anyway.”

No secrets or hidden agendas, please

Daly said she was happy to see some of her colleagues pick up on a full-disclosure model for proxies that have converted to actions.

“Let’s not do this in secret,” says Daly. “This is critical for the rest of the shareholders [to know].”

So how have global warming resolutions done this year? In general, resolutions that once attracted six to 10 percent of the vote are now getting 20 to 30 percent.

To put this in perspective, consider that to win the right to bring a resolution the following year, shareholders need to garner at least three percent of the vote the first year, six percent the second year, and 10 percent the third year.

If they don’t make those thresholds — something that happened two years ago at ChevronTexaco when ICCR’s resolution only won 9.99 percent — shareholders must wait three years before they can the bring the same resolution or a similar one again.

Even if a resolution wins 51 percent, however — or 100%, for that matter — no resolution is legally binding on the company. As undemocratic as that may appear, the reality is management quivers when those numbers rise.

“In the post-Enron era, any company that is not responsive to shareholders looks like it’s got something to hide,” says Chris Fox, director of investment research at CERES. “That only increases the scrutiny.”

Scrutiny abounds. In Enron’s wake, a new breed of corporate governance rating analysts has emerged. CERES last year published a report authored by Douglas Cogan of the IRRC that connected a company’s policies on climate change with its corporate governance (available at www.ceres.org).

“The insurance industry already has been under the gun with asbestos,” says Leslie Lowe, director of ICCR’s Program on Energy and the Environment. She points out that asbestos has caused some companies to go under and others to recapitalize.

New off-the-balance-sheet risk

“Undisclosed environmental liabilities are a new off-the-balance-sheet risk for investors,” Lowe says. “Right now, companies don’t have to quantify it so much as provide a narrative of what they are seeing coming at them. And they are not even doing that.”

In fact, getting resolutions in the proxy is a game in itself. Companies lobby the SEC to omit the resolutions. This year, for example, the SEC omitted a resolution asking ExxonMobil for a report on renewable energy. The company already had produced a report, it argued, even though it did not include the information ICCR colleagues wanted.

“Luckily another member of ICCR [Daly] filed another resolution asking them to give the scientific data that would support their position on global warming,” says Father Michael Crosby, associated with Province of St. Joseph of the Capuchin Order and the primary filer for the omitted resolution. “ExxonMobil tried to [stop] that resolution also by saying they had effectively implemented it. But the SEC did not agree, and so that resolution is on the proxy.”

The good news: Shareholders withdrew resolutions at five of six electric companies — key emitters of greenhouse gases — this year. The companies agreed to produce reports on climate change published by the board or a committee of the board.

In terms of systemic change, it is important work. According to Connellan, getting the system back in balance requires breaking two links: campaign finance reform and shareholder activism. “American shareholders have abdicated our responsibilities as owners,” he says. “Management relies on that abdication.”

The proxy season is not over. But engagements continue and shareholders are already planning strategies for next year. As Connellan points out, the Sisters take a long-term view.

“They do it very softly,” he says. “It is not adversarial. Their approach is, ‘We are here to help you make decisions because long-term it will be better for you.’ “

Ellie Winninghoff is a Seattle-based investigative financial writer.

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