For those who assumed that socially responsible investment (SRI) firms confine themselves to buying stock in solar energy, organic juice and recycled sandals, take a closer look: Most North American SRI agencies have at least some oil, mining or gas companies in their portfolios. Financial analysts say investment agencies can’t afford to ignore the lucrative extractives industry if they want to provide good returns for their clients.
The challenge is how to be socially responsible while investing in an industry that is not inherently sustainable, will cause at least some degree of contamination – even with the latest environmental technology – and has a track record of human rights violations.
Almost one thousand investment firms representing $25 trillion in assets have signed the UN’s Principles for Responsible Investment, pledging to be “active owners and incorporate environmental, social and corporate governance issues into (their) ownership policies and practices.” They use their leverage as shareholders to try to influence company policy, including calls to defend the rights of local communities affected by oil, mining and gas projects.
This growing chorus of investors and traditional SRIs say they are shareowners, actively using their influence to push companies to improve social and environmental policies. Their stance is both moral and economic: evidence shows that poor environmental and social practices can lead to financial woes, like the $40 billion price tag attached to BP’s oil spill in the Gulf of Mexico.
But do companies really listen to these do-gooder investors? Analysts, non-profits and even company insiders say that although final decisions rest with the majority shareholders (the owners), minority shareholders – even those with relatively few shares – can have an impact. A company’s annual general meeting (AGM) provides an opportunity for responsible investors to file shareholder resolutions, vote on company policy and garner media coverage for their cause.
“Companies prepare for their AGMs months in advance and they know if a shareholder resolution is in the works,” said one oil and gas insider. To avoid the spotlight, he said, “they’ll do everything they can in advance to resolve problems.”
Private talks, phone calls and letters are more appealing to company executives who are intent on minimizing scandal. Shareholder resolutions, on the other hand, are public. If passed, the company is obliged to execute them and report on progress. Since most SRI firms hold less than 1 per cent of a company’s shares, it’s rare for their resolutions to obtain a majority vote. But a tally of 20 per cent will capture media attention and might put enough pressure on a company to address some of the issues raised.
To gain more votes, SRIs need to win over more mainstream investors. An analysis by Corporate Knights, using data from the environmental-investor group CERES Resolution Tracker, shows that SRIs are making an impact. About three-quarters of environmental and social resolutions tracked by CERES received either 20 per cent of shareholder votes or the matter was resolved in advance. The list included several oil, mining and gas companies. Issues ranged from water pollution and worker safety at Marathon Oil to climate change and emission reductions at Occidental Petroleum and Exxon Mobil.
A new study published last year by U.S. and U.K. academics shows that activism by shareholders (known as ‘engagement’) also makes financial sense. The study, which won a prize from the University of Berkeley, examined 2,152 engagements by shareholders over a 10-year period and found that successful activities led to higher shareholder returns.
But even when a resolution is passed, implementation can be difficult, as illustrated by the famous Newmont gold mining case. In 2007, a group of about 15 Christian investors filed a resolution at the gold giant’s annual meeting in Colorado. The document called for an independent review of Newmont’s poor handling of conflicts with local communities at its mines around the globe. Oddly, the resolution passed with over 95 per cent support, meaning the company itself actually voted in favour. This marked the first time a U.S. mining company had endorsed a social resolution at its own AGM.
Rev. Seamus Finn of the Missionary Oblates of Mary Immaculate, one of the resolution’s supporters, says Newmont’s support remains a mystery. “It may have been they saw the writing on the wall.”
At the time, Newmont was under fire for its treatment of local communities in Peru, Ghana, Indonesia and the U.S., and had even faced legal action for environmental contamination at a few of its mines. Despite the surrounding controversy, the resolution was heralded as a victory for SRIs.
The resulting independent review, published in 2009, was surprisingly critical of the company and included a hefty list of recommendations. In a move some consider groundbreaking, Newmont created an independent advisory panel to help implement the report that included Christian Brothers Investment Services, the leading proponent of the resolution, and long-time critics of the company like Oxfam and Earthworks.
“We felt the report could have an impact on the industry,” says Julie Tanner, assistant director of SRI at Christian Brothers. “It was one of the first in the mining industry that was so extensive and with the clear goal of trying to develop recommendations for change.”
But three years later, Tanner admits it’s been “difficult” to get information on the company’s implementation of the report. Activists put it more bluntly, saying that recent violence at Newmont’s mine proves the company has failed to follow through on the recommendations.
In 2012, Newmont was forced to suspend a $4.8 billion expansion project at its Yanacocha mine in Peru after massive protests supported by the regional government resulted in five civilian deaths. The Minas Conga gold project would have been Newmont’s largest mine to date, but locals say it would destroy four sacred lakes, the source of water for an entire farming region.
Every day of delay from protests was costing Newmont shareholders an estimated $2 million, illustrating the danger of pushing ahead with a project without first obtaining local consent. But Newmont insists that Conga isn’t completely dead. It has announced plans to build water reservoirs on the site, sparking accusations that the company is creeping ahead with plans to build the mine despite local opposition.
Newmont’s responsible investors now face some tough decisions. If they divest, they lose their opportunity to hold Newmont accountable. But if they stay, they risk being used to prop up the company’s already tarnished image. Having SRI firms on board is like being awarded a certificate of “good conduct” and Newmont’s handling of the Conga crisis hardly deserves a medal.
The case highlights another challenge for responsible investors: the issue of local consent. It’s not hard to ask a company to put more women on the board of directors or to use cleaner technologies. But what if the local community’s wishes go against shareholders’ interests? What if the community quite simply wants the company to go away?
These tough questions were put to the test when a group of responsible investors, including Ethical Funds, part of NEI, filed a shareholder resolution in 2008 asking Vancouver-based Goldcorp to conduct a human rights impact review at its Guatemalan mine. Before the resolution came up for voting, the company agreed to conduct the review and the resolution was withdrawn. A year later, the Public Service Alliance of Canada, one of the resolution’s signatories, withdrew its involvement in the review process because community leaders said they were not consulted about the resolution. They also accused Goldcorp of manipulating the review process.
That the SRIs neglected to obtain support from locals before taking action on their behalf highlights what activists consider a conflict of interest. “SRI firms might be supporting best practices, but at the end of the day they earn money from the company,” said Camilo Leon, who has worked on corporate social responsibility for mining firms, non-profits and the government in Peru. “If there’s no mining project, there’s no money.”
Can investors overcome this conflict of interest? There’s the encouraging case of Vedanta Resources, a British-based natural resources company that tried to develop a bauxite mine in India’s Orissa state despite opposition from the local indigenous group. The 9,000-member Dongria Kondh survive on hunting and gathering and said the project would destroy their water resources and livelihood.
In 2007 Norway’s sovereign wealth fund divested its holdings of Vedanta, accusing the company of environmental damage and complicity in human rights violations. Three years later several other high-profile investors divested, including the Church of England, Marlborough Ethical Fund and the Dutch pension giant PGGM. India’s government responded by rejecting Vedanta’s plans, causing the company’s shares to plummet.
The SRIs that divested not only made a strong moral statement, they also spared themselves the resulting losses from Vedanta’s falling share prices.
Examples like Vedanta, where shareholders divest from billion-dollar projects that lack a social license, are few, however. The majority of SRIs have a more subtle impact on oil, gas and mining industries, leveraging their clout to advance social and environmental policy and more efficient use of natural resources. In the process, they must navigate tricky waters to ensure they don’t harm local struggles or become good publicity for companies with damaged reputations.
The challenges are great, but the alternative is to leave investment in this sector to the sharks: those who believe “social” means a good cocktail party and “responsible investing” is about getting the highest return for clients, without caring how that money is earned.