Financial advisors know that what gets measured gets managed. When investors vote their proxies in support of greater transparency around environmental, social and governance (ESG) risks and opportunities, we can send a strong message about what we would like to see companies measure and manage.

Proxy voting is a frequently overlooked aspect of owning company stock. Voting proxies can be empowering for clients, and offering assistance in proxy research can provide a competitive advantage for some investment advisors.

With the 2010 proxy season substantially behind us, green investors are celebrating victories on many fronts. There have been dozens of successful dialogues and engagements; ESG-related resolutions have fared well as vote counts have been tabulated; and we have seen the federal government come out in support of greater corporate disclosure on ESG issues.

Today more and more investors are waking up to the idea that sustainable and responsible investment criteria are critical indicators of reputational and financial risk.  Whether investors seek information regarding a company's environmental impacts, climate change risk-mitigation strategies, executive compensation policies or any other number of issues-greater transparency is the common theme.

By The Numbers
According to Proxy Governance Inc., some 2,885 annual meetings were held in the first half of 2010. Ballots from those meetings included 570 shareholder proposals of various types, including 172 proposals related to ESG issues. Of those, 10% garnered more than 40% support from shareowners, and nearly half attracted 20% or more support. Two resolutions received majority votes; a stunning achievement.

A 20% vote may not sound like much in a world where something more than 50% is usually required to "win," but in the U.S., proxy voting is something akin to a rigged election. Most institutional investors automatically (and blindly) vote with management, and management is very rarely willing to endorse a proxy resolution submitted by a shareowner.

Since 2005, the proportion of social and environmental resolutions surpassing the 20% and 40% thresholds has increased four-fold and ten-fold, respectively. The trend toward higher voting support suggests that institutional investors are becoming increasingly concerned about environmental impacts and other negative externalities. Incorporating environmental and social liabilities into the financial considerations of corporate business operations is gaining widespread acceptance.

"Shareholder advocacy is a critical component of environmentally responsible investing," said Larisa Ruoff, director of shareholder advocacy for Green Century Capital Management. "Recent environmental disasters such as the BP oil well blowout and the Massey [Energy] mine tragedy are stark reminders that a company's environmental performance can have dramatic implications for shareholder value."

Cause For Celebration

It's impossible to track the overall number of engagements, since many dialogues are held in private, but it is estimated that almost half as many resolutions were withdrawn as showed up on the ballot in 2010. This is because company management saw some value in the shareowner's proposal and agreed to act in advance of the annual meeting. Another piece of good news comes with a 20% or 30% or 40% vote. Because of the way the proxy system works, and the high hurdles to overcome in order to garner a substantial number of votes on issues opposed by management, such vote tallies can send a loud message to the directors of a publicly traded company.

Two resolutions received majority votes. A first-year sustainability proposal at construction services company Layne Christensen won 60.3% support and sets a record for a social or environmental resolution opposed by management. And a greenhouse gas reduction proposal at Massey Energy garnered 53.1% of the shareowner vote, the highest support level ever for a climate-related resolution. Of course, all proxy votes are non-binding; so, despite the clear messages delivered to the boardrooms of these companies, it remains to be seen whether real improvements will be forthcoming.

Climate change and executive compensation were priority issues for many investors in 2010. The Investor Network on Climate Risk reported that 95 shareholder resolutions specifically related to climate change were filed this proxy season, a 40% increase over last year. More than 60 companies voluntarily chose to implement a shareholder advisory vote on executive compensation packages in recent years (sometimes as a result of proxy pressure). The new financial legislation now mandates that companies implement "say on pay" policies.

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