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.

Prior to the financial reform package just signed by President Obama, the Securities and Exchange Commission (SEC) issued interpretive guidance on what companies should report related to climate change-related business issues. This is the first official SEC citation of climate change as a source of risk and/or opportunity, and the first mandate for companies to disclose climate change impacts to investors. This move by the SEC could have a dramatic impact on how companies manage their environmental impact, and what they tell investors about those efforts. Remember, what gets measured gets managed.

Breakout Issues
Two new issues attracted widespread attention and votes in 2010:  hydraulic fracturing (hydro fracking) and coal ash disposal.

Hydro fracking (or "fracking") is a process that is used to extract reserves of natural gas from underground pockets. The process requires the injection of as much as 7.5 million gallons of water and toxic chemicals under extreme pressure per well to crack open rock and allow the gas to flow to the surface. While this process is one of the major developments behind the explosive growth of domestic shale gas production (capture of natural gas trapped in permeable shale formations), it is causing great concern because of the secrecy around the toxic chemicals used. In some areas of the country, ground and drinking water pollution has occurred. Shareowner proposals which called for reports summarizing efforts to mitigate environmental impacts of hydro fracking operations received an average of 32.1% support across five companies, including Williams Cos., where such a resolution received 41.8% of the vote.

Coal ash is a waste product of the coal burning process that contains arsenic, mecury, lead and other toxins. Coal ash is usually stored in landfills, impounding ponds or abandoned mines. A December 2008 breach at a Tennessee Valley Authority coal ash pond released 1.1 billion gallons of coal ash sludge over more than 300 acres in eastern Tennessee. Shareowner proposals asked coal-fired utilities to report on their efforts to mitigate the possible health and environmental hazards. Average support for three coal ash resolutions was a surprising 34.9%.

"We expected votes in the twenties, but the resolutions received shareholder votes in the forties," said Michael Passoff of As You Sow. "You figure that people who own coal companies are not going to be too concerned about that issue; it's part of the industry, and shareholders generally accept those risks. I don't think those companies ever received that kind of feedback."

What You Can Do
While most independent financial advisors have limited capacity to develop advocacy programs of their own, we can stay on top of the trends and become an information source and educator for our clients. While roughly 30% of shares are held by retail investors, fewer than half of those shares are voted.

First Affirmative Financial Network provides proxy voting for all clients who authorize us to vote on their behalf based on a set of criteria that reflects the social and environmental priorities of most of our clients. For investors wishing to vote their own proxies in line with ESG criteria, a number of tools exist for advisors to help. Moxy Vote is a new platform that offers free proxy research and allows registered users to actually vote their proxies and submit their votes online. Proxy Democracy also offers free research and will show you how various mutual funds are voting the shares held in their funds.

Collectively and individually, shareowners are finding ways to engage companies on the issues that are important to them. Advisors who serve social investors have an important duty to either climb the proxy voting learning curve or refer their clients to appropriate outside resources. One of the best ways to begin learning is to begin voting!

Steven J. Schueth is president of independent registered investment advisor First Affirmative Financial Network LLC. First Affirmative specializes in socially responsible, sustainable and transformative investing, and supports a nationwide network of investment professionals who work with socially conscious investors. First Affirmative also produces the annual SRI in the Rockies Conference. The 21st annual SRI in the Rockies Conference will be November 18-21, 2010. Schueth is a former director and spokesperson for the non-profit Social Investment Forum. He can be reached at [email protected].