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How Investors Can Engage Companies on Sustainability

BlackRock and Ceres collaborate on a practical guide for convincing businesses about the need to focus on long-term challenges.

You don’t need to look any further than today’s California water crisis or the tragic factory collapse in Bangladesh two years ago to understand why investors are becoming increasingly concerned about the impact that a range of sustainability risks have on corporate performance.

Businesses today face challenges on a global scale: climate change, water constraints, supply chain breakdowns and human rights abuses. In response, investors during the past decade have stepped up their corporate engagement on sustainability issues. In 2014 alone, more than 450 environmental and social resolutions were filed with U.S. companies — and that’s just one form of engagement.

This growing interaction between companies and shareholders is crucial. But we need more of it. That’s why we at BlackRock and Ceres teamed up to create a guide that U.S. institutional investors can use to engage companies and policymakers on sustainability issues. Our guide, 21st Century Engagement: Investor Strategies for Incorporating ESG Considerations into Corporate Interactions, is practical. It draws on the experience of some of the biggest U.S. investors, including the California Public Employees’ Retirement System (CalPERS), T. Rowe Price and TIAA-CREF, and outlines the successful strategies they have used to help company managers understand why they should be interested in specific long-term sustainability challenges.

Our guide is also good business. Studies from the Harvard Business School, the University of Oxford, Deutsche Bank and our own experience at BlackRock and Ceres show that companies that focus on sustainability are more resilient and perform better over time on a variety of metrics.

Successful engagement comes in many forms. Our contributors’ experience ranges from TIAA-CREF’s practice of quiet diplomacy to Wespath Investment Management’s advice on effective letter writing, which begins with a quote from Jane Austen: “Let us never underestimate the power of a well-written letter.” The guide outlines the hows and whys behind a spectrum of actions that investors can take, from one-on-one informal meetings with management to changing the makeup of corporate boards and to collaborations to achieve higher sustainability standards across the economy. Consider just a few of the case studies:

• CalPERS, the nation’s largest public pension fund with $304 billion in assets, tackles the issue of how, when and whom to engage at a company. The right approach differs, depending on the situation. But when it comes to strategic issues, investors need to engage directly with the board. This engagement can range from requesting board discussions around risk scenarios, on issues like climate change, to participating in investor protests to signal displeasure about strategy and risk oversight. For instance, after Duke Energy Corp.’s massive coal ash spill in 2014, CalPERS and the office of the New York City Comptroller publicly organized a vote against the reelection of four board members to highlight serious changes that needed to be addressed.

• At other times, dealing with folks responsible for daily company management is just as helpful — and can have as big an impact. For example, company staff can comply with questions about everyday operations, such as providing environmental compliance records. These kinds of investor inquiries can be powerful, serving as an early warning about a company’s vulnerabilities on specific issues. In advance of BP’s disastrous 2010 Gulf oil spill, for example, many investors sold their stock amid concerns about BP’s safety record.

• Boston Common Asset Management, an investment manager with $2 billion in assets that specializes in sustainable and social investing, describes how intense, structured discussions between groups of shareholders and companies can build a shared understanding of complex issues and drive adoption of best practices. In 2010 Boston Common and Apache Corp., an oil and natural-gas explorer and producer, started a series of roundtable discussions for investors to improve their understanding of hydraulic fracturing and gain access to technical experts who could answer critical questions. These discussions prompted new ideas that ultimately helped Apache lower its costs with greener fracking practices that use fewer chemicals and less water and diesel fuel.

• The North Carolina State Treasurer’s office explains how coordination is essential to any action undertaken by a coalition of investors. Following a 2010 explosion that killed 29 workers at a Massey Energy Co. coal mine, the North Carolina Retirement Systems and eight other pension funds joined together to press for management reforms and improve health and safety conditions. Thoughtful collaboration was key to success. To come up with a plan for action they could move on quickly, they divvied up research, with CalPERS researching board members’ skill sets and the North Carolina State Treasurer’s office providing information about the federal investigation of the mining accident. The coalition, initially formed to remove three directors, ended up removing one unresponsive board member and the CEO.

• Last, a BlackRock contributor outlines how investors, organizations and companies are working together to draft standards that define what it means for financial products and business activity to be sustainable. Investors need standards so they can effectively communicate product and disclosure needs and gather comparable disclosure data for benchmarking, analyzing and valuing investments. For instance, BlackRock and Ceres are working with key market players to develop standards for the green bond market — an important debt instrument that helps fund clean energy infrastructure and other environmentally beneficial projects. A lack of standards will hinder the growth of this market, increase concerns of “green washing” and undermine overall market interest for this burgeoning asset class.

These are just a few examples of the successful engagement approaches investors are taking, examples we know others can learn from. With the business environment changing faster than ever and becoming ever more global, tech-driven and hypercompetitive, it’s hard for companies to see beyond the here and now. They need us — their investors — to speak up and encourage a focus on escalating sustainability challenges that will affect both their bottom lines and the future of the planet.

Mindy Lubber is president of Ceres, a nonprofit group mobilizing business and investor leadership on climate change and other global sustainability challenges. Michelle Edkins is managing director and global head of corporate governance and responsible investment at BlackRock. The guide, 21st Century Engagement: Investor Strategies for Incorporating ESG Considerations into Corporate Interactions, is available

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