Tearing Down the Great (Fire) Wall

In this column in December, I wrote about potential threats to internet freedom in the U.S. Those pale in comparison to dramatic abuses of internet freedom currently occurring in China and other parts of the globe. While high tech companies have long praised the internet’s capacity to promote freedom and democracy, many have been complicit in efforts by repressive regimes to restrict internet freedom.

For example in China alone,

1) Secret police demanded Yahoo help them identify political dissidents who sent some high profile e-mails critical of the government through their Yahoo accounts. After Yahoo complied, some of the dissidents were arrested and are now serving up to 10 years in prison.

2) Microsoft has taken down blogs in which Chinese democracy activists criticized their government.

3) Google has voluntarily self-censored a Chinese version of its search engine called Google.cn, filtering out results for searches on terms such as democracy and human rights, in order to keep Chinese authorities from blocking access to the site.

4) Cisco faces criticism for supplying China with equipment used to censor and monitor internet use and for marketing equipment to Chinese law enforcement agencies.

China’s aggressive efforts to restrict internet freedom appear to be strengthening further. According to the Financial Times, just last month the Chinese Communist Party’s ruling politburo held a special session on the internet, where President Hu Jintao said the party must act to “purify the internet environment” and “extend the battlefront of propaganda and ideological work” to the internet. At the meeting, President Hu advocated the creation of a new branch of authorities to address internet challenges. Hu told the gathering that “Whether or not we can actively use and effectively manage the internet…will affect national cultural information security and the long-term stability of the state.”

In light of these challenges, some companies have chosen to limit their operations in China to avoid partnering with the government’s internet crackdown. In one notable example, AOL turned down a major deal with a Chinese computer maker because executives were unwilling to comply with authorities requests to censor searches and gather personal data on Chinese AOL users. Despite launching Google.cn, Google has chosen not to offer its Gmail e-mail service in China to avoid requests from authorities for personal information on its users.

Companies that have tried to accommodate China’s requests have faced strong criticism, and not just from human rights groups. Last year, executives from Cisco, Google, Yahoo, Microsoft, were excoriated by House members at a Congressional hearing on their activities in China. The actions have also upset company employees and customers, and prompted Google co-founder Sergey Brin to recently note, “On a business level, that decision to censor [Google.cn]…was a net negative.”

To try to help companies address this issue more proactively, Trillium Asset Management has joined a collaborative effort of businesses, human rights groups, academics, and others seeking to create principles to “guide company behavior when faced with laws, regulations and policies that interfere with the achievement of human rights.” The process, facilitated by Business for Social Responsibility and the Center for Democracy and Technology, includes other socially responsible investment firms; human rights groups like Amnesty International, Reporters Without Borders, and Human Rights Watch; researchers like the Berkman Center for Internet and Society at Harvard Law School; and company participants Google, Yahoo, Microsoft and U.K. cell phone company Vodaphone. The goal is to work together through 2007 to create a code of conduct that will help the participating companies (and hopefully others) to better protect human rights, freedom of expression, and user privacy on the internet. Whether Chinese bloggers will be able to write about our efforts anytime soon remains to be seen.

The Michael Jordan Principle(A)

“It’s the Michael Jordan Principle. If he can get $30 million, I have to get it.”

— Joseph Bachelder, CEO compensation negotiator

We, the body politic, have utterly failed to rein in outrageous executive pay packages. Since CEO pay began to skyrocket in the late 1970s, shareholders and the SEC’s efforts to restrain it through limitations on golden parachutes, increased disclosure, tax incentives have all perversely backfired. (For example, increased disclosure allowed CEOs to see what their peers were making and use that negotiate more effectively.) The greed, self-entitlement and cronyism that drive these paychecks through the roof have foiled us every time. You can’t shame the shameless.

The premise underlying today’s executive excesses is that CEOs and other senior execs deserve to be compensated on a commission basis for all the big deals they’re pulling off, as though they were comparable to athletes and rock stars. Harvey Golub, the CEO of American Express in the 1990s, made $57 million salary, bonus and restricted stock over eight years, exercised options worth $92 million and upon retiring, was granted another 990,000 in options. Pointing to the $55 billion in increased market cap during his tenure, he asked the Wall Street Journal, “How much of that $55 billion should I get?”

To buy into this, one has to agree that Golub’s made a truly outsized contribution his company’s rise in market cap, rather than something like, say, a terrific bull market or the hard work and talent of thousands of employees. But many CEOs want – and get it – both ways, negotiating killer packages that pay off even when performance lags or thousands are laid off. Perhaps we’re supposed to console ourselves with the thought of how much worse things might have been if someone else other than the former Pfizer CEO Hank McKinnell ($83 million in pension benefits) had presided over Pfizer’s 37% drop in stock price that coincided with his five-year tenure.

Viewed through the lens of corporate governance activists , if the board doesn’t have the stuff to link pay to performance, then the power balance is out of whack. But for social investors, and much of the public, something bigger is going on. The obscene amounts of wealth that executives make compared to the rest of us tears away at our tattered social fabric. The richest 1 percent of Americans held 32 percent of the nation’s wealth in 2001 (not even counting the Forbes 400 billionaires, who control roughly another 2 percent of the nation’s wealth).

So we have to simply become cleverer about shaming the shameless. In a roundabout way, that is the hope embedded in a shareholder resolution at Citigroup filed by the American Federation of State, County and Municipal Employees (AFSCME), and co-sponsored by Trillium. It calls for an annual shareholder vote to ratify the compensation of named executive officers, and reduction of ambiguity around the size of the package. The vote would be advisory only, but the thinking is that Citigroup (and 60+ other companies that will receive this resolution this year) will have at least the PR sense not to propose compensation packages so fat that they’ll get rejected by shareholders. Last year, the resolutions received support in the range of 35 to 45% at seven companies. Advisory votes are already standard practice in the U.K., Australia, the Netherlands and Sweden. They might just provide the forum needed to embed some reason and economic justice into compensation system gone crazy.

Sources:

“Behind Executive Pay, Decades of Failed Restraints,” Wall Street Journal, October 12, 2006; “Study Finds Wealth Inequality Is Widening Worldwide ,” New York Times, December 6, 2006; Executive Compensation vs. Workers: An Overview of Wages, Pensions and Health Benefits of Rank-and-File Workers and Sky High Executive Pay, Prepared by Democratic Staff of the Financial Services Committee, October 24, 2006.

Roadblocks on the Information Highway?(A)

“Freedom of the press is guaranteed only to those who own one,” said A.J. Liebling. Nobody really owns the decentralized network of networks that make up the internet, but major telecommunications companies like AT&T, BellSouth, Verizon, and Comcast act as gatekeepers that own how millions of individuals connect to the Internet. As they invest billions of dollars in new fiber optic networks to allow service offerings like online movies and internet-based telephone calls, they’ve argued they should be able to charge users and even content providers for access to those faster systems. The same way UPS might choose to pay the tolls on private toll roads that have cropped up in congested cities like Denver and LA to ensure on-time delivery of packages, the telecoms argue that content providers could pay to use less congested, high speed network access, especially for data-intensive offerings like online video.

That seems fairly reasonable on its face, but it raises troubling questions. There are lots of surprise internet success stories from Google to You Tube that might never have gotten off the ground if they’d had to pay millions of dollars in fees to reach users from the start. High fees or slow download speeds could easily stop new innovation like that represented by EBay, which grew from an online auction site that a programmer built over a Labor Day weekend in order to sell a friend’s collection of Pez dispensers into a company with $4.5 billion in annual revenues today.

Even more troubling, allowing service providers to discriminate in how quickly they provide different types of content could hinder access to websites of political and advocacy groups that don’t have the resources to pay for faster loading, or that advance ideas not favored by giant telecommunications companies. As a real world example, Telus, a major Canadian telecom company, blocked access to a union website and other sites supporting its workers involved in a labor dispute. AOL blocked all e-mails that mentioned a website fighting the company’s proposed pay-per-e-mail pricing plan. In both cases these blockages were brief, but the possibilities of private censorship of the web remain troubling enough that groups across the political spectrum—from MoveOn to the Christian Coalition—have joined together to fight for tough protections of the internet.

The issue gained prominence in the last session of Congress after the Federal Communications Commission ruled in August 2005 that internet services provided by phone companies are not bound by the common carrier regulations. (Those are rules dating back to the days of telegraphs that prevent phone companies from deciding whose calls they carry on their phone lines and whose calls they won’t carry.) To replace the common carrier standard for services like DSL, the FCC established four net neutrality principles, which many advocates see as insufficient protection against content discrimination. However, the FCC did fine a small local telephone company, Madison River Communications for blocking its DSL customers from using competing internet telephone services and the company stopped that practice.

In 2006, Congress considered five different bills to protect network neutrality, although none of them passed. Incoming Democratic Congressional leaders, including Nancy Pelosi, have expressed support for network neutrality legislation, and the next Congress is much more likely to act on the issue. This past year, we contacted several key members of Congress in favor of legislation to protect innovation and freedom of information on the internet, and will be doing so again as the new Congress convenes. I just hope they got our e-mails….

What I Advocated on My Summer Vacation(A)

The September issue of Investing for a Better World seems an appropriate time for a “What-I-Did-On-My-Summer-Vacation”-style update on some of my recent advocacy. Demonstrating that those of us in the United States just don’t take vacations like our European counterparts, in August alone I had in-person or phone meetings with staff at AIG, Bank of America, Citigroup, Coca-Cola, Ecolab, Intel, Microsoft, PepsiCo, Sysco, and Weyerhaeuser. I didn’t even try for French-based Danone, assuming that anyone there I wanted to talk to would be out for the month of August. Among some of the highlights:

We led two calls for dozens of investors to ask Coca Cola and PepsiCo how they are addressing allegations that their products in India have unsafe levels of pesticide residues. These allegations are controversial and India’s Health Minister has dismissed them, but we pressed Coca Cola and PepsiCo to take strong steps to safeguard their products, engage with their critics, and put the controversy behind them. Both companies have installed new filtration systems to ensure the safety of their products, are working to decrease pesticide use by their suppliers, and are moving towards agreeing to a common test method that will allow the Indian government to finalize safety standards for their products.

We learned that we helped convince Intel, which already had strong programs in place to reduce its water use, to adopt a new formal Water Conservation Strategy with new water use reduction goals to meet by 2010.

We worked to hold Weyerhaeuser accountable for its lobbying by pointing out the disconnect between its laudable announcement this summer that it will reduce its greenhouse gas emissions by 40 percent and its lead role in opposing a citizens initiative in Washington state to require utilities in the state to boost their use of renewable energy sources 15 percent by 2020.
Of course, we meet with lots of groups other than companies. This August, for instance, I talked with staff at Business for Social Responsibility, the Pacific Institute for Studies in Development, Environment, and Security, and the Bill and Melinda Gates Foundation looking to identify leading edge practices in water stewardship we should promote in the corporate sector.

Thinking back to earlier in the summer, we led an initiative by the Social Investment Research Analysts Network (SIRAN) in partnership with research firm KLD Research and Analytics to produce a new study on how some of the biggest companies in the U.S. are reporting on their environmental and social performance. The study of reporting practices among the S&P 100, found that more than three-quarters (79 companies) now have special sections of their websites dedicated to sharing information about their social and environmental policies and performance. This represents a 34% increase from last year, when 59 companies in the S&P 100 included this information on their websites. Over a third of the S&P 100 Index (34 companies) now base their corporate social responsibility reports on a widely recognized external standard for reporting called the Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines. This was up sharply from 2005, when 25 companies in the S&P based their reports on the GRI guidelines. The uptick reflects a concerted outreach effort by Trillium Asset Management and other SIRAN members to promote reporting based on the GRI standard. For more on the study, visit http://www.siran.org/csr.php.

Oh, one little thing I shouldn’t forget to mention is that I also got married this summer and head out on my honeymoon for the first couple weeks of September. Then it’s back to work just in time for shareholder filing season this fall. Well, unlike grade school when I had to rely on the use of the word “very” a lot towards the end of my essays, I’m actually over my word limit and should sign off for now.

Bedfellows and Our Independence(A)

I once enjoyed a brief exchange with Hank Greenberg, then-Chairman of American International Group at the company’s annual shareholder meeting, which I was attending to present a resolution co-filed by Trillium and Catholic Healthcare West. As sometimes happens, the proponents of another shareholder resolution at AIG asked if I could present their proposal because of a scheduling conflict. At the appropriate time, I approached the microphone and said, “Mr. Chairman, it’s Shelley Alpern from Trillium Asset Management again but this time I’m representing the Presbyterian Church, not Catholic Healthcare West.” Greenberg asked, “And what religion are you?” which drew a big laugh. “I’m Jewish, actually,” I replied a little sheepishly, resulting in more laughter. (A reporter from the Financial Times was so amused he wrote up a blurb for the next day’s paper.)

Hey, this is America. Some of the other cards in my electronic rolodex make much stranger bedfellows. Contact information for Global Exchange, which ran a campaign against the Gap, is virtually nestled beside the names and emails of the Gap’s corporate responsibility employees. These data bits probably don’t interact that much if they can help it, but I have no compunction about using both in the course of our research and advocacy. Talking to a wide range of people is necessary to get the complete story about a company, particularly where there are allegations of social wrongdoing. It is in the nature of our work as well to partner with groups to file shareholder resolutions even though our perspectives can differ. For example, we have co-filed animal welfare resolutions with People for the Ethical Treatment of Animals, even though we’re not a vegan organization, as PETA is, nor have we ever thrown fake blood on real fur, as PETA has.

Since we feel it’s pretty obvious that our point of view is distinct from our allies and coalition partners, it can be annoying to have our motives conflated with theirs. I’m still getting over some psychic indigestion from a recent experience of this nature. To understand why, allow me to present a bit of background.

This year, for the third year in a row, we filed a shareholder proposal at Chevron that addresses the controversy surrounding Texaco’s legacy of pollution in Ecuador (Chevron acquired Texaco in 2001, and with it, a class-action lawsuit that alleges that Texaco did not properly clean up hundreds of contaminated sites). Our resolution asks for the company to report on its expenditures related to lawyers’ fees, expert fees, lobbying, PR and media expenses and remediation related to the health and environmental consequences of hydrocarbon exposures at Texaco’s former Ecuadoran sites.

The plot thickened when Chevron wrote to the Securities and Exchange Commission in an attempt to gain permission to omit our proposal from the 2006 ballot. One of Chevron’s arguments to the SEC was that the information we were asking for was of no value to shareholders and could only be of value to the plaintiffs’ lawyers; hence, it was implied, we must be filing the proposal at the lawyers’ behest. This claim relied on an interpretation of a mysteriously obtained private email sent by the advocacy group Amazon Watch to ourselves and others who had participated in a briefing session with plaintiffs’ lawyers. The email notes a discussion in which Trillium declared an interest in filing a shareholder resolution about Ecuador. Pointing to this email, Chevron conflated our interests with the lawyers’ and advocates’, rather than acknowledging that shareholders might have their own valid reasons for pushing it to better account for its handling of the litigation. Thankfully, the SEC wasn’t buying the guilt-by-association argument, and the resolution will appear on the 2006 ballot.

And I, for the record, am no vegan, though some of my best friends are.

The Big Chill

The number of institutional investors weighing in on the risks of climate change has increased dramatically over the past few years, but the feeling isn’t mutual. Mutual funds, that is. The three largest public pension funds in the U.S. and the largest private pension fund, TIAA-CREF now have policies to routinely support resolutions calling on companies to address the risks of climate change. Financial giant Goldman Sachs adopted a major new environmental policy a few months ago, which included the statement, “Goldman Sachs is very concerned by the threat to our natural environment, to humans and to the economy presented by climate change and believes that it requires the urgent attention of and action by governments, business, consumers and civil society to curb greenhouse gas emissions.” Shareholder resolutions on climate change have reached record vote levels at ExxonMobil and other companies over the past two years. Yet they’ve achieved this support without the votes from most mutual funds, which now hold nearly a quarter of all shares in U.S. companies.

Indeed, a new study produced for the investor coalition Ceres by the Investor Responsibility Research Center found that none of the 100 largest mutual funds in the U.S. supported any of the 33 resolutions on climate change that came to a vote at U.S. companies last year. The study found that of the 31 investment companies that manage the largest 100 mutual funds in the U.S., 28 of them have adopted policies that require them to either vote against all environment-related shareholder resolutions or to abstain from voting. This includes American Funds, Fidelity, and Vanguard, which together account for 70 percent of the assets held in the top 100 mutual funds. Only three of the investment companies had policies allowing them to vote for climate change resolutions on a case-by-case basis, although none of them chose to support any of the climate resolutions pending in 2005.

Mutual funds’ voting records on climate change are not only out of step with an increasing number of pension funds and other major investors, they are also out of step with the wishes of their own clients whose shares they are using to cast their votes. The Ceres study was accompanied by an opinion poll of mutual fund investors sponsored by the Open Society Institute. That poll found that 71 percent of mutual fund investors said they wanted mutual funds to “support shareholder resolutions asking company management to pay closer attention to global warming concerns and problems.” It also found 79 percent of investors said that “companies should analyze the long-term financial impacts that global climate change will have on their business and on the potential value of their stock,” something that most of the 33 pending shareholder resolutions on climate called on companies to do.

Mindy Lubber, Executive Director of Ceres and of the Investor Network on Climate Risk said of the findings, “Mutual funds are a critical missing link in push for better corporate disclosure about climate risks.” Civil Society Institute Pam Solo said, “The fact that mutual funds are missing in action on climate change is an unacceptable situation that investors should insist on changing.” One way individuals can weigh in to try to correct this situation is to visit Co-Op America’s mutual fund action page by March 31 to join the thousands of people sending letters to American Funds, Fidelity, and Vanguard asking them to change their proxy voting guidelines. And Trillium Asset Management’s clients can rest assured that under our own proxy voting guidelines, we consistently vote our clients’ shares in favor of resolutions asking for companies to address the risks of climate change.

Nailing Down Staples’ Forest Commitments(A)

Last month marked the three-year anniversary of major new environmental commitments Staples made to reduce its impacts on forests around the world, including a pledge to triple the amount of postconsumer recycled paper it sells and to phase out the sale of products coming from endangered forests. Having played a role in gaining these important commitments, Trillium Asset Management has monitored the company’s progress in meeting those goals. Based on our latest conversations with both the company and some of the leading environmental groups that pressed the company to act on forest protection, we see tremendous progress in many areas. There are also some continuing challenges in figuring out how Staples can work systematically to protect endangered forests around the world.

Staples has made dramatic progress in meeting a target it set to have an average of 30 percent post-consumer recycled content across all the paper products it sells. The company has boosted the average of post-consumer content by weight of its overall sale of paper products from about 9 percent when it made its commitment three years ago to 20 percent last year and 28.5 percent now, and hopes to soon meet and surpass its 30 percent goal. The company now makes many Staples brand products available only with recycled content, with no non-recycled alternatives available.

The company has also engaged in a number of innovative pilot projects to protect endangered forests around the world, from Indonesia to the forests of the Southern United States. At the same time, Trillium Asset Management and some environmental groups are encouraging the company to work more systematically to meet its endangered forest commitment.

“When we identified a source of Staples products from endangered forests in Canada’s Boreal region, the company took action in its supply chain to address the problem,” said Aaron Sanger, Director of the Corporate Action Program at environmental group ForestEthics. “To phase out of all products from endangered forests, Staples will have to develop a comprehensive system that identifies all of its sources for these products.”

Kelly Sheehan, Campaign Director with Dogwood Alliance, told us, “We applaud the progress Staples has made to reach an average of 30 percent post-consumer recycled content for all the paper products it sells. We are expecting to see similar progress soon on the company’s commitment to phase out of all products from endangered areas such as the Cumberland Plateau in the U.S. South.” While encouraging the company to do more, these groups generally praised Staples’ leadership in its sector, noting that competitor OfficeMax has yet to adopt an environmental procurement policy to address forest protection.

The company has been tackling lots of other environmental issues in addition to forest issues, such as electronics recycling and energy conservation. Staples has made significant efforts to reduce its impact on climate change through energy conservation and using more renewable energy. Staples was an early member of the Green Power Market Development Group, a coalition of companies working to boost demand for renewable power through purchasing commitments. Currently, ten percent of the electricity Staples buys meets the Green E certification standard for renewable energy. As pilot projects, the company has also installed solar cells and even experimental wind turbines on a few of its stores to generate power. Overall, the company has committed to reducing its total greenhouse gas emissions from its power use, fleet vehicles, and business travel to seven percent below 2001 levels by 2010, even as it opens new stores and its business grows.

We’ll continue to watch Staples’ progress on these and other environmental initiatives, push for improvements when needed, and encourage other companies to demonstrate similar environmental leadership.

Chalmette Then and Now(A)

Believe it or not, I was planning to write about Chalmette, Louisiana, in this space well before Hurricane Katrina. Recently described in the New York Times as “a mostly white, working-class community where two oil refineries, a natural-gas processing plant and some fisheries make up most of the local economy,” most of Chalmette’s 68,000 residents are now “scattered to who knows where.”

I had been trying to arrange a visit with the managers of Chalmette Refining LLC, a joint venture between ExxonMobil and the state oil company of Venezuela. Trillium and a number of religious shareholders affiliated with the Interfaith Center for Corporate Responsibility had been corresponding with the refinery’s managers since January over issues raised in a community lawsuit arising from the plant’s high toxic air emissions. Unsatisfied by the response to our questions, we finally requested a face-to-face meeting.

Now it’s anyone’s guess when Chalmette will return to “normal.” (Normal, for the refinery, was being the #3 carcinogen emitter in the U.S., #5 in the release of developmental toxins, and #2 in the releases of reproductive toxins.) The refinery’s managers are eager to restart operations, which they describe as contributing to the disrupted national energy supply, but which one activist read as proof that “they don’t give a DAMN about people – they will crank it up and run as quickly as possible, especially without others around to complain or report.” Now the Bush Administration is loosening Clean Air Act regulations to speed the Gulf’s economic recovery.

Frighteningly toxic floodwaters have displaced and dispersed thousands of tons of heavy metals, hydrocarbons and other industrial waste in addition to sewage, bacterial contaminants and decaying bodies. After the pumping, the waters will eventually make their way to the Gulf of Mexico. Some “dead zones” have already been identified.

The extraordinary concentration of oil and petrochemical facilities makes this region one of the worst places in the world for flooding. Hugh Kaufman, a senior policy analyst at the Environmental Protection Agency, architect of the Superfund legislation, and a renowned whistleblower, called the situation “infinitely worse than Love Canal” and characterized New Orleans itself as the “largest Superfund site in U.S. history.” “This is the worst case,” he said.1 Why is it that we concentrate refineries like that in a perpetual hurricane zone anyway?

The verdict on all 140 chemical plants operating between New Orleans and Baton Rouge is not yet in. We do know that two hazardous waste facilities sustained flooding, and ruptured oil tanks may have dumped as much as 3.7 million barrels of crude into the Lower Mississippi River. Initial testing has revealed high levels of E. coli and lead. Government officials are avoiding characterizations of the waters as “toxic” (relying on “bacterial” or even “septic,” presumably preferred by focus groups), even as an advisory warns those still in the city to not even touch the water that is everywhere around them (good luck with that), and scrubbing them with bleach before they can reach for that first bottle of water.

On NPR, a Louisiana Department of Environmental Quality official carefully dodged the question of whether this disaster was on the scale of Love Canal and dismissed as unhelpful the observation that the oil and gas industry’s environmental agenda dominates Louisianan politics.

Wearing my shareholder hat, I can’t help but wonder if the petrochemical industry will be sued for wastewater cleanup. The linkage is well known between the political contributions of the oil and gas industry and the legislative agendas of their recipients. Maybe this time the contaminants lapping up against homes in the more prosperous zip codes will finally open a few eyes to the fact that we all live downstream eventually, not just the folks in Chalmette.

A Race to the Top? (A)

Critics of globalization often point out the dangers of a “race to the bottom,” as companies and governments lower their environmental and social standards to stay competitive globally. Grocery chains try to cut worker health benefits to stay competitive with Wal-Mart. Companies outsource more and more production overseas until it seems that everything bears the label “Made in China.” Movies, TVs, and music rely on violence and sex to appeal to a lowest common denominator global mass market.

It’s true that in many ways, the global marketplace is eroding long-standing social programs and environmental protections. Yet there are some hopeful indications that the racecourse may run both directions. Our advocacy in the financial sector provides a welcome example of a “race to the top” emerging, as banks across the globe begin adopting best practice standards to reduce the harmful environmental and social impacts of their lending.

In the last month, I’ve met with senior executives at four of the largest U.S. banks about environmental and social issues associated with their lending. Their attitudes have shifted dramatically from five years ago, when Trillium Asset Management and other shareholder groups began raising these issues. At that time, few if any banks admitted they should be held accountable for the impacts of their investment decisions. A small number had environmental programs, but these were largely focused on paper recycling and energy conservation within the bank, and ignored the far greater impacts of the funding they were providing for large dams, mines, and oil drilling projects.

In the space of a few short years, banks have taken significantly more responsibility for their financing decisions. Over the last two years, 31 banks from the U.S., Europe, Japan, and Brazil have committed to the Equator Principles, a set of voluntary standards for banks to ensure that the large infrastructure projects they finance are subject to environmental reviews and have environmental management plans in place. The banks involved represent 80 percent of total project finance lending globally. Citigroup, J.P. Morgan, Bank of America, and Wells Fargo have announced new initiatives to increase their investments in renewable energy and environmental technologies. All these banks have pledged to reduce their own energy use, and Bank of America and J.P. Morgan have also pledged to work to encourage some of their large industrial customers to cut their own energy use and greenhouse gas emissions. European banks like ABN AMRO and HSBC have broken new ground by establishing their own environmental standards for financial clients in sensitive industries like forestry and the chemical sector. Among the largest global banks, those that aren’t working to address environmental issues are becoming the exception rather than the rule. And some of those are now planning to announce their own environmental initiatives soon to catch up with the pack.

This relatively quick turnaround in the conservative, slow-to-change banking industry reflects hard work and persistent negotiations by a coalition of shareholder groups that Trillium Asset Management helped organize, effective campaigning by groups like Rainforest Action Network, and leadership and vision from some key leaders within the banking industry. It also reflects the tendency for large companies facing tough questions to play “follow the leader” and quickly adopt good practices of their competitors. We saw similar developments after Home Depot and Staples adopted endangered forest policies that soon became standard for their industry sectors.

Of course, making these pledges is one thing, and effectively implementing them is another. There’s still much work to be done with banks to make sure they are doing what they’ve promised. But we hope that as companies race for the top, they’ll find it crowded at the finish line.

Strategic Outlook: Pushing Markets to Take the Long View (A)

I’ve been asked several times recently how the stock market could be rebounding in the face of such bad news, and in particular what appear to be large long-term imbalances. Out-of-control health care and military spending are driving up government borrowing, and consumers are awash in debt backed by the mirage of million-dollar, three-bedroom homes.

The markets have joined the politicians and become hooked on short-termism, with the election cycle being compressed into the four-times-per-year earnings report. None other than William Donaldson, outgoing Chairman of the Securities and Exchange Commission (SEC), highlighted this problem in a May speech to the leading society of investment analysts:

For companies, the short-term outlook has given rise to the disturbing syndrome of trying to force earnings into an artificial model of uninterrupted quarter-to-quarter growth. “Making the numbers” often results in unsound corporate strategies, which pay no regard to the cost of postponed investment. Such a goal is often achieved only by bending accounting standards.

Highlighting the breadth of the problem is the finding contained in a National Bureau of Economic Research working paper. The authors surveyed 401 financial executives and 78% said they would sacrifice an initiative they expected would create economic value if it would affect their ability to realize smooth earnings.1

If company and analyst behavior is going to change, the vanguard will be owners of stock, who have the ultimate power to shape management behavior. A good example of investor leadership for the long term is in the area of climate change. The Investor Network on Climate Risk (INCR) is devoted to raising climate risk awareness among institutional investors. It includes 45 members with $2.7 trillion in assets. These investors realize that climate change is a long-term investor issue with fundamental impact on regulation, liability and the very structure of the underlying economy that drives investment returns.

At the INCR conference at the United Nations in May, a group of state treasurers, state and city comptrollers, public and labor pension funds, foundations and religious institutional investors signed a call for action, including commitments to 1) deploy $1 billion of capital to achieve attractive long-term investment returns in clean technologies, 2) develop investor proxy voting policies around this issue, and 3) create a reliable global standard for company disclosure on climate risk.

As investor money focuses on the long term, both Wall Street analysts and the companies themselves will react. Climate change proxy resolutions, which received less than 5% of shareholder votes a decade ago, are now achieving more than 30% approval at energy companies like Anadarko and Apache. After a process of shareholder engagement Cinergy, which is the country’s largest emitter of greenhouse gases, has agreed to cut emissions by 5% by 2012.

It is on a multi-decade view, not a quarter-to-quarter basis, that society and its corporations are dependent on sustainable policies that ensure a healthy, balanced economy. A true investment horizon encompasses our lifetimes and those of our children and grandchildren. As such, the big-picture issues like government finance, international relations, consumer debt and climate change policy will be the ultimate drivers of market returns. The more that owners of capital demand a focus on the long term, the better these returns will be.

1 CFA Institute Annual Conference, Philadelphia, May 8, 2005.