Establishing a corporate sustainability monitoring tool using the shareholder engagement commitment indicator

Abstract

This article explains the construction of a shareholder engagement commitment (SEC) indicator that enables the comparison of shareholder engagement activities for responsible investment from a company perspective. The study of four elements in engagement that are tied to the robustness of interaction between shareholders and companies enables this comparison. The elements are (i) the frequency of shareholders’ interest in the responsible behaviour of their investments; (ii) the magnitude of support from other shareholders on the issues raised; (iii) the efficiency of company responses and (iv) the sustainability of engagement solutions previously addressed. The SEC indicator is a stable indicator that enables cross-country and cross-company comparisons, as well as time-series comparison for the same company. It is potentially useful for regulators, non-government organizations (NGOs), investors and companies to monitor the corporate social responsibility progress of an organization. In addition to descriptive assessment and case studies techniques, shareholder engagement can now be studied using quantitative methods that allow causal analysis.

Keywords:

• corporate governance
• corporate sustainability
• responsible investment
• shareholder engagement

Notes

Investibility weighting is the percentage of market capitalization of each stock available to investors. Cross-holdings are common in Japan; companies own other companies’ stock in a complicated system of corporate ownership. This means that free float (shares actually traded and thus available to investors) is smaller than the total number of shares issued.

Adjusted by the ‘investibility factor’ determined by free float and share capping.

REO stands for responsible engagement overlay. It is run by the fund management company F&C (an UNPRI signatory) as an overlay service for institutional fund clients to leverage their aggregate share ownership position for engagement. It is operated on behalf of government pension funds such as PGGM, UK Pension Protection Fund; NGOs, for example, European Bank for Reconstruction and Development (EBRD); and commercial organizations and their pension funds, for example, Royal & Sun Alliance, John Lewis Partnership pension trust.

Macalister (2007b).

Mason (2010) and Macalister (2007a).

Sims (2007) and Treanor (2009).

‘BP launches image overhaul’, Reuters, 27 July 2010, www.cnbc.com/id/38423142/.

Private dialogue with HSBC staff and HSBC Sustainability Report 2010, www.hsbc.com.hk/1/2/cr/sustainability_at_hsbc.

In 2009, Rainforest Action Network took on the Royal Bank of Canada (RBC), complaining about the bank's role as a lead funder in Tar Sands development that caused environmental damages (www.youtube.com/watch?v=pjz3DB8O7ME). It took RBS a year and a half to establish an environmental standard in its lending policy. In March 2010, Greenpeace took on Nestle, complained about its unsustainable palm oil supplier Sinar Mas (www.youtube.com/watch?v=VaJjPRwExO8). With over half a million hits on its YouTube videos, Nestle dropped Sinar Mas as its supplier within 2 months. In June 2011, Greenpeace took on Mattel, complained about its unsustainable packaging=material supplier Asia Pulp & Paper (APP). With nearly 700,000 hits on its YouTube videos, Mattel dropped APP and other unsustainable suppliers, committed to their use of recycled paper and sustainably certified fibre to 70% by the end of 2011, and 85% by 2015.