Risk & Governance Weekly

2008 Preview: Environmental Issues

By Carolyn Mathiasen, Editor, Social Issues Service

The following is an overview of environmental proposals that shareholders have filed at U.S. companies this year. A preview of other social resolutions will appear in the March 28 edition of Risk & Governance Weekly.

The environment, corporate political contributions, sustainability, non-discrimination, and human rights top the list of social concerns that investors are bringing to the attention of U.S. companies this season. RiskMetrics Group is tracking 381 proposals so far on social issues for 2008 annual meetings--almost as many as were proposed for all of 2007.  As proxy season enters full swing, 91 of the proposals have already been withdrawn, often after agreements with companies. Firms have obtained permission from the Securities and Exchange Commission staff to omit 43 resolutions.

Proponents are hoping to build on their record success in 2007. The average investor support for social proposals was 15.3 percent, a full two percentage points higher than the previous record set in 2006. Sixty-four social issues proposals last year received support from more than 15 percent of the shares voted, 10 more than the year before.

As in the last several years, the environment category is the biggest and most diverse, with 144 proposals on global warming, renewable energy sources, disclosure on toxic materials, and international environmental controversies.

Global warming continues to be a major concern of proponents of environmental resolutions with 54 proposals filed so far. The Sisters of St. Dominic, a leader on climate change since the issue first came before shareholders, have resubmitted their 2007 proposal to Chevron, ExxonMobil, Ford Motor, and General Motors asking the companies “to adopt quantitative goals, based on current technologies, for reducing total greenhouse gas emissions from the company’s products and operations.” The religious order has also submitted that resolution to utility firm Southern for the first time. The group’s 2007 resolution got 31 percent support at ExxonMobil, a new high for a climate change proposal there, and 29 percent at General Motors.

Four different proponents filed similar resolutions with natural gas pipeline companies. The California State Teachers’ Retirement System (CalSTRS) filed at ONEOK,Boston Common Asset Management at OGE Energy,Catholic Healthcare East at El Paso, and the New York City pension funds at Williams. These resolutions ask the companies to set emissions reduction goals based on emerging, as well as current, technologies. The proponents are concerned that natural gas pipelines may be a significant source of methane, which they describe as “a greenhouse gas more than 20 times more effective in trapping heat in the atmosphere than carbon dioxide.”  The proposals have been withdrawn after agreements at El Paso and OGE.

A resolution by CalSTRS asking Dynegy to report on and reduce greenhouse gas emissions was withdrawn after the company agreed to produce a report by Dec. 31.

The New York City pension funds submitted a different greenhouse gas proposal at Arch Coal, Consol Energy, El Paso, Massey, and ONEOK, while the Unitarians submitted it at Foundation Coal. New York withdrew the proposal at El Paso, but Arch Coal and ONEOK sought to exclude the proposal on “ordinary business” grounds. The companies cited the SEC policy enunciated in June 2005 that allows companies to omit proposals that entail the evaluation of business risk.  Arch Coal argued that “the proposal specifically requests that the report address the risks of competitive pressures. These and other implications throughout the proposal clearly indicate a focus on Arch’s internal risks and not on any overall social policy issue.” The SEC staff allowed the omissions, even though the wording, asking for a report “on how the company is responding to rising regulatory, competitive and public pressure to significantly reduce carbon dioxide emissions,” had survived “no action” challenges in earlier years. A spokesman for the proponents said the decisions were surprising because the New York City funds had come up with that wording with the help of the SEC staff back in 2004, after the staff had sanctioned omission of a different climate change proposal that referred specifically to risk.

Calvert Asset Management continues to pursue the climate change issue after obtaining a number of withdrawal agreements last year, but it also got a surprise decision at the SEC. This season, Calvert asked seven companies to issue reports assessing the impact of climate change on their operations and giving their rationales for not providing information through reporting mechanisms such as the Carbon Disclosure Project.
Early on, Calvert reached withdrawal agreements with Big Lots, Lowe’s, Kirby, Harley-Davidson, and Ryder System; the details of the agreements are not yet public. But OGE Energy went to the SEC to argue that the resolution also entailed evaluation of risk, and the staff agreed. The resolution is still pending at Dover.

The Nathan Cummings Foundation is continuing to press the building industry on climate change. It now has resolutions pending at Pulte Homes, Ryland Group, and Standard Pacific. The proposals to Ryland and Standard Pacific ask for quantitative goals, while the resolution at Pulte seeks a feasibility report on developing policies to minimize climate change.

Some of the builders also tried to argue that the Cumming Foundation’s resolutions, like the proposals from New York City and Calvert, should also be omitted as risk evaluation, but the SEC staff did not agree.  After the foundation’s feasibility report proposal at KB Home survived an SEC challenge, KB Home worked out a withdrawal agreement with the foundation and its co-sponsor, Catholic Healthcare West. According to the foundation, the company has agreed to produce a sustainability report this year that also addresses greenhouse gases. Walden Asset Management also worked out a withdrawal agreement on the same resolution at Parkway Properties.

In addition, global warming skeptics, who have filed a handful of resolutions in the past, have stepped up their effort this year. Action Fund Management is re-filing its resolution asking General Electric to publish a global warming report. The proponent, which manages the Free Enterprise Action Fund, suggests that the report discuss specific scientific data and studies relied on to formulate GE’s climate policy, the extent to which GE believes human activity will significantly alter global climate, and whether a cost-effective strategy for mitigating any undesirable change is practical. Action Fund Management also has filed proposals at 14 other other firms, but it appears that a number of them will be omitted on grounds that the companies’ existing reporting makes the proposals moot.  

Proponents have withdrawn four of the six resolutions that focus on energy efficiency. The New York City pension funds asked Allegheny Energy and Dominion Resources to report “on actions the company is taking to work with policymakers to design new incentives that will provide financial returns for the company to reduce greenhouse gas emissions by improving the efficiency with which its customers use energy,” but withdrew the proposals after engaging in dialogue. A Connecticut Retirement Plans resolution at Southern and a Trillium Asset Management proposal at Alliant Energy were both withdrawn as well.

In the related area of renewable energy, the Capuchins are asking ExxonMobil to report on how it can “become the industry leader within a reasonable period in developing and making available the technology needed (such as sequestration and engineered geothermal) to enable the U.S. to become energy independent in an environmentally sustainable way.”

Most of the requests that companies issue reports on sustainability have lent themselves to withdrawal agreements because the companies have agreed to produce the reports. In February, proponents withdrew sustainability resolutions at Kellogg, Lowe’s, and Safeway. Recent withdrawals include Capital One, Cigna, Continental Airlines, Felcor Lodging Trust, Hasbro, Pentair, Raytheon, Regions Financial, Sigma-Aldrich, Tyco International, and Waters.

Toxic Substances

Members of the Investor Environmental Health Network (IEHN) are now in the third year of a coordinated campaign focused on product toxicity. The group achieved a number of withdrawal agreements last year, so there are not very many repeat resolutions. The group is taking on a new subject—nanomaterials—which resolutions describe as “operative particles smaller than 1,000 nanometers.” A nanometer measures one-billionth of a meter, and the proponents are concerned that nanoparticles are absorbed through the skin and interfere with cell function. Nanomaterials are used in cosmetics, anti-aging skin creams, and sunscreens.

Calvert Group filed a proposal at Avon that seeks a report on “product categories that currently contain nanomaterials, and discuss any new initiatives or actions, aside from regulatory compliance, that management is taking to respond to this public policy challenge.” The proponents are eager to see better labeling and consumer education. Calvert withdrew the proposal at Colgate-Palmolive after the company agreed to state in its upcoming sustainability report that it does not use nanomaterials in its products or packaging and is in the process of developing a nanotech policy. An As You Sow resolution asked Wal-Mart for a report with a list of all products that contain nanomaterials, but the company was allowed to exclude it on “ordinary business” grounds, as dealing with the sale of particular products.

A new IEHN resolution to Circuit City from the Sisters of St. Francis of Philadelphia deals with toxic chemicals in electronics supply chains, emphasizing PVC (polyvinyl chloride). The resolution asks for a report on the company’s product safety policies, with information on which products may be affected by safety concerns. Catholic Healthcare West has filed a similar resolution with Kroger, while shareholders await the release of vote tallies for Domini Social Investments’ resolution on brominated flame retardants at Becton, Dickinson’s January meeting.

Amalgamated Bank’s LongView fund re-filed a resolution at DuPont on the use of PFOA (perfluoro-octonoic acid) in the production of Teflon and other products. The proposal, which asks for an evaluation of an expeditious phaseout of PFOA and the development of safer substitutes, got 22.9 percent support last year. The company argued to the SEC that it had now substantially implemented the proposal and was allowed to drop the 2008 resolution from the ballot.

NorthStar submitted new resolutions asking AIG, Connecticut Water Services, and PepsiCo to “create a comprehensive policy” concerning the “Human Right to Water” as defined by the United Nations. NorthStar said the policy “should address potability, volume, physical accessibility and affordability of water.” All of those are still pending, but a coalition of church groups withdrew a resolution asking Coca-Cola for the third time to commission a report on the potential and environmental health damage from its ventures that extract ground and surface water from areas of water scarcity in India.  The withdrawal took place after the company agreed to have an ongoing dialogue about compliance with the recommendations of Teri, an India-based nonprofit research organization.

Sustainable Forestry

Domini continues to approach companies on the issue of purchasing products certified by the Forest Stewardship Council (FSC), which it describes as “the only independent certification system in the world accepted by the conservation, aboriginal, and business communities.” This year, Domini is asking R.R. Donnelley and International Paper to issue reports “assessing the feasibility of phasing out . . . use of non-FSC-certified fiber and increasing the use of post-consumer recycled fiber as a means to reduce our company’s impact on greenhouse gas emissions.” Another Domini resolution, co-sponsored by the Capuchins, was withdrawn at MeadWestvaco after the company failed win permission from the SEC to omit the proposal. Details on the withdrawal agreement have not yet been made public.

A different Domini resolution asks Home Depot for a report on progress toward implementing the company’s 1999 wood purchasing policy. The policy says the company will give preference to purchases from certified well-managed forests, but the proponents are concerned that the company does not provide sufficient information to enable shareholders to assess its performance under the policy.

A longer version of this article appears in the January edition of the Corporate Social Issues Reporter, a publication of RiskMetrics Group’s Social Issues Service. For a comprehensive report, “Social Policy Shareholder Resolutions in 2007,” providing an overview of the year’s activity on social issues and a study on how institutional investors voted on social proposals last year, please click here.