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November 16, 2011

Support by Mutual Funds for Sustainability Proposals Increases, but is it Happening Quickly Enough?
    by Robert Kropp talks with Jackie Cook of Fund Votes about the results of voting by mutual funds on shareowner proposals in 2011 relating to sustainability. -- As recently as 2004, support by mutual funds for shareowner proposals relating to sustainability barely topped six percent. In the 2011 proxy season, according to analysis by Fund Votes, support for social and environmental resolutions stood at 18.3%.

"Mutual funds are realizing that ESG (environmental, social, and corporate governance) issues are having more of a material impact on businesses," Jackie Cook, founder of Fund Votes, told "Shareholder campaigns have become more sophisticated. Activists have started to hone the message in a more sophisticated way to make appeals that mutual funds can support by making it a bottom line issue with serious risk."

"Also, the SEC (Securities and Exchange Commission) has changed its stance on allowing language relating to risk," Cook continued. "Shareholders can now say that an issue is a material risk that the board has to consider, whereas before three years ago they couldn't say that because it fell under ordinary business."

In part due to concerns over corporate governance following the financial crisis, mutual funds have also increased their support for shareowner resolutions addressing governance, as average support by mutual funds for such resolutions reached 46.4% in 2011.

"The increase in support for corporate governance issues is significant, because with management providing the vote we've lost the advisory votes on executive compensation," Cook said. "So there's increased support elsewhere. There's a stronger emphasis this year on proxy governance, and I expect it will continue next year."

Cook believes that because mutual funds now consider management proposals on executive compensation (which were mandated by the SEC this year for the first time), their support for shareowner proposals addressing aspects of compensation decreased. Support for resolutions addressing tax gross-up payments, executive severance pay, and executive retirement benefits was down.

On the other hand, shareowner support for resolutions on director elections relating to board declassification increased from 59% to 67%, and votes in favor of an independent Chairperson, addressed in 27 resolutions this year, showed an increase in support as well, according to Cook.

Clearly, even mainstream mutual funds, which typically vote with management on most issues, are able to connect the dots between corporate governance and fiduciary responsibility. But despite the increase in support for other sustainability issues—and considering that mutual funds control more than 25% of the stock market wealth in the US—is their acknowledgement of the materiality of social and environmental proposals sufficient?

"Support for environmental and social issues didn't go up that much this year," Cook said. In 2010, support totaled 18.1%.

Furthermore, an analysis of mutual fund voting on climate-related shareowner resolutions, conducted by Fund Votes and Ceres, reveals that support for such issues actually declined in 2010, for the first time since 2007.

"Large fund families know, just as we do, that climate change is a real and material risk," Cook said when the analysis was published in April. "Yet their proxy voting guidelines are silent. Climate and sustainability are central to performance and need to be specifically addressed in voting policy reviews."

Cook said of the voting this year, "Mutual funds are not supporting issues such as linking executive pay to environmental performance and putting a member with environmental expertise on the board. They don't seem to like governance-related changes driven by environmental considerations."

"It's disappointing to say that these large institutions are not taking climate change seriously," she continued. "Material disclosure requirements may have come too late for the voting in 2010, and this year the stalemate in legislation seems to be letting everybody off the hook."

While sustainable funds are not among the largest by market capitalization, "They remain extremely supportive, which is crucial," Cook said. One mainstream fund whose support for sustainability proposals increased dramatically is Russell Investments, whose vote in favor jumped from 7.7% in 2010 to 46% in 2011.

Last week, announcing the appointment of Sustainalytics to provide stock-level ESG analysis, Mike Clark, chair of the Russell Sustainability Council, said, "There are a number of factors which mean that investors around the world are taking an increasing interest in responsible investment. This requires an understanding of how companies might be impacted by ESG considerations, cultural shifts and regulation as major influencing elements on their portfolios."

Since 2009, Russell has been a signatory to the United Nations' Principles for Responsible Investment (PRI).

However, TIAA-CREF, another PRI signatory, supported fewer shareowner proposals across the ESG spectrum in 2011. The financial services organization, with more than $450 billion in assets under management, states in its commitment to socially responsible investing (SRI) that it exercises its "shareholder rights to influence the ESG policies of the companies in which we invest across the entire TIAA-CREF portfolio."

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