New Shareholder Proposal Seeks to Help Investors Mitigate the Systemic Risks of Externalized Costs

Endowment managers seek to balance risk and return in their portfolios in order to grow capital while providing annual support through spending distributions at colleges and universities.  They spend a considerable amount of time rightly examining the risks in their portfolios - inflation risk, liquidity risk, tail risk, sector risk, and concentration risk, among others.  As the globe warms and wealth disparity grows, endowment managers must consider the risks of the externalized environmental and social costs that one company imposes on the economy and on their other portfolio holdings.

Future endowment success will mean not only increasing “alpha” (your performance as compared to the market’s overall performance) or decreasing the fees charged to your beneficiaries but also improving “beta” (the return of the entire market).  Improving beta requires that companies reject practices that will, in the long run, damage the systems that support our global economy, even if those actions could increase the relative return of the particular company.

Clearly, an endowment manager cannot divest from every company that imposes these costs on the economy.  They can, however, better understand these costs and the risks they pose to the rest of their diversified portfolio.  At this time the data to be able to assess this risk is limited, but a new type of shareholder proposal created by The Shareholder Commons is designed to redirect companies to a systems-first model where companies analyze and report on the costs they are externalizing to the broader economy.

The proposals take two forms. The first proposal seeks disclosure as to social and environmental costs the company externalizes. The second is a request that the company convert to a public benefit corporation (with duties to stakeholders). These issues are important to investors with diversified portfolios, who rely first and foremost on healthy social and environmental systems to support the economy.

The proposals highlight the fact that individual companies can be rewarded for profits that come from externalized costs, even when the company’s diversified shareholder base suffers from those costly externalities. For example, a recent study showed that publicly listed beverage companies, as a whole, create negative social value annually that exceeds 20% of their market capitalization, far in excess of the profits they create. Thus, a proposal might ask Coca-Cola to put its negative business impacts into their full context by proposing (1) that its disclosures explain how those costs affect diversified shareholders or (2) that its legal structure specifically address the effect of externalized costs. 

The Shareholder Commons wants to work with investors to help them act collectively to level the playing field so that all companies are competing to profit, but only from activities that do not create social and environmental costs borne by the rest of the market. 

Sample disclosure proposals for Coca-Cola, Altria, Archer Daniels Midland, DuPont, Walmart, Raytheon and Exxon Mobil are available for review from TSC, as are sample PBC proposals for DuPont, Walmart, 3M and Amazon.  Click here for more details and to review sample resolutions.  TSC will host a session on this issue for IEN members in early 2021, and they are available to discuss the issue sooner with anyone interested in amending their voting policy or sponsoring a proposal. 

Members who are not able to file shareholder proposals due to the structure of their investments might consider engaging their external managers on these questions, writing a letter of support for this initiative and adopting provisions in their proxy voting policies that reflect support for these ideas. 

Interested members should contact Sara Murphy, [email protected].

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