The following guest post comes from Usman Hayat, was published by the CFA Institute on 13 February 2013, and is republished here with permission.
Why, how, and to what effect do faith-based investors engage with companies to seek positive social and environmental change? A recent report, “Believers in the Boardroom: Religious Organizations and Their Shareholder Engagement Practices” by International Interfaith Investment Group (3iG), addresses this question.
The report offers case studies from three faith-based investors — Missionary Oblates of Mary Immaculate, Church of England, and Joseph Rowntree Charitable Trust — who lobbied financial giants such as Goldman Sachs (GS) and Bank of America (BAC), to varying degrees of success.
Faith-based investors, according to the report, engage with companies because their religious faith leads them to support such ideals as “stewardship, justice, care of creation and the environment, and debt relief.” They consider environmental, social and governance (ESG) issues relating to their investments, and where the situation demands, they lobby companies to change things for the better.
Despite the relatively small size of their assets under management (€340 million), the Missionary Oblates of Mary Immaculate (OMI) engaged with a financial giant that is no stranger to controversies, Goldman Sachs (GS). “The overarching goal” of this engagement with Goldman Sachs was “to make major players in the global financial system more attentive to the impact of financial crises on the less affluent communities across the world and the credit needs of the underserved, especially poor people.”
From 2007 to 2008, the OMI’s Justice and Peace and Integrity of Creation (JPIC) Office, lobbied Goldman Sachs for clearer disclosure on how it managed counter party risk in derivatives trading. The JPIC set up meetings with senior management and filed a shareholder resolution. The JPIC considered the engagement successful because Goldman Sachs subsequently tightened its risk management.
On the other hand, the OMI met with less success when engaging Bank of America. The focus of this engagement, which lasted from 1998 to 2000, was the development and implementation of ethical lending criteria to ensure that loans would not be used to finance “activities which did not respect human rights, or which endangered communities,” according to the report. The OMI found that while Bank of America developed ethical lending criteria, it was unable to offer evidence that the criteria had been implemented.
With more than £8 billion of assets under management, the Church of England is the largest of the three faith-based investors covered in the report. The church has an Ethical Investment Advisory Group (EIAG) to ensure that investment policies do not conflict with its values. The EIAG considers its 2003–2007 engagement with UK-based supermarkets and farmers a success. This collaborative engagement was linked with a formal inquiry by the Competition Commission into the relationships between supermarkets and farmers. “The aim was to gain fairer treatment for small farmers in the UK who were losing out in their relationships with supermarkets because of the market power of the supermarkets and the fragmented farming industry,” according to the report.
The Church of England both owns farmland and has links to farming community, which helped its engagement. Its efforts led to the production of the report “Fair Trade Begins at Home” in November 2007, “which contributed to the competition authorities recommending the creation of a groceries market ombudsman to oversee supermarkets’ supply chain relationships.”
The Church of England was less effective in its engagement with Vedanta Resources (VED), a company that has a listing at London Stock Exchange but operates principally in India. The EIAG was concerned about the company’s human rights record, and from 2009 to 2010, conducted site visits and meet with the senior management of Vedanta. Little progress was made, however, and EIAG concluded that Vedanta was not going to change its ways, thus prompting divestment.
The third faith-based investor covered in the report is the Joseph Rowntree Charitable Trust (JRCT), an independent endowed foundation set up by a Quaker businessman in 1904 that has £150–200 million assets under management. JRCT objected to the fact that Reed Elsevier’s exhibition division was organizing international arms fairs.
After three years of engagement with Reed Elseiver (2004–2007) — conducted through a variety of means, from letter writing to face-to-face meetings — the trust divested its shares in 2007. Though JRCT owned less than 1% of the company’s shares, the collaborative engagement by the trust led to news coverage of the issue, which put pressure on Reed Elsevier. Within four months of the disinvestment by JRCT, Reed Elsevier announced its intention to sell the arms exhibitions division, and the trust later reinvested in the company.
To its credit, the 3iG report provides insights into engagement by faith-based investors, a topic not widely known or understood. Investors may have economic or noneconomic motivations for engaging with the companies on ESG issues, but the process of engagement is usually similar.
According to the report, there are several common ways that shareholders engage with companies:
- Letter writing
- Calling executives
- Asking questions at annual general meetings
- Filing resolutions
- Private dialogue with management/board
- Voting shares
- Joining action groups
- Lobbying other shareholders
Other faith-based investors, such as Islamic funds or or even conventional funds, can benefit from this practical knowledge. Perhaps, as a part of these case studies, some information on organizational arrangements for engagement, the cost of engagement, and its potential effects on the financial performance of the investments would have added more value.
But, far from being a simplistic cheering of the achievements of faith-based investors, the report is rather a sober reflection, encouraging engagement without downplaying its challenges. As stated in its conclusion, “Undertaking shareholder engagement is not without its challenges and is not to be entered into lightly. It involves a commitment of time and resources, a need for expert investment knowledge and a juggling of priorities and timing to achieve the greatest impact.”
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute. Photo credit: ©iStockphoto.com/MHJ
About Usman Hayat, CFA
Usman Hayat, CFA, is director of Islamic Finance and ESG at CFA Institute, where he focuses on Islamic finance and socially responsible investing. Previously, he worked as an independent consultant in the capital market in Pakistan in the areas of market development and risk management for clients, including the securities regulator, stock exchanges, clearing company, and the securities depository. He has been an active columnist on capital market issues. He has earned the Financial Risk Manager designation from the Global Association of Risk Professionals, the Islamic Finance Qualification from the U.K. Securities and Investment Institute, and a Certificate in Islamic Finance from the Chartered Institute of Management Accountants. Mr. Hayat holds an MBA from Lahore University of Management Sciences and an MA in development economics from University of Sussex in the United Kingdom. Topical Expertise:Islamic Finance and ESG Investing | Follow Usman on Twitter
More on faith-based investing at The Interfaith Center on Corporate Responsibility and Community Investing Toolkit for the Faith Community. See also Global Impact Investing.