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July/August 2007
by Belinda Hoff, Research Associate, The Institute for Responsible Investment, Boston College Center for Corporate Citizenship
Have you ever received a survey from an “SRI” and wondered what it was all about? Has your investor relations contact come to you with a shareholder resolution filed by an “SRI” asking you to deal with the issue before the company’s annual shareholder meeting? Does the thought of your CEO being asked to describe the company’s commitment to the environment in a shareholder meeting keep you awake at night?
SRIs are socially responsible investors - that is, investors who consider the social and environmental consequences of their investment decisions as well as the materiality of environmental, social and governance issues for corporate performance.
According to the Social Investment Forum, SRIs held $2.29 trillion in assets at the end of 2005 – an amount that has grown exponentially since the mid-1990s. With growing consumer activism spreading to financial services products, and multilateral initiatives such as the UN’s Principles for Responsible Investment now representing more than $9 trillion in assets, there is little doubt that these numbers are set to increase.
In short, SRIs are not going to go away, nor are their questions about social and environmental performance nor their shareholder resolutions. So how does a company deal with this issue? We recently spoke with Mary Jane Klocke of BP’s North American Investor Relations department, to get BP's perspective.
BP’s engagement with the SRI community began reactively in response to a crisis, says Klocke. In 1996, BP faced allegations of human rights abuses by its security forces in Colombia. Rather than ignoring these allegations and hoping they would go away, BP’s then CEO John Browne directed staff to meet with critics to communicate the facts of what had occurred.
Following this, BP’s approach remained more proactive. In 1997 John Browne gave a speech at Stanford during which he committed BP to reducing its CO2 emissions – even if there was not yet conclusive evidence around global climate change. When BP met its emissions reduction target eight years ahead of schedule, saving $650 million in the process, the company had, as Klocke describes it, a huge opportunity to engage with SRIs and communicate BP’s achievement. BP has followed through on this opportunity and ensured that SRI engagement is not just a ‘nice to have’ at BP, but rather a ‘must have’.
The Value of SRI Engagement
Since then BP has actively engaged with the SRI community – and responded to a number of shareholder resolutions. By building relationships among leading SRIs and SRI firms, BP has also realized considerable benefits.
As the following examples show, the trust and goodwill built up through BP’s history of engagement proved valuable in the face of two recent events for the company: the tragic explosion at its Texas City refinery in 2005, followed closely by the closure of a Prudhoe Bay transit line in 2006.
- Engagement with SRIs has enabled BP to foresee problems and identify opportunities. Over the long term, the company has worked with SRIs and NGOs to find ways to address environmental and operational issues in more innovative ways. For example, BP sought feedback from SRIs when designing its sustainability report, making the report a more useful tool for responding to questions around social and environmental performance.
- Having open channels of communication and seeking feedback from SRIs has meant that BP can resolve issues before they result in shareholder resolutions. Several years ago, BP received a shareholder resolution on biodiversity that ultimately resulted in a change to the way BP conducts its project proposals and assessments. BP consequently formulated environmental requirements for new projects. The company resolved the issue with the SRIs who were willing to withdraw the resolution, however, it was too late according to BP’s company requirements to allow for withdrawal of the resolution. The lesson learned here was to identify ahead of time the concerns of the SRI community in order to ensure that there is time for constructive dialogue around issues. With sufficient constructive dialogue with SRIs and NGOs, some shareholder resolutions can be avoided entirely.
- Proactive engagement with the SRI community – and the relationships Klocke and her colleagues have established – has built up considerable goodwill and confidence in the company and allowed it to retain SRIs during major crises. Although SRIs make up only a small proportion of BP's total shareholder base, they are investors BP wants to retain. As well as being long-term investors, SRI decisions to buy and sell BP stocks have profound impact on the company’s brand and reputation. In particular, Klocke found that the support of the SRI community during the Texas City refinery explosion and the Prudhoe Bay transit line closure was valuable to BP in mitigating the damage to BP’s reputation as a result of the incident.
- The engagement process allows BP to educate SRIs about BP’s operations, so that SRIs are better placed to understand the significance of positive and negative events. In the case of the Prudhoe Bay transit line, some SRIs that were contacted by journalists and others stated that, although they were keeping a close watch on the situation, they were not going to sell their BP shares as they believed in the long term value of the company. This was made possible by their insight into BP’s operational structure and management processes facilitated by BP’s proactive engagement.
- Creating a formal channel of communication and building relationships with SRIs allows BP to ensure that SRIs have the information they need to evaluate the company. In the case of the Texas City refinery explosion, within hours Klocke was able to direct her SRI contacts to a web site established by the company that contained factual accounts of the incidents published by BP and links to third party reports, including those of regulators. Consequently, BP was able to dispel some of the misconceptions created by the media hype surrounding the incident and retain open communications with the SRIs.
Tips for proactive engagement with SRIs
So how does BP go about engaging with SRIs? Klocke had the following tips for other companies seeking to be proactive about engaging with the SRI community:
- Make direct contact with key SRI firms. Klocke recommends that companies take the opportunity to send a copy of their social report or a press release hot off the press, providing SRIs with a contact point for further information. Alternatively, follow up by phone or email after the SRI firm has made an announcement about a survey or rating of your company to find out more about their assessment of your company’s strengths and weaknesses. Take opportunities to meet with SRI firms one-on-one to facilitate transfer of information.
- Convene groups of SRIs to discuss particular issues. BP has used two formats in the past: roundtable discussions on particular topics, and group sessions to provide information about emerging issues.
- Consider including SRIs in calls with and presentations for mainstream financial analysts. Klocke believes that including SRIs in conversations with the mainstream investment community has been a win-win situation for the company. BP was one of the first companies to include SRIs firms in conversations with mainstream analysts and key management and one of just a few in the U.S. to do so. Responding to questions from SRI analysts allowed BP’s executives to inform the mainstream financial community about the business case for its commitment to renewable energy: commitment to the sector, the existent business opportunities, and why this was not just a marketing exercise. Similarly, SRIs were able to hear mainstream analysts asking questions about BP’s management of environmental health and safety issues and understand that these are fundamental concerns for the company.
As BP’s experience shows, engaging with SRIs need not be a source of sleepless nights or an annual battle during proxy season. By taking a proactive approach to initiating and developing relationships, maintaining open channels of communication and seeking feedback from SRIs, companies can reap considerable benefits.
In December the Center’s Institute for Responsible Investment will host a convening around communications with SRI analysts. The objective of this dialogue, which will bring together corporations, responsible investors, and other stakeholders, is to uncover the best ways to identify and communicate the long term value drivers for corporate performance. Watch for more details in this newsletter and on the Center’s web site, or contact David Wood or Belinda Hoff for more information.
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