KLD INDEXES
Setting the Standard
for Social
Investment |
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Closing values for 09/30/2002
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Value
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Change
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%
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302.75 |
-35.44 |
-11.71%
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|
|
60.00 |
-7.10 |
-11.84%
|
|
|
61.26 |
-7.03 |
-11.48%
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September 2002: SEC discovers
SRI
Editor's Note: Due to a
compositional error, a draft of our leader on the SEC was
substituted in the @KLD Newsline dated October 24, 2002 for
the article which appears below. We apologize for any
inconvenience this may have caused.
In September, the Securities & Exchange Commission (SEC)
took two steps along a trail long blazed by SRI.
First, the SEC proposed regulations that would require mutual
funds and investment advisors to adopt proxy voting guidelines
and report their votes to their investors. Then, on September
19, SEC Chair, Harvey Pitt told the Council of Institutional
Investors (CII) he favored abolition of the “ordinary
business” rule which the commission has used to block numerous
shareholder resolutions of the last 25 years.
Socially responsible investors can take much of the credit for
forcing these issues.
Proxy
Voting Regs
The proxy voting regulations, if adopted by the SEC, should
end the long-standing practice of mutual funds and investment
advisers voting blindly with management or neglecting to vote
at all.
“These rules,” says Adam Kanzer of Domini Social Investments,
“should produce more accountable corporations on issues
ranging from executive compensation to the environment.” SEC
Chair Harvey Pitt told the CII, “I'm pleased we're finally
addressing the petitions, which are premised on bedrock
principles of the federal securities laws: transparency and
adherence to fiduciary duties that require advisers to vote in
their clients' best interests.”
Social Mutual Funds: the Model. Shareholder activists
began attacking the practice in the 1970s with Project GM and
the movement for South Africa divestiture.
During his stint at the Department of Labor during the
mid-‘80s, Robert Monks staged the first regulatory attack on
this practice. He ruled that the same fiduciary obligations
applied to the voting of proxies as it did to investments. His
logic was simple: The shareholder’s right to vote had an
economic value; therefore, the manager has a fiduciary duty to
vote in shareholder elections in the interest of the shares’
beneficial owners.
There matters stood until 1996. In January of that year, Amy
Domini asked KLD to formalize and prepare for publication, the
proxy voting guidelines it had developed for the Domini Social
Equity Fund in 1991. With their publication in March, Domini
became, we believe, the first mutual fund of any sort to
publish guidelines
As for reporting proxy votes: “In 1999, Domini Social
Investments and the California Public Employees' Retirement
System (CalPERS) became, respectively, the first mutual-fund
company and first public retirement system in America to
publish their proxy votes.” http://domini.com/about-domini/News/Press-Release-Archive/Barrons_OpEd_5-02.doc_cvt.htm
Other socially screened mutual fund families and a few
institutions have followed suit. See http://www.shareholderaction.org/proxy.cfm for
a complete list. These include Pax World, Walden, Citizens,
MMA Praxis and the General Board of Pensions of the Methodist
Church. But these institutions are notable exceptions to the
larger rule, which is not to disclose voting policies or
records.
The Rule-Making Petitions. How did the proposed rules
come about? Adam Kanzer, General Counsel for Domini Social
Investments, summarizes: “The proposed regulations are a
direct response to rule making petitions filed by the AFL-CIO,
the International Brotherhood of Teamsters and Domini Social
Investments.”
“The unions deserve significant credit for pushing this issue
to the forefront of the SEC’s agenda, but it is difficult to
imagine that the Commission would have taken this important
step had Domini and other SRI funds not taken the lead by
demonstrating that it is possible to provide this information
in a timely and cost-effective manner.”
The proposed regulations, of course, serve the cause of
transparency. Managers will have to reveal what their policies
are and how they implement them. Far more importantly, the
regulations will compel managers to look closely at each
proxy. If the regulations are ultimately adopted, corporate
management can expect bruising fights over resolutions, and
they will lose some of them.
The mutual fund proposal will be found at: http://www.sec.gov/rules/proposed/33-8131.htm
The investment adviser proposal: http://www.sec.gov/rules/proposed/ia-2059.htm
The proposed regulations are outlined in the following
article.
“Ordinary
business” exception to be abolished?
Ensuring
this sea change would be the abolition of the “ordinary
business” exception which SEC Chair Harvey Pitt has proposed.
For 30 years or more, the Commission has barred many social
proxy resolutions on the grounds that they interfered with the
corporation’s routine business operations. So, for instance, a
resolution on ending sweatshops abuses at overseas vendor
factories might would not reach shareholders if it directly
raised the issue of wages. This out is unique to the SEC.
Companies whose stock is not publicly traded do not enjoy this
excuse.
Pitt’s Proposal. What Mr. Pitt told the CII about the
“ordinary business” rule is better quoted than summarized.
“Recently issues have arisen regarding shareholder suffrage
regarding options treatment. My approach to these issues is,
above all else, pragmatic. The purpose of shareholder
proposals is to give shareholders a chance to inform
management about how they feel regarding major issues
confronting corporations. Last year, when Disney was presented
with a proposal to let shareholders express their views
regarding whether their company's outside auditors should be
allowed to do any consulting work, I strongly endorsed the
right of shareholders to express their views on such a topical
issue, breaking with past tradition. I believe the same is
true with respect to options accounting. Whatever one's views
are on the merits of the subject, it is clearly an issue of
extraordinary importance; as a result, I don't think
corporations should be able to exclude aggressive shareholder
proposals like these under the rubric of the ‘ordinary
business exception.’"
“Indeed, I've asked our Director of Corporation Finance, Alan
Beller, to consider a proposal to eliminate the ‘ordinary
business exception’ from the list of reasons that companies
can exclude otherwise validly promulgated shareholder
proposals. It is my hope that we can eliminate this exception,
making shareholder suffrage a reality, and sparing our Staff
from trying to resolve what is, or isn't, within the purview
of ordinary business issues facing public companies.”
Social investors have waited a long time to hear this from an
SEC Chair. Now, we must help him realize his – and our – goal.
Caveat
The
proposed regulations and the proposal from Chairman Pitt will
lack the force of law until they appear as adopted in the
Federal Register. Both have powerful opponents. Those favoring
their adoption have much organizing and lobbying to do (the
public comment period on both rules ends December 6).
Nonetheless, the terms of the debate have changed from whether
the proposed actions should occur to when.
This September brought social investors two victories to
savour. With some more hard work, they may have two triumphs
to celebrate early next year.
Acknowledgments
Adam Kanzer of Domini Social Investments and Kyle Johnson of
KLD contributed extensively to this story. Our thanks to both
of them.
KLD Analysts Mark
Milestone
On
Sept. 28, 2002, KLD marked a research milestone: the 10,000th
entry to the SOCRATES Continuous Update Log.
The
Continuous Update Log is the Research Department’s record of
changes to the social profiles of the more than 3,000
companies KLD tracks. KLD has maintained the Log since Sept.
2001, as part of its daily company monitoring process.
KLD’s
bi-weekly publication, @kld, alerts SOCRATES clients to
entries in the Continuous Update Log, ensuring that clients
have up-to-date social information on their portfolio
holdings.
KLD
Senior Research Analyst Libby Horan Edgerly, a KLD analyst
since 1993, made the 10,000th entry when she logged a KLD
concern assigned to the social profile of Wyeth.
For
more information about KLD’s research process, please contact
Eric Fernald, KLD’s Director of Research at efernald@kld.com.
KLD Company Spotlight: Trex Company
Inc.
On January 18, 2002, KLD added Trex Company Inc. (TWP) to its
Domini 400 SocialSM Index (DS 400). Trex manufactures lumber
from recycled wood fiber and reclaimed polyethylene. The
company’s composite lumber is used in residential decking,
marina docks, boardwalks, playgrounds, and nature trails. Trex
is notable for its innovative approach to recycled material
and for the beneficial impact its product has on the recycling
market.
Trex’s
principal product is decking manufactured from waste wood
fibers and reclaimed plastics. The company obtains wood waste
from woodworking operations and reclaimed plastic from
recovered stretch films and plastic grocery bags. The company
sources plastic grocery bags from major grocery chains that
have bag-recycling programs. It buys stretch film from
distribution centers in various industries that use the film
in packaging and shipping. Trex reports that its decking is
completely recyclable and that it accepts used Trex decking
for recycling.
Conventional
wood decking is commonly pressure-treated with pesticides and
other chemicals such as chromated copper arsenate (CCA), one
of the most frequently used pressure-treating chemicals, to
resist insect and weather damage. The Environmental Protection
Agency (EPA) has recently reached an agreement with CCA
producers to phase it out because arsenic may leach out of
CCA-treated lumber, both during its use and after the lumber
has been disposed of. EPA reached its conclusion after high
arsenic levels were found under structures made from
CCA-treated wood and in landfills used for building wastes.
Trex’s decking does not require the use of pesticides and
therefore eliminates pressure-treating problems.
In
June 2001, Trex launched a joint venture in Spain. The new
company will collect and recycle approximately 20,000 tons of
polyethylene film annually. Trex will have the right to
purchase the venture's entire output.
Four
executives of Mobil created Trex, after acquiring Mobil's
composite products division. Each of the company's five senior
line executives is a former Mobil Oil Corporation employee.
Trex went public in April 1999.
For
more information about Trex, please contact KLD Research
Analyst Sam Warren at swarren@kld.com.
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| SHORT
TAKES |
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Commission Proposes
Disclosure of Proxy Voting by Mutual Funds,
Investment Advisers
The Securities and Exchange Commission voted
on September 19, 2002 to propose regulations
requiring mutual funds and registered investment
advisors to disclose their proxy voting policies
and procedures and their actual proxy votes. If
finally adopted, the regulation will enable fund
shareholders to monitor their funds' votes on
social and corporate governance issues –
something they can’t do now.
The
Commission also proposed requiring investment
advisers to adopt written policies and
procedures governing the voting authority of
client securities. Advisers would have to tell
clients about these policies and how to obtain
information from the adviser about votes cast.
Investment
Company Proposals
The
proposals affecting registered management
investment companies would require the
following:
*
Investment Company Proxy Voting Policies and
Procedures.
A fund would have to
disclose in its registration statement the
policies and procedures that it uses to
determine how to vote proxies relating to
portfolio securities. The procedures would
include a process to resolve a conflict on a
vote between the interests of fund shareholders,
on the one hand, and those of the fund's
investment adviser, principal underwriter, or
any affiliated person of the fund, and on the
other its investment adviser, or principal
underwriter.
*
Investment Company Proxy Voting Record.
A fund would have to file its complete proxy
voting record with the Commission. That
information would include for each vote:
information identifying the matter voted on;
whether the matter was proposed by the issuer or
by a security holder; whether and how the fund
cast its vote; and whether the fund cast its
vote for or against management.
*
Disclosure of Proxy Votes That Are Inconsistent
With Fund's Policies and Procedures.
A
fund would have to disclose in its reports to
shareholders proxy votes inconsistent with the
fund's voting policies and procedures and to
explain the inconsistent votes.
*
Availability of Proxy Voting Information to Fund
Shareholders.
A fund would have to make
available to its shareholders information about
its proxy voting policies and procedures and its
voting record. The proposed regulations would
require a fund to send the information within
three business days of a request.
Investment
Adviser Proposals
The
investment adviser regulation would require:
*
Investment Adviser Proxy Voting Policies and
Procedures.
Investment advisers would
have to adopt written policies and procedures
governing their exercise of voting authority
with respect to client securities. They would be
designed to ensure that the adviser votes
proxies in the best interest of clients and
address material conflicts of interest that
might arise between the adviser and its clients.
*
Investment Adviser Disclosure of Proxy Voting
Policies and Procedures.
Investment
advisers would have to describe their proxy
voting policies and procedures to clients and
furnish a copy of this upon request.
*
Obtaining Information From Investment Advisers
About Proxy Votes.
Investment advisers
would have to inform clients how to obtain
information from the adviser on how it voted
proxies.
The
full text of the SEC’s releases concerning the
proposed regulations is on the SEC Web site at:
http://www.sec.gov/news/press/2002-139.htm..
The
mutual fund regulations themselves are at:
http://www.sec.gov/rules/proposed/33-8131.htm.
The investment adviser regulations are at: http://www.sec.gov/rules/proposed/ia-2059.htm
SRI Alert: November 5 -
Making it Right Conference:
On November 5th, 2002 in New York City, the
first major conference to address the new
sourcing challenges in the apparel, footwear and
toy manufacturing and retailing industries: Hear
leading CEOs, industry experts and monitoring
groups talk about workplace compliance programs
and the three major monitoring programs: The
Fair Labor Association, SA 8000 and WRAP.
Speakers include: Paul Charron, CEO , Liz
Claiborne; Peter D. Whitford, President
Worldwide, Disney Store; John Eyler, Chairman
and CEO, Toys 'R' Us; William K. Fung, Group
Managing Director, Li & Fung Limited; Hal
Upbin, CEO, Kellwood; Auret Van Heerden,
Executive Director, The Fair Labor Association;
Alice Tepper Martin, President, Social
Accountability International; Lawrence Doherty,
Executive Director, Worldwide Responsible
Apparel Production.
Presented by World Monitors Inc.,
Lebhar-Friedman Chain Store Age and DSN
Retailing Today, in collaboration with the Asia
Society. Sponsored by Li & Fung.
For a conference brochure and to register go to
www.worldmonitors.com or e-mail:
e-monitors@worldmonitors.com.
SRI Alert: Nov. 7 &
8 - Fourth Triple Bottom Line Investing
Conference
The forth Annual Triple Bottom Line
Investing Conference will take place at Hotel Le
Plaza, Brussels, Belgium. The conference will
feature workshops, panel discussions, and
several keynote talks by representatives from
the financial and business sectors.
The
agenda includes four analyst meetings in which
TBL (Triple Bottom Line) analysts will meet with
representatives from retail, chemical, life
science, transportation, energy, and insurance
to measure their performance against a Triple
Bottom Line.
With
over 24 workshops and 105 speakers, TBLI is
truly the leading SRI learning and networking
event of the year.
Planned
workshops address Governance, TBL Regulation,
Human Rights, Reputational Risk, Micro-Credit,
Venture Philanthropy, Religion & TBLI,
Social Auditing, Environmental Auditing, Latest
TBLI Research, Corruption, Global TBLI funds,
Stakeholder Engagement, Climate Change, and
more. For regular updates on the program visit
http://www.tbli.org.
Commentary: Heat
Wave!
A book that might be more enticing now that
the dog days of an exceptionally hot summer have
passed is Eric Klinenberg’s Heat Wave: A Social
Autopsy of Disaster in Chicago (Chicago, 2002).
Klinenberg links the 700 deaths in the
record-setting 1995 heat wave to the breakdown
of civil society in neighborhoods around the
city.
Malcolm Gladwell wrote a positive review and
insightful essay on Heat Wave . (“Political
Heat”, New Yorker, August 12, 2002, pp. 76,
78-79.) In the midst of it, Gladwell digressed
on the subject of air conditioner efficiency
standards, a subject Klinenberg does not
discuss.
It seems that President Clinton on
his way out of office approved regulations that
would require air conditioner manufacturers to
increase efficiency from level 10 to level 13 on
a scale called the seasonal energy-efficiency
ratio (SEER). This spring, in response to
lobbying by Carrier, the administration reduced
the increase by a third.
Now, this decrease won’t mean much to the polity
which will pay less for air conditioners and
more for electricity (and the consequent
pollution, of course). Except in a heat wave.
As we in Boston learnt three times this summer,
air conditioners in heat waves place huge
demands on the grid. Reducing the efficiency
standards, says Gladwell, “means that by 2020
demand will be fourteen thousand megawatts
higher than it would have been, and that we’ll
have to build about fifty more power plants. The
cost of those extra power plants - and of
running a less efficient air-conditioner on hot
days - is part of what will make
air-conditioning less affordable for people who
will someday desperately need it.”
Last spring, the altered regulation seemed an
insignificant loss in the war on the
environment. Now, the super-heated, polluted air
of Summer 2002 and the melting Arctic ice caps
make the loss seem not insignificant at all.
As Amory Lovins says, we don’t need megawatts;
we need negawatts. – Peter D. Kinder
@kld November
Schedule:
In the upcoming weeks, look for:
October
28 & November 12: @kld- KLD's
biweekly updates on changes in the social
records of more than 3,000 companies.
@kld
delivers SOCRATES subscribers summaries of
breaking stories, legal settlements, new
environmental and social initiatives and
corporate actions that impact companies on the
S&P 500TM Index, Domini 400
SocialSM Index, Russell
3000TM Index and KLD Broad Market
SocialSM Index (available only to KLD
SOCRATES subscribers.)
November
20: @kld Monthly Index Performance.
This monthly publication provides data on the
performance of KLD indexes.
November
27: next issue of @kld Newsline,
KLD's monthly newsletter featuring new
developments in the socially responsible
investing industry.
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KLD
Research & Analytics Inc. supplies social investment research,
benchmarks, and compliance and consulting services to leading
investment institutions worldwide. KLD is the creator of SOCRATES, a
comprehensive online social research database, and of the Domini 400
Social IndexSM (DSI 400), KLD Broad Market Social
IndexSM (KLD BMSI), and KLD Large Cap Social
IndexSM (KLD LCSI). Visit our website at www.kld.com.
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