Tim Smith, a pioneer of sustainable investing, was involved in the first shareholder resolutions pressing companies to withdraw from South Africa because of apartheid, the country’s cruel system of racial segregation. In the early 1990s, the South African government abandoned apartheid and formed a democratic government. Smith counts this as an early success, as was his work on the boycott of Nestle and other companies whose aggressive marketing of baby formula led mothers to stop breastfeeding. Ultimately, the World Health Organization voted in favor of a code of conduct on baby formula, with the United States the lone dissenter.
An early staffer at the Interfaith Center on Corporate Responsibility, Smith serves as senior ESG advisor at Boston Trust Walden, where he advises on the firm’s shareholder engagement efforts related to climate lobbying and governance. Over Smith’s long career, sustainable investing has become mainstream, with big asset managers such as BlackRock and State Street offering solutions for investors, and the field exerting a growing influence on company decision-making. Smith will retire from Boston Trust Walden at the end of this year to return to the ICCR. Morningstar sat down with him to reflect on the changes in the field, how individual investors can take action, and why company political spending is so important to watch.
Q: ESG—or environmental, social, and governance—investing has been under fire this year. Should people drop the term altogether?
Smith: Years ago, the US SIF forum [the trade association for sustainable investing] basically changed the term to sustainable, responsible, and impact investing. The debate about names and definitions will continue. I don’t think people will run away from the term ESG just because it’s being challenged. They’ll simply explain what it means to them, how they do that kind of investing for their clients, and why it’s simply commonsense investing. It has become a controversial debate, but a constructive one.
Q: Your successes in the South Africa divestment and the Nestle boycott helped set the stage for investors to push companies on a whole host of issues, including climate emissions reductions.
Smith: Investors, from small investors who’ve filed a shareholder resolution to the New York State Comptroller’s Office, to CalPERS and CalSTRS, have played a key role in this evolution. Unfortunately, the speed with which this transformation is occurring is not fast enough to protect us from some of the major ravages of climate change. However, there’s been meaningful progress with companies, which have set clear climate goals accompanied by transition plans.
A different challenge is diversity on boards of directors. Today, you have State Street and BlackRock saying they’ll vote against boards that are inadequately diverse. So companies have their nominating committee clearly state that the pool of board candidates must be a diverse one. And they publicly state that it’s good for shareholder value to have a diversified board. I think almost every Fortune 500 or S&P 500 company has diversity on its board, and now the debate is about how diverse.
Q: Let me follow up on emissions. You know, many people say it’s impossible to hit net-zero emissions by 2050. What does this do to the argument that ESG is financially prudent?
Smith: I’d turn that question on its head. ESG is prudent because we are raising that specific risk with companies and investors. If companies and governments don’t move in this direction, and we don’t meet those goal posts, our economies are going to hell in a handbasket.
Q: You’re known for shareholder engagement and advocacy. How has the field changed?
Smith: At the very first resolution in 1971 sponsored by the Episcopal Church with General Motors GM on the South Africa issue, the stockholders’ meeting had thousands of people. The only people that filed shareholder resolutions before that were individuals who the press liked to call “gadflies,” and they filed resolutions mostly on governance issues. In those early years, you were lucky if you got 3% support, allowing you to bring the resolution back the next year. Now the situation is very different. Last year, over 35 resolutions got majority votes. A significant number got over 40%. That sends a message to any smart company that investors care and want them to take leadership on certain issues.
Votes are important. There’s lots of debate about whether BlackRock and Vanguard go far enough. But they’re talking about and pressing companies on these issues.
We hear from companies that the voice of employees is also growing stronger and that younger employees want them to show this kind of leadership. Finally, these resolutions have a spillover effect in helping support legislation. If we can point to significant investor interest in issues, which SEC chair Gary Gensler pointed to when he proposed new climate regulations, it can be a stimulus not just to the SEC but for legislative actions as well.
Q: We’ve seen an increase in so-called anti-ESG shareholder proposals, which use various tactics to get on the ballot, many of which obfuscate the real intent behind them and are usually submitted by groups that oppose the work of “pro-ESG” investors. Do you expect these to grow?
Smith: There are, as you know, different kinds of anti-ESG resolutions. Some are clearly anti-ESG, for example, diversity resolutions claiming white males face discrimination. Others are clones of existing resolutions, for example, seeking lobbying disclosure. I don’t expect these to increase dramatically. Strive [an Ohio asset manager that has criticized ESG] has said they plan to introduce resolutions challenging companies to focus on the bottom line and ignore ESG factors. It’s hard to predict, but we can expect those kinds of resolutions to grow.
Q: How can individuals engage with companies?
Smith: Well, James McRitchie and John Chevedden together filed about 200 resolutions in 2022. They’re usually focused on governance issues, but they’ve also begun to file on political spending and lobbying. These resolutions regularly get over 50% of the vote because pension funds, etc., aren’t usually concerned about the motivation of the sponsor. If the resolution asks for an end to staggered boards, it will get a majority vote no matter who files it.
There are also individuals who file resolutions with As You Sow as a partner. Some have done quite well. You have to learn some things about the resolution process There are handbooks about how to file. If you want to file on issues that are commonplace, such as climate change or board diversity or Equal Employment Opportunity disclosures, some groups will assist you in filing or cofiling a resolution.
Q: But can an individual conduct ongoing dialogue with companies in the way portfolio managers and stewardship officials do?
Smith: If an individual wants to do this, even with two or three companies, they have to spend some time to do it. You can definitely write a letter and ask to have a discussion with management. A lot of companies don’t just want to talk to the CalPERS of the world. They do want to know what the retail investors are thinking and doing.
You’re correct, there aren’t organizations that coordinate individual investor engagements. But an investor who wants to do it could find a route to be an active voice with companies. Of course, voting your proxies is an important tool as well.
Q: Sustainable investing has been an institutionally led movement. Now, new tools let individuals invest according to their values. What are the implications for the industry? Plenty of people who might oppose ESG investing may want to express their values through investing.
Smith: You’re absolutely right. In the future, I expect more individuals will declare, “I’m going to find investment opportunities representing what I believe in.” And now we have more conservative investment opportunities as well for that type of investor. If you’re a company, you’re now hearing from more of your smaller individual investors as well as large investors. That sends a message as well. Investors aren’t just investors—they are consumers; they are citizens. It’s a positive if individuals get more involved, through voting, writing letters, signing petitions, or filing resolutions.
Q: Don Phillips of Morningstar argues that individuals investing their values are more likely to hang on to their investments longer, leading to better investment outcomes.
Smith: That makes sense. Those investors become long-term investors. They also sometimes demonstrate more loyalty to the firm or mutual fund they’re part of. For example, the Calvert Group or the Domini Social Investment Fund likely have some very loyal clients who stayed with them through both up and down cycles.
Q: You’ve focused on political spending in the last couple of years. Why?
Smith: I co-chair a working group about lobbying at the Interfaith Center on Corporate Responsibility. We’ve filed resolutions for over 10 years asking companies to disclose their lobbying information. In this day and age, it’s even more important for companies to be transparent about their lobbying and political spending, where it goes, about the oversight at the board and management level, and how they evaluate who they provide money to. The most dramatic example was Jan. 6, right? So many companies put a moratorium on political donations to candidates who were election deniers but then returned to traditional financial support several months later.
You may wind up supporting election deniers or climate deniers, or you can support politicians fighting against these bills. There are numerous press accounts highlighting companies with very good human resources records, who clearly say they support women’s reproductive health, including funding medical procedures out of state, but are still supporting politicians or organizations who are actively involved in anti-abortion campaigns.
Bruce Freed at the Center for Political Accountability has done some studies about the key role that organizations like the Republican Attorneys General Association play in certain kinds of legislation, and you need to be aware where your corporate money is going.
Q: Can you give us an example?
Smith: A dramatic example of this kind of confused messaging by companies is those taking very firm positions on climate change, while being members of trade associations that are vigorously opposing climate legislation and regulation using those members’ funds. That’s why there have been resolutions to numerous companies globally, asking for companies to assess the lobbying activity of trade associations. Resolutions at six companies got majority votes in 2022 in the U.S., and more companies are agreeing to evaluate the positions of their trade associations and report on their findings.
So, the issues of political spending and lobbying are very timely and more important than ever.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.