A question of shareholder responsibility
Another blow to the palm oil industry came on March 11 when JP Morgan Asia Pacific Equity Research revealed that the Norwegian Government Pension Fund Global (GPFG) had disposed of its stakes in 23 Asian palm oil companies in 2012, including several Indonesian companies committed to the sustainability movement.
The GPFG, the world’s largest sovereign wealth fund, was reported to have divested out its stakes, citing concerns about unsustainable palm oil production.
The divestments appeared to be a blanket sell-down of the sector without due consideration of company-specific plantation management practices. Some of the companies are publicly known to have progressively been adopting sustainability standards and certifications.
There is a notion that the GPFG’s decision may be driven by environmental pressure groups that singled out the palm oil industry as the cause of deforestation. Discriminating against an industry without due process is unwise in advocating for sustainability, and specifically in promoting good corporate governance and socially responsible
Fund managers and investors should be good owners, not just traders. Contrary to public beliefs that investors are only looking for profit in their shareholdings, there has been strong signs of shareholder activism in the wake of many corporate scandals since the 1990s. Even in the 1960s, many investors, through the corporate governance mechanism, actively involved and engaged in setting the company’s social and environmental policies.
There are three terms that have close links in shareholding practices: corporate governance, shareholder activism and socially responsible investment. Basically, shareholder activism is related to the make positive use of the rights of shareholders and to align the company with the shareholders’ interests, usually in terms of corporate governance, social and environmental goals.
While, socially responsible investment is the use of ethical, social and environmental criteria in the selection and management of investment portfolios, including more proactive practices such as shareholder activism.
Many fund managers and institutional investors believe that shareholder activism is instrumental in socially responsible investments. Whereas, screening companies to invest through either “negative” or “avoid” lists is no longer considered adequate under current corporate governance circumstances.
There are two options for investors, particularly big institutions such as pension funds, in exercising their roles in corporate governance practices, which are either to “voice” or “exit”. The “voice” means investors can actively shape up the direction of the company by sponsoring shareholders’ resolutions, nominating executives/committees, voting at Annual General Meetings (AGMs) to discuss the proposal, or seeking proxies from other big investors to force the company to adopt certain policies.
The second option is “exit”, to sell the shares and walk away, leaving negative publicity for the company’s shares, expecting that the threat of lower stock prices will force the company to adopt certain policies. However, there has been a general agreement that the investor must preferably adopt the “voice” option when time and resources permit, to meaningfully shape up the company’s direction.
Take the example of Rev. Sullivan, who was a prominent black civil rights activist in the US. Since the 1960s, he and his church groups had been actively investing in car manufacturer stocks, campaigning for companies to adopt shareholder proposals on the equal treatment of employees, regardless of their race.
As a result of the campaign, in 1971, Rev. Sullivan was invited to join the General Motors’ board of directors and became the first African-American on the board of a major corporation. He succeeded in introducing the equal employment policy in the car manufacturer. The policy was then formalized in 1977 as The Sullivan Principle, as a code of conduct for companies operating in Apartheid South Africa. The principle was instrumental in ending Apartheid in 1984.
How should we analyze the case of blanket divestment of the Norway GPFG?
First, we need to take note that the partnership and synergy are now becoming the underlying principles for any sustainability works. The government of Norway has signed a memorandum of understanding (MoU) with the government of Indonesia to support a program on Reducing Emissions from Deforestation and Forest Degradation (REDD). This is a good example of active engagement, collaboration and synergy between governments for advancing social and environmental goals.
Second, it seems that the Norway GPFG is intentionally overlooking the fact that one of the most advanced sustainability movements is happening in the palm oil industry. The RSPO (Roundtable on Sustainable Palm Oil) is an international multi-stakeholder organization and certification scheme of sustainable palm oil, founded by farmers and oil palm growers (Indonesia and Malaysia), mills, processing plants (including food producers), banks and NGOs (Oxfam, Conservation International, WWF and the Zoological Society of London).
If palm growers want their business units to be certified as sustainable palm oil producers, they must comply with the principles and criteria, which are audited by credible independent auditors.
With this collaborative process between companies and NGOs, the adoption of an RSPO certification scheme since it was introduced in 2009 is astonishing. About 15 percent (and increasing) of the palm oil produced is sustainability certified and rewarded with a premium price above the market.
JP Morgan stated that the Norway GPFG divestment appeared to be a blanket sell-down of the sector, without researching some companies publicly known to have progressively been adopting the sustainability certification.
There is an ethical question of how the Norway GPFG “exited” from companies that actively invested in the sustainability movement and were certified producers of sustainable palm oil producers. This is contrary to the government of Norway actively engaging itself in the sustainability arena.
The “exit” from shares of companies that are not producing RSPO-certified sustainable palm oil (CSPO) is understandable. But they also “exited” from sustainability-committed companies that abided by sustainability principles and criteria. This clearly shows that the Norway GPFG acts more like a trader than a good owner, which may hurt the sustainability movement.
Third, in terms of an active “voice” and a submissive “exit”, has the Norway GPFG exercised its legitimate rights as shareholder to “voice” its environmental concerns, instead of just walking away? I believe it can be meaningfully engaged in advancing sustainability goals by exercising its legitimate shareholder rights, such as actively preparing shareholders’ resolutions for company that holds the stock, to adopt the RSPO.
Norway can also actively nominate an executive or propose a sustainability committee that is responsible for the sustainability issue. Norway can also vote at an AGM to discuss its proposal, or dismiss executives that do not want to adopt the RSPO. And lastly, Norway can also seek proxies from other institutional investors to force companies to adopt the RSPO and its sustainability standards.
I strongly believe that any investors have an ethical shareholding responsibility to advance sustainability, with shareholders having the potential to exert their power and ownership rights to encourage companies they invest in to live up their roles as corporate citizens. We may see growing public scrutiny of how investors behave.
The public will expect more shareholder responsibility to engage with rather than to surrender and “exit” from the fight for the common global agenda of environmental stewardship and social justice.
The writer is vice president II of the Roundtable on Sustainable Palm Oil (RSPO).
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