The Obama Administration and new Democratic Congress take office at a time of extraordinary crisis but also potential opportunity. Even with U.S. and global financial markets plus entire sectors of the economy in turmoil, the elections have opened the door for fresh leadership and new policies. We now have the chance to contain the recession, shore up the financial system, and invest in a green economic renewal all at the same time. While all investors clearly have a stake in advancing each of these objectives, sustainable and responsible investors have an especially broad and timely perspective on the governance and regulatory underpinning of a sound economy. The incoming Administration and Congress will, of course, be focused first on stabilizing the markets, creating jobs, arresting the slide of the auto industry and other sectors in distress, and getting the economy back on track. Yet amidst the gloom, encouraging indications are mounting that tough lessons will be learned and applied that can strengthen the financial markets and broader economy in important ways.Already there is a consensus that this crisis was caused in part by a combination of inadequate corporate governance (especially in the financial sector) and regulatory oversight, and that both must be strengthened in order to regain investor confidence and rebuild public trust in the markets. Moreover, there are also signs of an emerging consensus that economic recovery can be stimulated by accelerating, rather than delaying, bold steps to tackle the central sustainability challenge of our time: diminishing climate change and curbing our dependence on fossil fuels by investing in renewables. With a shrewd combination of vision and pragmatism, a “green recovery” can deliver short and long-term economic and environmental benefits alike. We have before us a rare convergence of opportunities that all are complementary: fresh, dynamic new leadership in Washington; a financial system that can be bolstered by stronger corporate governance and investor rights, and a world that should be ready to face the reality of the climate change crisis by making serious commitments and smart investments that create jobs and spur
growth at the same time. Calvert sees a number of important areas where focused initiatives can turn this crisis into opportunities. One of the harshest lessons learned over the past several months is the damage that can be done by poor corporate governance, insufficient regulatory oversight, and lack of transparency whether in pricing of assets or disclosure of exotic investment instruments such as complex derivatives. There is already movement to address these problems. Global leaders meeting in Washington for the Group of 20 financial summit on November 15 called for greater disclosure. Furthermore, nearly all country codes of conduct developed in response to the recent market crises endorse enhanced transparency of company financial performance and ownership. Support for environmental, social and governance (ESG) disclosure is also building across different regulatory regimes. Already some foreign stock exchanges, including those in Brazil, South Africa, and Malaysia, have such ESG disclosure requirements. Calvert believes that the U.S. should adopt similar disclosure standards. Doing so would provide investors with more information on issues that are increasingly understood to have financial materiality with bearing on corporate performance and, over time, the potential to enhance shareholder economic value.
Good governance is often compromised when a company emphasizes quarterly earnings and other short-term goals, rather than the long-term soundness of the enterprise. The new Administration and Congress should support reforms that encourage market participants to pursue long-term value creation and take a broader view of ESG impacts.The Bernard Madoff scandal highlights the importance of enhancing the SEC’s enforcement capabilities in order to better protect investors. The new Administration should ensure that the SEC acts in the best interest of shareholders through the rules it proposes and the priorities it sets. It is critical that the SEC Chair, other Commissioners, and agency staff preserve and strengthen the voice of shareholders and promote investor participation in corporate governance. For example, the SEC should promote the right of investors to use shareholder resolutions to ask companies to conduct risk assessments and disclose the results.
Key reforms can enhance investor oversight and involvement in corporate governance, helping to ensure that management interests are better aligned with those of shareholders. Board of director elections should be more democratic by including a provision for majority voting, so that a board candidate who did not receive majority shareholder support would no longer serve on the board of directors. Executive risks and rewards need to be transparent and better aligned with the interests of employees, shareowners, and long-term corporate performance. Passing legislation giving shareholders a “Say on Pay” through an annual advisory vote on executive compensation would increase investor-company communication and better align compensation with company performance. American investors and employees should not have to tolerate gross disparities in compensation without appropriate accountability. Focus on long-term investment to meet the challenges of climate change. Rather than use the financial and economic crisis as an excuse to delay action on climate
change, investors and policy makers ought to learn from the mistakes of short-term focus on the part of Wall Street to address these long-term challenges. Today’s lower energy prices should not be an excuse to put off investing in alternative sources of energy, promoting energy efficiency and conservation, and establishing greenhouse gas emissions cap and trade regulations. We need a strong national climate policy to create greater market certainty and enhance U.S. global competitiveness in energy and related markets. We support Federal climate change regulations in line with the scientific consensus and establishment of a target of 80% emissions reductions by the year 2050. We urge the Administration and Congress to focus on this critical objective, even —or especially — in such a challenging economic environment. Failure to take immediate action to reverse climate change will significantly increase investor risk and the likelihood of negative impacts around the world. While it is important to keep the focus on long-term challenges, the steps necessary to build a green economy can provide a shot in the arm right now to the economy. The incoming Administration has made clear that investments in renewable energy and green collar jobs as well as bold action on climate change are a centerpiece of the President-elect’s agenda. Indeed, it ought to be a central element of the stimulus the government enacts as part of its economic recovery plan. President-elect Obama has called for the creation of 5 million jobs through the investment of more than $150 billion in renewable energy, energy efficiency, biofuels and other green technologies with a goal of generating 25 percent of U.S electricity from renewables by 2025.Climate change also creates significant economic opportunities as the world transitions to clean energy, but the lack of a clear Federal policy makes it risky for U.S. businesses to pursue the large-scale, long-term capital investments needed. We need government policies that provide the proper market incentives, drive technological innovation, and establish uniform minimum emissions baselines across the country. Action by the private sector will be absolutely critical to addressing global warming, but voluntary action is not enough. The U.S. market needs policy certainty that will encourage and enable companies to make the necessary large-scale capital investments in clean energy and other low-carbon technologies and practices. Climate change presents serious economic risks that we must confront through coordinated global action. It is important that the new Administration begin immediately to play a constructive role in the United Nations Climate Change negotiations, building toward the December 2009 conference in Copenhagen where the successor to the Kyoto Protocol will be developed. The array of fundamental challenges from corporate governance and regulatory oversight to climate change and energy diversification, to name just a few, is daunting as the new Administration and Congress prepare to take office. Investors must take advantage of this opportunity to engage policy-makers to build a much more accountable and sustainable future—- and present — beginning in January 2009.
Stu Dalheim is director, Calvert Shareholder Advocacy and Bennett Freeman is Senior Vice President, Calvert Social Research and Policy.