What is a responsible investor to do when a company’s political spending or lobbying goes against its sustainability objectives or the broader needs of society? It’s a question confronted in two papers published late last week by Principles for Responsible Investment and the Organization for Economic Cooperation and Development.
Lobbying, campaign contributions, policy recommendations, revolving-door hiring, media promotions, and think tank funding and other forms of political engagement are all part of that, and those practices can say a lot about a public company’s actual position on ESG issues.
“In extreme cases, political activities that lack governance safeguards have translated into corruption risks,” PRI stated.
The group pointed to Ohio utility firm FirstEnergy, which last year settled a federal bribery investigation for $230 million. As part of that agreement, the company admitted to paying off public officials, using funds from its 501(c)(4) nonprofit, to advance nuclear energy legislation from which it would benefit.
When a company’s political activity — or even policies for lobbying — raise red flags, investors should consider becoming more involved, the report last Thursday from PRI stated.
That can include not just engaging with companies, but also with policymakers, PRI noted.
“The level of investor activity on corporate political engagement has been limited, except on issues such as climate lobbying or political spending in the U.S.,” the report read. “The reticence could be due to a fear of being embroiled in political debates. It could also be due to beliefs that investors are unlikely to achieve the intended impact or do not have the necessary data, expertise or capacity to engage on such complex matters.”
PRI’s report outlines steps to make that process more approachable. ESG investors can approach political activity by first developing the position they should take, researching companies’ political work and then engaging with them, the group wrote.
“It is key that investors understand the intended objectives, processes and outcomes of investees’ political engagement to determine the extent to which they align with their long-term interests and shared societal needs,” PRI’s report read. “This will allow investors to monitor companies’ performance against expectations, but also assess their interdependence within the portfolio on a range of policy matters and the broader system-level implications.”
But a big problem is that there's frequently little insight into a company’s political activities, including the identities of the key decision-makers in that area, the report noted.
“Although companies have begun to disclose some of this information, it is largely piecemeal and reactive,” PRI stated.
Political spending through trade and lobbying groups also complicates things, given the secretive nature of the groups' membership and contributions, the report noted.
In response to pressure from shareholders, BP and Total recently pulled out of U.S. trade associations that lobbied for looser emissions standards, PRI stated.
Both the PRI and OECD papers point to the necessity of political engagement by companies for making informed policy decisions and meeting balanced needs in a democracy. But they note that investors can push for companies to be far more transparent.
That can include adopting standards of conduct and processes for working with trade and lobbying groups, for example.
The OECD recommended corporate policies that explain how political activities align with sustainability goals and help ensure that lobbying by membership groups does not conflict with those.
Standards, the OECD report noted, could apply across a company’s business lines and should address revolving doors and the roles of board members and executives when it comes to political activity.
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