The Greening of the Proxy Season

Investors are targeting more companies than ever before with environmental proposals. And they're going beyond oil to homebuilding, retail, and more

Dan Nielsen is on a mission. As a manager of the pension fund for the United Methodist Church in Evanston, Ill., he helps steer $14 billion in assets into "socially responsible" investments. He won't touch companies that make money from alcohol, tobacco, gambling, pornography, or weapons. And each year, he looks beyond those sectors to target companies in the fund's portfolio where he thinks improvements need to be made.

Nielsen, who has an MBA from the University of Chicago, says he shows companies how social issues affect shareholder value. He's made headway with companies like Wal-Mart (WMT), developing a code of conduct for supplier factory conditions in countries like India.

Now, as he heads into the 2007 proxy season, Nielsen is pushing companies to adopt more green business practices. He's hoping that retailers will cut down on the energy they use in their stores, property managers will manage buildings more efficiently, and homebuilders will build houses that use less gas and electricity.

"We're approaching the environment as a moral issue—as God's creation," says Nielsen. "But climate change also impacts a company's bottom line, and more mainstream investors are ready to address it."

He's making some progress. He helped persuade Circuit City (CC) to boost the energy efficiency of its stores. And after submitting a resolution to Horsham (Pa.) homebuilder Toll Brothers (TOL) that called for the company to report to shareholders on its efforts to boost energy efficiency, enough progress was made for Nielsen to withdraw the resolution. "It was just what we wanted," he says. "They agreed to look into how they use energy and how they measure it, and make it public this spring. They're starting to see that energy efficiency gives them the edge in the marketplace."

Shareholder Activism

Get ready for the green proxy season. As public companies mail out their proxy statements in preparation for their annual meetings, shareholders will find more environmental resolutions in them than ever before. Forty-five such proposals have been filed at 35 companies, according to Institutional Shareholder Services, a proxy advisory firm. That's up from 36 proposals last year.

In addition to filing more proposals, green activists are broadening the scope of the companies they're soliciting. In the past, most environmental efforts have focused on energy companies like ExxonMobil (XOM), General Electric (GE), Chevron (CVX), and ConocoPhillips (COP), or automakers like Ford Motor (F) and General Motors (GM). Many of these companies are still on activists' radar screens, especially Exxon, which faces five environmental proposals this year. But shareholder groups are increasingly turning to other industries, from homebuilders to retailers and beyond. At financial giant Wells Fargo (WFC), they're calling for greenhouse gas reduction goals, and at Prudential Insurance (PRU), it's a draft of a climate change strategy.

Activists like Nielsen are increasingly focused on homebuilders like Toll Brothers. Nielsen and his peers are urging homebuilders to at first disclose their energy usage and then start setting targets on being more efficient with every brick they lay. These eco-activists say that greening operations today will bring both a better reputation and bigger profits. In all, 10 building companies have been targeted with energy-efficiency resolutions.

The Nathan Cummings Foundation, a charitable organization with a $525 million endowment, developed the template proposals for Nielsen and other investor groups, and has submitted resolutions at several builders, including Centex (CTX) and Standard Pacific (SPF).

Some Cooperate, Some Fight

"Global warming is a challenge to Corporate America's ingenuity, from homebuilders to retailers to oil companies," says Leslie Lowe, director of the energy & environment program at the Interfaith Center on Corporate Responsibility, a shareholder advocacy group. "There are capitalists who own significant positions in these companies saying, 'You can do better. And if you don't, the market will punish you.'"

Advocates like Nielsen say it can be an uphill battle, but a growing awareness of environmental issues is leading to success. Of the 2007 homebuilder resolutions, nine have been withdrawn because the parties negotiated successfully, including Toll Brothers and D.R. Horton (DHI), which have agreed to public reporting on energy efficiency.

But three have been omitted following successful company challenges at the Securities & Exchange Commission. The SEC can omit resolutions if companies successfully challenge them, most often on the grounds that the proposals suggest interference with the "ordinary business" of a company.

Homebuilders on the Spot

Some companies choose to fight the shareholder resolutions head-on with hard-hitting counterproposals. In response to Nielsen's proposal pushing for a "sustainability report" that details the company's efforts on environmental and social issues, homebuilder Lennar (LEN) wrote in its proxy statement that the board does not advocate "monitoring social and environmental issues" that "have little to do with the business of running a profitable company." The proposal will go to a vote at the Mar. 28 meeting.

Though consumer support for all things green has exploded recently, this may be a tough time for homebuilders to fundamentally change their ways. The housing slump has hammered their financial results and stock prices in recent months. Just on Mar. 9, Hovnanian Enterprises (HOV) reported a net loss of $57.3 million for the three months ended Jan. 31, compared with an $81.4 million profit in the year-earlier period (see, 3/9/07, "Hovnanian’s Florida Burn"). With losses piling up, builders may be reluctant to take on new green initiatives, which can raise the costs for them and for home buyers.

For shareholders like Nielsen, winning isn't everything. The proxy votes are typically nonbinding, so whether they receive 9% of the vote or 90% they serve only as a recommendation. Still, Nielsen and others say they'll continue pushing for greener practices. They figure they want to do whatever they can to make sure companies are building a better future.

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