By Sebastien Akbik, Analyst, Governance Issues, PRI
Corporate political engagement, such as lobbying or political contributions, can create company-level and system-level risks when left unchecked. Managing such risks should rank high on the investor agenda. While companies have a legitimate interest in informing policy-making, outsized corporate influence can result in outcomes that favour short-term business interests over the long-term interests of investors.
Unchecked corporate political engagement creates risks for investors
PRI’s latest investor case paper highlights how unchecked political involvement raises governance risks at a company level, especially when there is a misalignment between a public commitment (e.g., support for the Paris Agreement) and political engagement activities (e.g., lobbying against climate regulations). However, corporate political engagement activities are by no means limited to climate. Companies across all sectors seek to influence legislation on key ESG issues - from big pharma opposing medicine pricing reforms to smartphone manufacturers staving off right to repair regulations.
A PRI blog has also highlighted the risks for investors of political contributions in the US, where companies make contributions to individuals with controversial positions that can go against the company’s values, and interests.
Lack of disclosures is exacerbating these risks. The recent World Benchmarking Alliance’s (WBA) Social Transformation Baseline Assessment found that only 20% of the assessed 1,000 companies disclose a high-level approach to lobbying and only 8% publish their spending on lobbying. The scarcity of meaningful corporate disclosures, far from being a reason to deprioritise the issue, should compel investors to push for greater transparency.
The argument that companies are safeguarding their competitive advantage by influencing legislation should not be taken at face value. Companies should disclose their political activity efforts to let investors form their own opinion on whether their investee’s corporate political engagement is indeed contributing to shareholder value, and aligned with investors’ long-term interests, or simply creating unnecessary risks.
Investors that fail to integrate corporate political engagement in their assessment of portfolio companies are not getting the full picture of a company’s impact on sustainability issues.
Company-level risks translate into systemic-level issues when corporate lobbying is derailing policies beneficial to investors. For instance, companies lobbying against climate regulations affecting their business models are imposing long-term costs on investors and diminished risk-return profiles. Likewise, companies enjoying privileged access to policymakers over other stakeholders fuels the perception that governments are not working for the people they are elected by, thereby eroding trust in governments and undermining democracies.
Gaps in regulation compound risks for investors
Although attempts to regulate political engagement have been increasing globally, a recently published OECD report supported by the PRI shows that no jurisdictions have sufficiently robust frameworks to guarantee responsible political engagement.
For instance, while lobbying registers are a step in the right direction, a closer look invariably exposes loopholes in design or practice. The UK and Australian lobbying registers only apply to paid external lobbyist and don’t cover employees acting as lobbyists, which makes up 90% of all lobbying in the UK. Likewise, the EU register doesn’t require the disclosures of lobbying meetings with policy assistants, staffers, advisors, and most of the Commission workers actually drafting proposals.
While some recent shareholder resolutions call for the disclosures of “grassroots” lobbying, in practice, very few companies disclose information on this, probably because indirect lobbying remains an area of unregulated influence as shown in the OECD report. A form of indirect lobbing popular with tech companies in the EU, and in the US is to support independent think tanks and academics that produce research on privacy and digital competition regulations favourable to big tech.
There are even instances where companies leveraged their large employee and user bases to influence policy decisions with great success. For instance, Airbnb has been accused of indirectly lobbying municipal authorities in the EU through “hosts clubs” supported by the company.
Greater investor oversight is needed
The current regulatory gaps demonstrate the need for stronger oversight of investee companies, and for greater investor support of government efforts to strengthen regulatory frameworks.
Corporate political engagement can be a force for good when companies share their expertise and insights to contribute to the design of more informed and effective policies. However, these benefits can only materialise with transparency and adequate safeguards. The stakes are high: the need to restore trust in institutions and promote collaboration between the private sector and governments to achieve global sustainability objectives is greater than ever.
Investors need to start assessing the extent to which portfolio companies’ political engagement aligns with investors’ long-term interests and responsible objectives. The increasing investor support for shareholder resolutions on lobbying and political activities is a strong call to action for investors to set out clear expectations in their voting policies.
The PRI’s investor case paper on political engagement provides initial guidance for investors. As part of PRI’s new workstream on responsible political engagement, we will develop further stewardship guidance.
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