Responsible corporate policy engagement

By Carine Smith Ihenacho, Chief Governance and Compliance Officer and Matt Genasci, Senior Investment Stewardship Manager.

Our view

• Companies should approach policy engagement in a responsible manner.
• Transparency and robust oversight are the cornerstones of responsible corporate engagement in the policymaking process.
• Companies’ policy engagement activities should be aligned with their stated policies and sustainable value creation.

Relevance to us as a long-term financial investor

The fund’s long-term returns are dependent on a sustainable economy, well-functioning markets, and good corporate governance. These in turn require robust international standards and effective regulation. Our responsible investment management policy acknowledges the importance of these standards and regulations and forms the basis for Norges Bank Investment Management’s engagement with regulators and standard setters to promote their development.

Companies also have clear interests in ensuring that these regulations and standards are fit-for purpose. Many companies choose to engage in policy and regulatory development though lobbying, political contributions, participation in business associations, research sponsorship, philanthropic donations, and other activities. The strategic importance of policy engagement has arguably only increased in the context of complex and globalised supply chains. Responsible policy engagement can inform policymakers about the unintended impacts of proposals and highlight market inefficiencies that only policymakers can address. Our expectation documents accordingly call for companies to support the development of policies and best-practice standards on various topics and to develop internal policies and guidelines for engaging responsibly and transparently with regulators, standard setters and other stakeholders.

Certain types of corporate policy engagement can also carry significant risks. For example, we believe that policy engagement that is rent seeking in nature, rather than supportive of long-term value creation, runs counter to our long-term interests as a universal owner. Accordingly, in the context of climate change, we expect companies to align their lobbying activities with the objectives of the Paris Agreement. In some contexts, corporate policy engagement may also contribute to higher levels of company-specific and systemic risk.[1] Policy engagement can bring reputational damage vis-à-vis customers, employees, or other stakeholders, particularly where the activity is perceived to be misaligned with company values or the interests of key stakeholders. Such misalignment can contribute to regulatory risk in the context of regulators’ scrutiny of “greenwashing”. Even where their objectives are uncontroversial, the manner in which companies engage can increase legal, financial and reputational risks.

Evaluating the risks and opportunities of policy engagement has become more challenging as corporate strategies have evolved to encompass a diverse range of activities. The challenge is made more difficult by the variation in company disclosure practices. Many companies provide granular information about certain policy-related activities while providing almost no information about others. For instance, some companies claiming to provide comprehensive disclosure of their policy-related activity nevertheless fail to disclose memberships in certain types of politically active organisations. Other companies set relatively high monetary thresholds for reporting on their policy-related expenditures, leaving potentially material activities and memberships opaque. Disclosures on corporate think tank and research sponsorship remain sparse.

Policy engagement is both an important topic of discussion in our dialogues with companies and a significant focus of recent shareholder proposals across sectors and regions. With heightened attention on company policy engagement and many companies struggling to navigate competing demands from stakeholders, we want to provide our view, from the perspective of a long-term, globally diversified financial investor, on responsible corporate practice in this area. In doing so, we hope to contribute to the development of standards and principles that may guide companies seeking to inform and influence policy in a responsible, constructive, and effective manner.

Key elements of responsible corporate policy engagement

1. Company engagement in the policymaking process carries inherent risk and demands robust oversight.

Companies that choose to engage in the policymaking process should establish robust governance mechanisms to oversee their activities. Boards should ensure that policy engagement is integrated into broader business strategy and risk management processes, and boards should have visibility into the full scope of company activities and spending. Companies should have adequate management and compliance measures in place, including internal codes of conduct or guidelines for responsible engagement. Where a company’s policy influence strategies rely on third parties, such as industry associations or other groups, the lack of direct oversight and control can increase risk. Such modes of engagement therefore demand additional governance measures, including clear funding criteria and appropriate due diligence and monitoring.

2. Corporate policy engagement should be transparent, with companies reporting comprehensively on their positions, activities, and expenditures.

We believe that policy-related activity that is undertaken behind closed doors is more likely to run counter to the interests of investors and other stakeholders and thus carries more inherent risk. We consider robust disclosure of policy objectives, as well as details of direct and indirect activities and expenditure, to be core components of responsible and accountable practice. Many companies provide substantial detail on certain types of activity or third-party engagements while failing to make meaningful disclosures of other types of activity or group memberships.Justifications for such disparate treatment often rely on differences in applicable reporting requirements. We take the view that compliance with applicable lobbying and disclosure regulations is a necessary, but not sufficient, criterion for responsible policy engagement. Robust disclosure across a subset of activities does little to reduce risks attached to a company’s other, undisclosed activities. Our interests as an investor are best served by comprehensive reporting across activities and jurisdictions.  

We believe that risks arising from anonymous policy influence in most cases outweigh any strategic benefit that such anonymity provides. Transparency promotes public trust and strengthens companies’ social licence to operate. Transparency regarding group memberships and other indirect activities is necessary to allow us to assess alignment between a company’s policy activities and our sustainability expectations. We are also of the view that such transparency is likely to sharpen management oversight, ultimately leading to policy engagement that is better aligned to long-term value creation.

3 Companies should strive for alignment between their stated policies and their policy influence activities.

Companies should take meaningful action to assess and mitigate potential misalignment between their policy activities and their stated values, goals and commitments. They should strive to ensure these activities are focused on material issues, proportionate, and support sustainable value creation. Our climate change expectations call for companies to address membership in trade bodies or associations that “is or may appear incongruent with the company’s climate change policy”. We take that view that misalignment with regard to other core company policies presents similar risks.

Companies may join business associations for reasons not related to policy engagement, such as to coordinate industry best practices. We recognise that the value of these activities may in some cases justify the risk related to policy misalignment. However, membership in a business association amplifies that association’s voice on policy, irrespective of the company’s primary purpose for joining. The existence of non-policy-related membership objectives therefore does not diminish the importance of assessing and mitigating material misalignments.

We do not take a view at this time on the necessity of alignment vis-à-vis individual political candidates. Politicians must take positions on a range of topics, and alignment between a company’s policies and the voting record of specific candidates it supports may be impracticable. The same cannot be said of business associations or other groups, which are free to define their agendas and strategies. We believe meaningful, demonstrable efforts to achieve substantial alignment with regard to group membership and other forms of indirect activity is therefore an important element of responsible corporate policy engagement. Responsible policy engagement may involve negotiation within groups and potentially even withdrawal.

Developments to follow

Our view on corporate engagement in the policymaking process may evolve over time as standards and company practices develop. We will closely follow and contribute where appropriate to the ongoing work of initiatives and standards such as the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, the OECD Recommendation of the Council on Principles for Transparency and Integrity in Lobbying, the OECD Principles on Responsible Corporate Lobbying and Political Engagement, the G20/OECD Principles of Corporate Governance, the CPA-Zicklin Index of Corporate Political Disclosure and Accountability, the Global Standard on Responsible Climate Lobbying, the Global Reporting Initiative, and the Erb Principles for Corporate Political Responsibility.

[1] Research on the effects of financial sector lobbying has found that lobbying banks tend to exhibit higher risk taking and worse performance relative to non-lobbying peers, with company-level risk contributing directly to a build-up of systemic risk. See D. Igan & T. Lambert (2019), Bank Lobbying: Regulatory Capture and Beyond, IMF Working Paper, WP/19/171; D. Igan, P. Mishra & T. Tressel (2011), A Fistful of Dollars: Lobbying and the Financial Crisis, NBER Macroeconomics Annual, Volume 26 Issue 1 (p. 195-230); T. Lambert (2018) Lobbying on Regulatory Enforcement Actions: Evidence from U.S. Commercial and Savings Banks, Management Science 65(6):2545-2572.