Since its passage in July 2010, the Dodd-Frank Act has gotten a lot of attention, mostly for its sweeping new regulations affecting the financial industry. But buried in all those pages, in Section 1502 to be exact, is also a small provision aimed at addressing the problem of conflict minerals originating from the Democratic Republic of Congo (DRC). Along with requiring the US Secretary of State to develop a strategy to address the issue, Dodd-Frank requires companies under the jurisdiction of the SEC to report annually on whether they are using minerals from the DRC or its nine immediate neighbors. All companies must also report on the due diligence they have undertaken to verify their supply chain and avoid tainted metals. The SEC has until April 2011 to develop regulations to carry out this mandate.

In December 2010, MSCI ESG Research published an Industry Report on makers of semiconductors and related equipment. Along with other key ESG metrics, we looked at how the 34 firms in this space managed their supply chains. Our analysis included, in the wake of Dodd-Frank, an assessment of company efforts to keep conflict minerals out of their products. We found a wide variation in supply chain-related ESG risk exposure between leaders and laggards; click here to get access to the full report.

Earlier this month, the US Social Investment Forum (SIF) released its 2010 Report on Socially Responsible Investing Trends. The Report has been a standard reference for the American SRI market since the first was produced in 1995. (MSCI is one of two lead sponsors of the 2010 Trends Report.)

SRI has grown steadily over that period, and since 2007, its growth has accelerated dramatically. While total US assets under management grew less than 1 percent, sustainable/SRI assets expanded more than 13 percent over the past three years.

Along with other data to support this growth story, the Report also explores themes that deserve wider notice. These include the pivotal role played by institutional investors; the expansion of "positive" environmental, social and governance (ESG) integration methods; and how public policy changes are driving further ESG integration by investors – including those who aren’t explicitly “socially responsible.”

On Monday, the New York Times reported that Bank of America would resume foreclosures in 23 states where such actions had been suspended in recent weeks. The moratorium had been put in place because of concerns over both the foreclosure process and a growing concern about how, in many cases, it was unclear which entity actually held the mortgage notes for the properties in question.

Why end the moratorium now, when such questions are still outstanding? The Times’ Floyd Norris noted that B of A was scheduled to report quarterly earnings on Tuesday, and suggested that the speedy resumption of foreclosures “is likely to be greeted favorably by shareholders.”

But do investors really want to see a perfunctory halt to the review of American mortgage practices? The Financial Times reported Friday that the SEC is beginning an investigation of the mortgage mess, which would indicate that there is a lot that investors and the public still don’t know about this problem. More information and analysis of lending, servicing and securitization practices could help markets properly value bank stocks.

Towards this goal, the MSCI ESG Research team presented an October webinar entitled “A New Normal for Banks: Sustainable Finance After the Crisis.” Click here for a free replay of this webcast. 

[Click here to get access to more MSCI ESG research and analysis of the banking sector.]

On August 23, the Wall Street Journal published an editorial by Dr. Aneel Karnani that questioned the value of corporate social responsibility (CSR). His argument was directed against “pleas” and “appeals” for executives to “act voluntarily in the public interest and against shareholder interests.” He called CSR “irrelevant or ineffective,” an “illusion, potentially a dangerous one.” A reader unfamiliar with the term might surmise that CSR is actually a dangerous chemical, like DDT.

The socially responsible investing (SRI) community, as expected, took issue with Dr. Karnani’s column. Social Investment Forum (SIF) CEO Lisa Woll wrote to the Journal, countering the polemic with real-world evidence about the positive impact of corporate sustainability efforts. (With permission from SIF, Ms. Woll’s letter is printed in full at the bottom of this article.)

Besides its empirical shortcomings, Dr. Karnani’s case also betrays a methodological flaw that is both common, and instructive: While we can tell what he takes issue with, it’s never quite clear who he’s talking about. Here is the plainest statement of his thesis about corporate social responsibility:

Last week, the Harvard Business Review blog presented some Harvard faculty responses to the newly signed Dodd-Frank financial reform bill. The Business School Professors’ sentiments range from the “cautious optimism” of Robert Steven Kaplan to Robert C. Pozen’s assertion that the act “misses the main cause of the crisis,” which was Fannie Mae/Freddie Mac, in his opinion. And while David A. Moss believes that the bill takes important steps to rein in “too big to fail” banks, Clayton S. Rose says that “little has been done” to defuse the systemic risks of such institutions.

None of the Professors focus on what Joseph Fuller, co-founder of Monitor Group, has called “The Terminator” of modern financial markets: computer-based modeling and trading programs. In a 2009 piece in The American Scholar, Mr. Fuller argues that the work of “quants” worsened the financial crisis. He also describes regulatory steps that could help dampen the volatility produced by automated trading programs.

Neither the Dodd-Frank Act nor Harvard’s Professors assign high importance to quant-driven volatility, but Mr. Fuller’s argument suggests that they should. Automated models drive hair-trigger, lockstep responses to market signals. “The Terminator” has also discouraged the sort of qualitative historical analysis that many investors, including those who consider environmental, social and governance (ESG) factors, believe is the key to long-term value creation.

During the 2010 US proxy season, shareholder resolutions seeking enhanced disclosure on climate change and sustainability attracted greater approval than in years past. 2010 also saw increased support for proposals that ask companies to report on their political contributions. Another hopeful sign was the withdrawal of an unprecedented number of environmental and social resolutions, as more companies agreed to address such issues before they came to a vote.

[Ed. Note – The Dodd-Frank financial reform bill could significantly reshape the American economic landscape. Some of its provisions will affect core activities of the socially responsible investing (SRI) community, such as proxy campaigns involving executive pay and corporate environmental, social and governance (ESG) practices.

The Social Investment Forum (SIF), of which RiskMetrics is a member, has coordinated the SRI community’s input on what became the Dodd-Frank bill. SIF Director of Programs (and RiskMetrics alum) Peter DeSimone wrote a succinct summary of Dodd-Frank for the SIF listserv, and he has graciously permitted us to repost his letter here. If you have further questions about the implications of the bill for investors, please contact SIF.]

During this proxy season, the Securities and Exchange Commission (SEC) has been shedding more light on the reasons for its rulings on no-action petitions to exclude shareholder proposals from corporate proxy statements. In many cases, the staff of the SEC's Corporation Finance Division has been including nuggets of information that provide some enlightenment on why the agency made a particular decision.

Before this season, the ruling letters had been limited to largely unadorned comments that companies either must--or need not--include disputed resolutions under specified sections of SEC Rule 14a-8, the shareholder proposal rule. These opaque rulings made it more difficult for proponents to revise their omitted proposals to survive future challenges.

So far, proponents have been unable to get a 2010 shareholder campaign going on issues involving "net neutrality"—an umbrella term describing Internet service providers' control over access to the World Wide Web.

As shown by the high-level dispute over Google’s presence in China, corporate media practices can have major diplomatic and economic consequences. Indeed, net neutrality advocates include President Obama and Secretary of State Clinton.

But even as leaders proclaim their support for net neutrality overseas, SEC regulators have declined to allow neutrality-related shareholder proposals in the US. Also, a panel of US Court of Appeals judges has ruled that the FCC overstepped its authority in 2008, when it fined Comcast for slowing Web traffic for some users.

A previous ESG Insight article addressed net neutrality, among other 2010 proxy campaigns; this piece provides more detail on a still-pending proposal from Open MIC, the Open Media and Information Companies Initiative.

According to its mission, Open MIC “seeks to use private sector and capital market mechanisms to influence corporate media management policies.” In addition to net neutrality, the group also seeks greater access to broadband data services and better reporting from media and telecom firms on their security, censorship and information access practices.

Investors should note that the government’s position on net neutrality is far from settled.

[Ed. Note: Earlier this month, ESG Insight shared a piece from RiskMetrics analyst Carolyn Mathiasen about environment-related proxy proposals for 2010. Here she continues her survey with an overview of social-issue proxy campaigns. For more information, also see the Proxy Season Resource Center.]

Corporate political contributions, pay disparity, and board diversity are among the top social issues for the 2010 U.S. proxy season. So far, investors have filed more than 200 proposals on social issues, which also include human rights, sexual orientation discrimination, and Internet "neutrality," according to data tracked by RiskMetrics Group's ISS Governance Services. (Investors also have submitted 130 environmental and sustainability proposals this year.) And as the annual meeting season draws near, there have been some interesting withdrawals and omissions.