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Responsibility to Shareowners
GE is one of the most widely held stocks in the world. Ownership of the Company can and does benefit millions of people through flows of dividends and capital benefits, both to individual shareowners and through such intermediaries as pension funds and insurers. In fact, about half of GE’s issued shares are owned by individuals, including many of the Company’s current and past employees, who have helped to shape the Company’s success over decades and generations, and whose savings for retirement continue to create value through their investment in the Company. Historically, GE’s owners were predominantly from the U.S., but in the last four years non-U.S. ownership has grown to more than 10%, a sign of the globalization of capital markets.
“There is a significant universe of long-term investors who want greater exposure to well-managed companies and emerging markets. GE is able to respond to these investors and produce better value over the long term.”
Trevor Schauenberg, Vice President, Investor Communications for GE
GE’s responsibility, legally and ethically, is to provide the best possible return, financially and through its impact on the world today and in the years to come.
The Roles of Capital Markets
Capital markets facilitate the use of today’s resources to realize future benefits. Such benefits are most usually measured in financial terms, or more exactly, risk-adjusted returns to the investor. In our society, capital markets play the historic role of investing what we choose not to consume today. The objective is to provide economic opportunities strengthened by secure sources of energy, water and physical safety.
Over the past decade, capital markets have come under increased scrutiny for their effectiveness in these areas. The recent global recession, along with its destruction of economic value and jobs, has been attributed in large part to the short-termism of the capital markets, banks and investment houses. Citizenship, or the ethical pursuit of business success—achieved by delivering affordable products that help address pressing challenges—requires “patient” capital that rewards businesses whose strategies and practices align with these long-term, value-creating opportunities.
While the debate continues on the pros and cons of various approaches to financial regulation, a new breed of shareowner has emerged with a greater focus on citizenship and long-term concerns. Nearly one in eight dollars under professional management in the U.S. is already invested using some form of social responsibility criteria. Responsible investing itself is evolving beyond “negative screening” to a more positive engagement that identifies and promotes those social and environmental factors that can drive superior financial performance.
“Research shows that on average, positive, opportunity-focused application of environmental, social and governance investment criteria leads to outperformance.”
Cary Krosinsky, Senior Vice President, Trucost
Such active investing has become more mainstream in recent years. The UN Principles of Responsible Investment, for example, with nearly 850 signatories, representing around $25 trillion in assets, reflect these changing criteria. Stock exchanges around the world are also taking steps to promote and require greater transparency on environmental, social and governance performance and risk factors, with the BM&FBOVESPA Exchange in Brazil, the Johannesburg Stock Exchange and The National Stock Exchange of India taking steps in this area. The London Stock Exchange, NASDAQ and NYSE Euronext all have stock market indices that focus on companies that exhibit “best in class” performance or that provide solutions to sustainability challenges.
Major institutional investors focus on such key indicators of long-term value-creation potential as governance and remuneration.
The management of social and environmental impacts is increasingly viewed as a test for effectively handling complex strategic and operational challenges. As Trevor Schauenberg, vice president, investor communications for GE, explains, “There is a significant universe of long-term investors who want greater exposure to well-managed companies and emerging markets. Because citizenship is a key component of GE’s operational excellence, GE is able to respond to these investors and produce better value over the long term.”
“I am confident that GE will continue to be successful in the years to come.”
Warren Buffett
Solving Big Problems
GE’s products aim to meet many of tomorrow’s pressing needs, from clean energy to energy-efficient infrastructures and transportation to clean water and affordable healthcare.
GE is investing in technology. Over the last five years, the Company’s research and development budget has increased by more than 40%, from $2.8 billion in 2006 to $4 billion in 2010. These investments have focused increasingly on core societal challenges, such as those exemplified by two programs, ecomagination and healthymagination. These initiatives have established measurable commitments for creating products that, respectively, improve our customers’ energy, carbon and water efficiency footprints and the affordability, accessibility and quality of healthcare.
While the core of GE’s critical knowledge platform resides in the U.S., the Company has accelerated investment into “In country-for country” research in Shanghai, Bangalore, Munich and, soon, Rio de Janeiro. The idea is to effectively leverage local expertise and insights to address the evolving needs of emerging markets and their nations’ citizens.
GE’s approach is clearly aligned with the interests of long-term investors, offering exposure to a portfolio of future industries and fast-growing emerging markets, combined with the disciplined management and culture of compliance needed to manage the corresponding risk and complexity.
As GE prepares for the future, our cumulative earnings and cash flow over the last decade rank in the top 10 of all the companies in the world. In 2010, GE’s stock price grew 21%, outperforming the S&P 500 Index, which grew by 13%. And, while GE is widely acknowledged as a sustainability leader in its products and processes, the traditional “socially responsible investment” community, primarily because of its aversion to nuclear technology or defense-related activities, holds very little stock.
Valuing Citizenship
Citizenship is a critical value driver for GE, and it will continue to be an important differentiator to investors in the future. This is true for many other companies as well, as businesses adjust their products and processes to meet growing environmental challenges and the sustainability demands of customers and communities around the world.
Developing consistent methods for measuring and reporting on performance in areas such as greenhouse gas emissions and water use will be crucial to understanding and rewarding good performance. GE applauds the work of initiatives such as the Carbon Disclosure Project, the World Resources Institute and the World Business Council for Sustainable Development in creating the Greenhouse Gas Protocol. We use the GHG Protocol for our own emissions inventory and have worked with other companies in road-testing a new standard to help measure the emissions associated with products and supply chains.
Today’s capital markets are in the early stages of responding to such signals. Competencies, information flows, analytic models and remuneration approaches will continue to be reshaped in the years to come to deliver long-term financial returns. The challenge is not to measure the financial return for doing good, but rather the financial rewards from successfully addressing global challenges with profitable products and services. And GE expects to play a prominent role in this evolutionary process as it continues to generate value and solid returns for its many shareowners.
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Comments
Discussion Wall:
Sanford Lewis said:
July 17, 2011
Seems like after Fukushima the company owes a MUCH larger and more prominent discussion of its posture on nuclear, such as its commitment to the technology in the future, how it is weighing those risks for the public and for shareholders. There seems to be very scant and sketchy discussion in this report of this issue; I would expect at least a full page of thoughtful consideration and management’s analysis. This is not a low visibility issue or minor issue in the fog of policy issues; its’ a substantial sustainability challenge for GE that can’t be ignored by pointing to the other green technologies it is also investing in. – Sanford Lewis, Counsel, Investor Environmental Health Network
GE Citizenship said:
July 28, 2011
Sanford, thank-you for your comment.
You can read about GE’s immediate response in relation to the nuclear disaster in Japan on our GE Reports site.
While it was too soon to give a robust analysis of the future of the nuclear business at the time when the 2010 Citizenship Report (from which this article comes) was being developed, it is an issue that we will revisit both as a business, and as part of our reporting on sustainability issues.
Mark McElroy said:
July 19, 2011
Notwithstanding the fact that GE’s report is labeled a ‘citizenship’ report, it is prepared in accordance with the GRI guidelines for ‘sustainability’ reporting, or at least partially so. Those guidelines specifically call for the inclusion of ‘sustainability context’ in related efforts. Still, I see no such context in GE’s report, and so I cannot agree that its report is prepared in accordance with GRI’s guidelines to a sufficient extent, much less that it discloses sustainability performance per se. And to the extent that GE’s report is intended to be a citizenship report not a sustainability report, as if that might explain the absence of context, it seems reasonable to me to expect that citizenship includes a civic duty to function in a socially and environmentally sustainable fashion, hence the appropriateness of reporting in accordance with GRI and the ‘sustainability context’ it entails.
To be clear, sustainability context consists of norms, standards or thresholds against which the social and environmental impacts of an organization can be measured. They provide a basis for determining whether or not a company’s impacts have been, or are, sustainable, as opposed to simply reporting impacts in the absence of such norms, standards or thresholds. Sustainability reporting simply cannot be done without them. As a leading industrial force in the world, GE is uniquely qualified to set the example for how sustainability measurement and reporting ought to be done, by including context in its reports just as GRI correctly tells us it should.
GE Citizenship said:
July 26, 2011
Mark, thank –you for your comments, as you rightly point out ‘sustainability context’ is one of hardest aspects of sustainability reporting – and one where there remains no clear standard. In essence it goes beyond asking ‘what are you doing?’ to asking ‘are you doing enough?’ It is a dilemma we have highlighted in both the sections in the Citizenship Report on Energy and Climate and on Sustainable Healthcare.
Throughout the report we reference, and draw our understanding of sustainable development, from key global goal and local goals, such as the target to slow, stop and reverse US greenhouse gas emissions while growing the economy, and to meet the Millennium Development Goals in areas such as maternal and child health.
Finding robust, practical and useful ways to understand and communicate the magnitude of our own impacts in relation to these broader goals is a challenge that we are still grappling with. We are keen to engage with you, and others such as the Global Reporting Initiative, who are working to bring more clarity to this area. One way that we are seeking to better understand and communicate our own performance in relation to the sustainability context is by looking at the issues and impacts at a national and regional level. As a first step GE China is publishing our first country report, which will be launched in September.
Todd Cort said:
July 19, 2011
This is a good discussion and shows a balanced, and very market-oriented, perspective on sustainability practice within a business.
My only question is: why is this broken out as a stand-alone article? All of the concepts discussed within this article are embedded in the strategic vision within About Citizenship. In fact, this article really plays to the strengths of GE Citizenship overall. Not that this is a bad thing, but another strategy is to use the feature articles to demonstrate competency in those areas of greater controversy (such as fair tax payments, oil sands investment, nuclear power trade-offs, military hardware).
Michael Connor said:
July 19, 2011
This is a really interesting essay. It seems, essentially, to be a pitch for “patient capital” from shareholders to support GE’s sustainability initiatives. The company has a strong record in corporate citizenship and substantially outperforms the S&P 500 (at least in 2010) – yet it has a difficult time attracting support from traditional socially responsible investors, largely because of its nuclear and defense-related businesses. The situation highlights some difficult questions: what constitutes “shareholder value” these days? And to what degree is “sustainable value” a function of financial metrics, or of good intentions? Goes to show how much further we still have to go in bridging differences. Are we allowing the perfect to be the enemy of the good? Good thing GE views it as an “evolutionary” process; it could take some considerable time to work out.
Mark McElroy said:
July 26, 2011
Responding to the GE Citizenship post above, the absence of standards for context is frequently cited as a basis for not including it in reports, but I find such arguments to be unpersuasive. First, every organization is unique, and so in a very real sense there can be no standards for context, only individually framed and relevant ones, just as every company’s chart of accounts is different from every other’s. Second, it is better to have debatable norms, standards or thresholds of performance (context) than no context at all. My clients measure performance against self-selected standards, which until such time as we have universally applicable standards, if we ever do, are better than no standards at all, because without standards of performance, there can be no sustainability measurement or reporting per se, much less management. Indeed, without context, companies are literally flying blind insofar as their true sustainability performance is concerned. So my advice is don’t let the absence of standards prevent you from doing the right thing. Pilot, test and evaluate self-selected standards (context) of your own, and help lead the way to truly meaningful and authentic sustainability reporting.
Martin Thomas said:
September 28, 2011
Setting some norms of what the biosphere and society can absorb is critical. It helps answer not only “are we doing enough?” but also “where and how can we do most good (& least harm)?”. The underlying concept of social and environmental capitals that need to be maintained and grown resonates strongly with people throughout the organisation and outside it too. Since there are no norms that can be universally applicable, examining the carrying capacity of the environment of each organisation constitutes a vital step between CSR compliance and measuring sustainable performance.