The investor case for responsible political engagement

Unchecked political involvement can raise governance risks at a company level and increase risks of policy capture.⁹

Key concerns for investors and broader stakeholders include the lack of visibility and clarity around corporate political engagement - for example, who the decision makers are and how corporate positions align with the companies’ strategy, including on sustainability. Although companies have begun to disclose some of this information, it is largely piecemeal and reactive. This is particularly problematic in the context of a growing number of scandals that demonstrate improper use of corporate influence and the consequent reputational damage, loss of shareholder value and strained relationships with stakeholders.¹⁰

In extreme cases, political activities that lack governance safeguards have translated into corruption risks. A recent example is Ohio utility company FirstEnergy, which paid USD$230 million in bribery charges for using a dark money non-profit group to create a slush fund primarily to corrupt public officials and steer a nuclear subsidy bill through the state legislature.¹¹

The use of indirect forms of lobbying and spending could also result in concerns. For example, when corporates lobby via trade associations, the role that companies play in this process can be obscured. 

Given that trade associations generally have insufficient disclosure practices and fail to report who their members are or their expenditures, there is a risk that inconsistent lobbying leads to divergence from international standards such as the Paris Agreement. In fact, InfluenceMap’s research finds that some powerful trade groups have obstructed international, federal and US state-level climate policy.¹²  Such instances present a strong case for companies to review their memberships regularly and remedy any misalignments on positions related to climate goals or other sustainability topics.

At a macro level, unchecked political involvement can raise the risks of policy capture and create distrust in democracy. Without an inclusive and transparent approach to public decision-making, stakeholders lacking equal resources to powerful corporates and trade associations may be unable to contribute to political decisions, leading to inefficient public programmes, poor regulation and/or biased decisions.¹³  There have been many examples of this: the banking industry’s lobbying power during the global financial crisis which contributed to the build-up of risk and gaps in regulations;¹⁴  the intense lobbying from the car industry contributing to lax regulations that resulted in the Volkswagen emissions scandal;¹⁵  and the airline industry’s lobbying and influence tactics to reduce regulatory oversight on airplane safety that led to Boeing’s two fatal incidents.¹⁶

During the pandemic, some interest groups with access to well-connected lobbyists have enjoyed greater exposure to policy makers.¹⁷  In some cases, access has been used by certain industries to lobby for lower environmental standards, water down climate action, delay sustainability strategies for food production, etc.¹⁸  Experts have also noted an increase in the use of influence channels such as social media to bias public opinion, for example, undermining efforts to align COVID-19-related financial interventions with progress on climate change.¹⁹

Weak regulatory frameworks shaping corporate political engagement can exacerbate regulatory and reputational risks for companies.

Political engagement activities have become more sophisticated and involve greater use of informal channels; however, evidence suggests that regulation is lagging.

Although attempts to regulate political engagement have been increasing globally, only a minority of countries have frameworks to manage these risks. The PRI has worked with the OECD to map out hard and soft laws on corporate political engagement in 17 jurisdictions,²⁰  examining commonalities and differences and how effectively existing regulations minimise risks of regulatory capture.

Our research finds that regulations framing political engagement are often incomprehensive. For instance:

• Seven jurisdictions (Brazil, China, Hong Kong, India, Japan, Korea and South Africa) do not require any form of transparency on lobbying activities.
• Only eight countries (Australia, Canada, France, Germany, Italy, Netherlands, the UK, and the US) and the European Union have voluntary or mandatory public registries where lobbyists disclose information on their activities.
• Only three countries (France, Italy and the US) have adopted standards for hiring private sector employees into the public sector.
• The definition of ‘lobbyists’ in a number of jurisdictions does not cover unpaid lobbying activities nor the activities of certain organisations such as charities, foundations, think tanks and religious organisations. They are therefore excluded from transparency requirements.

There are several areas of unregulated influence that remain vulnerable to exploitation by powerful special interests such as third-party campaigning, political advertisements and industry associations. Regulations are also deficient when it comes to emerging forms of political engagement such as social media: only two jurisdictions (Canada and the EU) consider social media as a lobbying activity covered by transparency requirements.

The patchy legal framework exacerbates the risk that companies may engage in unethical practices, particularly where they may be technically deemed legal. Companies may also face increased uncertainty and heightened risks when laws change and corporate practices draw scrutiny from regulators and broader stakeholders.

Political engagement without proper safeguards could impede global sustainability objectives and contribute to system-level risks.

As the world grapples with a climate emergency, rising inequality, widespread biodiversity loss and human rights abuse, the call for action to investors is loud and clear. These systemic issues could undermine the economic, environmental and social systems on which financial value depends. Investors must, therefore, address these sustainability challenges in line with their fiduciary duty.²¹

However, investor efforts may be undercut by companies adopting a myopic view in their political activities and prioritising immediate returns over longer-term priorities, including strategic sustainability considerations. For example, companies’ attempts to water down the ambition or scale of climate policies that could impact their business models,²²  while ignoring the long-term impact of the absence of climate action, are well documented.²³  Such tactics not only delay the low-carbon transition for a company or sector but could also impact its viability and risk-return profile in the long term.²⁴  By disrupting efforts to achieve net zero emissions by 2050, companies risk imposing long-term costs on investors and beneficiaries.

Obstructive corporate political activities have not been limited to climate action. There are several examples of companies and trade associations that have lobbied against measures to promote nutritional health,²⁵  enhance social protection,²⁶  and implement progressive tax laws.²⁷  Some companies may believe it is in their interest to pursue short-term business objectives or profits in their political engagement activities. However, such actions externalise costs across the rest of the market or economy, disadvantage nascent sectors or exploit common environmental, social or institutional assets, ultimately hindering broader economic returns and stability. Such corporate practices increase risks and undermine long-term investment returns for universal owners, while exacerbating harms to people and the environment.

Therefore, there is a strong onus on investors to ensure that companies are actively facilitating progress on important sustainability issues. Investors must carefully consider how their investees are shaping the regulatory landscape just as they consider how these companies generate impacts on society and the environment through their operations, products and services. Otherwise, there is a risk that companies may weaken environmental and social regulations – even while they proclaim to support universal goals.