Supply Chain Sustainability Data Requests – Stop the Madness

By: Louis Coppola, Partner and Executive Vice President, The Governance & Accountability Institute

Companies are increasingly asking their supply chain for data on Environmental, Social and Governance issues. This data is important and can have huge impacts on supplier relationships, the sustainability of global economies, the environment and society as a whole. There are existing globally accepted frameworks that have been used by companies for decades. So, why are organizations creating their own new and unique frameworks and questionnaires for collecting this data? Small and medium size companies are overwhelmed with hundreds of individual requests and have every limited resources to respond to each and every unique survey.

If customers would utilize these existing standards to collect data from their supply chain then the same responses could be used by multiple customers and other stakeholders including investors, employees, NGOs, government, academia, raters and rankers and so on. Let’s start getting efficient when it comes to asking for ESG information from suppliers so we can all be more effective and utilize our resources for real world impact and change.

Sustainability Maturing – Supply Chain Footprints
Many large companies have integrated Sustainability programs throughout their organizations. These companies have typically established ambitious goals for their organizations around important issues like diversity, water, carbon, energy, biodiversity, human rights, and many other social and environmental issues. In Governance & Accountability Institute’s 2013 study on the S&P 500 we found that for the first time ever the majority are now publishing sustainability reports and that companies not publishing a report are in the minority (and it’s a shrinking minority).

As these companies mature in their sustainability programs they are now asking their suppliers for sustainability data, recognizing that they are part of the companies’ footprint. Leading companies like Microsoft, Wal-Mart, McDonald’s, Dell, Ford, Cisco, Procter & Gamble and many others are creating their own metrics to measure and engage with their supply chains.

Overall this practice is creating a wonderful cascading of sustainability into many more companies and helping to move the practice from large multi-national organizations down to small and medium size businesses. It is causing new mutually beneficial relationships and synergies to be found between customers, suppliers and other stakeholders that otherwise would not have been possible.

Growing Pains – A Growing Problem – “Survey Fatigue”
Survey-FatigueHowever, the maturing of sustainability comes with some growing pains along the way. Many companies are now complaining about what I like to call “Survey Fatigue”. The problem comes into play when each of these companies or other stakeholders collecting environmental and social information creates their own unique questionnaires, forms, or surveys.

On a recent Social Investment Research Analyst Network (SIRAN) conference call, members of the Coca-Cola Sustainability team stated that they received over 300 questionnaires to fill out and each is unique and overwhelming. From our conversations with other companies this is not uncommon at all and the numbers can be even much higher than this.

The same large companies that complain of Survey Fatigue from other stakeholders like NGOs, Media, Government, Academia, Media, Investors, Raters and Rankers are now doing this same thing to their own suppliers by creating their own questionnaires, surveys, and systems. The overwhelming number of questionnaires is often insurmountable by most organizations with limited resources for responding to these requests for information. Individuals in these organizations with small budgets and stretched resources must often make difficult decisions on who they will respond to and who they will not respond to. It is just not possible to respond to every one of these surveys even though much of the information sought after is on the same topics just requested by other parties in different methods and formats.

Globally Accepted Standards Are The Solution
This is an unnecessary problem. There are already many standardized frameworks for reporting on Environmental, Social, and Corporate Governance (ESG) data which cover the topics organizations are looking to measure in their supply chains. For example the Global Reporting Initiative (GRI) framework for sustainability is used by over 3,000 global organizations to report on various ESG issues and has been around for over a dozen years. The GRI framework is being used by the majority of these large companies to report on their own sustainability journey.

We need more efficiency in our Supply Chain Sustainability practices
as we all become more mature in how we manage our company’s own initiatives.
The large companies going out to their supply chain already use GRI to report publicly, so it would make sense to request the data from their suppliers in the same format so that all of it could be seamlessly rolled up into their own existing systems. We need more efficiency in our Sustainability practices as we all become more mature in how we manage our company’s own initiatives.

Companies could be using GRI and other standardized frameworks to request this info from their suppliers. This would lead to one report (or “survey”) that could answer the requests of all customers / stakeholder in the supply chain. The key is standardization so we can make the process for all parties involved much more seamless and less resource intensive.

There is a gap here that needs closing and a simple solution to the number one problem that companies and their suppliers are facing right now. The solution would enable collaboration and results that have real impacts for all stakeholders by freeing up the time of sustainability professionals in these organizations to enact new programs, initiatives, strategies and actions rather than worrying about answering the 300+ surveys. We need action on this now.

Let’s Get Started – Efficiency in Supply Chain Sustainability Data
The Governance & Accountability Institute’s solution for this is a 3 day workshop for large companies that are actively pursuing data from their suppliers. The concept for this workshop is to work with the customer company to develop a supplier data collection system that utilizes the globally accepted and tested GRI framework for Sustainability reporting. The company will invite their major suppliers to take part in this 3 day event either virtually or on-site. The suppliers will receive certification following the training event and take part in a variety of team-building and brainstorming breakouts with management of both the customer and suppliers – working together to find common mutually beneficial solutions. For further details: Contact me at lcoppola@ga-institute.com.

Survey-Fatigue-FixedAs Kevin O’Leary often says on the popular television show “Shark Tank” – “Stop The Madness” right now.  Let’s utilize what’s already tried and tested so we can concentrate our resources on impactful actions and initiatives instead of wasting our time filling out surveys.

This article originally appeared on Global Sourcing Council (GSC) April Newsletter:  http://gscouncil.org/supply-chain-sustainability-data-requests-stop-the-madness/

 

Responsible Investing – An Evolved Definition for the 21st Century

Guest Post by Herb Blank
- Senior Consultant | S-Network Global Indexes, LLC,
- Partner: Thomson Reuters Corporate Responsibility Indices

G&A’s good friend Herb Blank wrote this very interesting piece on Responsible Investing that we thought our readers would enjoy, value and learn from so we are sharing it here on Sustainability-Update:

 

There seems to be a lot of confusion in the market as to what constitutes Responsible Investing (RI) and Socially Responsible Investing (SRI).  There shouldn’t be, however, especially about the latter.  The principles of SRI have over time become more clearly defined and now fit into a consistent framework.  It may be worth taking a step back to look at the evolution of SRI through the years and try to define what SRI means within the modern context.

In western culture, many trace the SRI movement back to the famed John Wesley Methodist sermon, “The Use of Money”, encouraging business practices that do no harm to neighbors.  One of the early investment funds quoted Edmund Burke, “The only thing necessary for the triumph of evil is for good men to do nothing” in implementing strategies that avoided ownership of the shares of companies in sinful industries as defined in the fund’s charter.  The popularity of this fund led to the development of others, some of which defined sinful industries differently and some that also excluded companies with poor corporate citizenship practices. The latter was generally defined by public controversies. For example, in the 1980’s and early 1990’s, I served on the Investment Committee of a Social Principles Fund where the Board members determined the criteria for what business practices were undesirable. Excluded companies included: Sherwin Williams that produced lead-based paints linked to children’s deaths; Union Carbide over its resistance to taking full responsibility for the cleanup and restitution to victims following the Bhopal disaster; Schlumberger for its repudiation of the Sullivan principles; and Exxon for its Alaskan oil spill and subsequent unsatisfactory response.

Around the same time, there were a number of student protests attempting to pressure university endowments  to  employ  socially  responsible  investment  screens  to  influence  the  behaviors  of corporations.  In  turn,  this  provoked  papers  by  respected  academics,  one  of  which  was  by  Yale University’s Dr. Stephen Ross arguing that removing stocks from the selection universe resulted in a reduction in the expected-return-per-unit-risk ratio for the overall portfolio.   He turned the socially responsible proposition on its head, proclaiming that it was downright irresponsible for a fiduciary in charge of an investment portfolio to consider social factors because the fiduciary’s most important obligation was to generate the highest possible return for a selected level of risk.  Other accomplished professors praised this paper.  Several opined publicly that social constraints had no place in the science of investing. The concept that attention to social factors causes inferior returns is still held as gospel by some to this day.

The next shift occurred in the 1990’s when some advocates of good corporate citizenship applied the ecological term sustainability to finance and economics.  Sustainability is defined as the potential for long- term maintenance of well-being which has ecological, economic, political and social dimensions. On March  20,  1987,  the  Brundtland  Commission  of  the  United  Nations  declared  that  “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs “Applied to the investment in stocks of corporations, sustainability looks beyond whether a company is engaged in “good” or “bad” businesses and to the actual practices of the company.”  However, as Louise Fallon, Editor of Worldwise Investor observed, “The problem with it, is that its interpretation depends on the perspective of the user.”

This harkens back to the “arbitrary” criticism attributed to SRI because what is socially irresponsible to the Southern Baptist Convention is not necessarily socially irresponsible to the Sierra Club and vice versa. In fact, one observed trend has been to drop the word social from responsible investing practices.  A lot of companies have renamed their CSR (Corporate Social Responsibility) departments and officers to Corporate Responsibility.  Similarly, many investment publications and an increasing number of investors have evolved these concepts from SRI to the phrase Responsible Investing. In this context, the word responsible means to divert resources away from the least sustainable activities in order to increase allocations to the more sustainable areas of the firm while the word social is firmly ensconced as one of the pillars of ESG (Economic, Social, and Governance) by referring to measurable firm behaviors with social impact. This is consistent with and leads into the current United Nations Principles declaration.

The United Nations Principles for Responsible Investing (UNPRI) defines “responsible investment” as an approach to investment that explicitly acknowledges the relevance to the investor of environmental, social and governance (ESG) factors, and the long-term health and stability of the market as a whole. It is driven by a growing recognition in the financial community that effective research, analysis and evaluation of ESG issues is a fundamental part of assessing the value and performance of an investment over the medium and longer term, and that this analysis should inform asset allocation, stock selection, portfolio construction, shareholder engagement and voting. Responsible investment requires investors and companies to take a wider view, acknowledging the full spectrum of risks and opportunities facing them, in order to allocate capital in a manner that is aligned with the short and long-term interests of their clients and beneficiaries. This definition has led many to refer to responsible investing as ESG Investing.

Identification of ESG factors as the three main building blocks brings form and shape to Responsible or ESG Investing (RI or ESGI).  Rather than judging a line of business to be “bad”, RI takes a best-practices approach within the ESG framework As the global trends of corporations stepping up reporting these data items continue to increase, the There are two major global organizations: the Global Reporting Initiative (GRI) and the Sustainable Accounting Standards Boards (SASB) dedicated to global acceptance of ESG reporting standards. The GRI is in its fourth global iteration and is based on the underlying principles of sustainability.  The US-based SASB follows a more rules-based approach.  Both initiatives focus on identifying material Key Performance Indicators (KPIs) within each of the three ESG pillars, then creating a reality where corporate reporting of these KPIs becomes as automatic as reporting on the firm’s key balance sheet and income statement items.

As increasing amounts of measurable corporate ESG data have become available globally, so have efforts to integrate these data into investment portfolios – even those portfolios without ESG mandates. This  makes  sense  because  they  contain  the  same  types  of  insights  into  the  future  directions  of companies and potential major risks (e.g., environmental events, litigation) as inventory turnover ratios and projected revenue growth rates. One such approach that has gained popularity is called Triple Bottom-Line Investing.   This is a holistic approach to measuring a company’s performance on environmental, social, and economic issues. The triple bottom line approach to management focuses companies not just on the economic value they add, but also on their exposures to potential positive and negative environmental and social effects and controversies.

Certainly, we will continue to see investors who wish to put their money to work in accordance with their beliefs.  This includes the traditional no-sin and socially principled investors referenced earlier along with a more recent movement known as impact investing.  One early forms of impact investing by institutional investors was the voting of proxies against management initiative to institute “poison pills” and other practices they considered representative of poor corporate governance. These efforts continue today but some have adopted even more activist approaches.  According to the Global Impact Investing Network, impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside an investment return.

In accordance with active awareness, leading SRI and impact investing practitioners have embraced the promotion of ESG reporting and made active use of increasingly available ESG data.  The traditional SRI investors score ESG data alongside traditional fundamental factors for their entire universe, then screen out companies in objectionable businesses or on a list of companies with bad practices. The impact investors use a similar universe screening practice to focus on companies where their investment dollars can promote positive impact.

The best fiduciary practices issue has now come full circle.   Increasingly, companies are publicly disclosing data relating to Key Performance Indicators regarding their environmental, social and corporate governance  practices.    Published  studies  have  documented  relationships  during  different  periods between such data and returns, some of which correlate periods of outperformance with positive ESG data.  Whether these relationships will persist throughout the majority of market cycles is still open to question.   Nevertheless, it is clear that investors who exclude or ignore ESG data as part of their fundamental research process do so at their own risk. The tenets of Modern Portfolio Theory state that alpha can only exist when one or more participants have access to and apply information that others do not.  If investors have access to publicly available data but ignore them, this may create the same market advantages that investors can achieve with nonpublic information. The only difference is that in this case, that informational advantage is perfectly legal.

At this point, I turn the question back to Dr. Ross and his colleagues.   As an increasing number of portfolio managers continue to integrate ESG data into the investment process, can investment policies that preclude the consideration of such data truly be responsible?  I posit that such a position is internally inconsistent. ESG-aware investing that accounts for these factors along with other fundamental factors is destined to become the standard for responsible investing.

 

Glossary

Active  ownership  -  Voting  company shares  and/or  engaging  corporate  managers  and  boards  of directors in dialogue on environmental, social, and corporate governance issues

Best-in-class – An approach that focuses on investments in companies that have historically performed better than their peers within a particular industry or sector based on analysis of environmental, social, and corporate governance issues. Typically involves positive or negative screening, or portfolio tilting

Corporate Governance - Procedures and processes according to which an organization (in this context, mainly a company) is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organization—such as the board, managers, shareholders and other stakeholders—and lays down the rules and procedures for decision making

CR (Corporate Responsibility) also known as CSR (Corporate Social Responsibility) – An approach to business which takes into account economic, social, environmental, and ethical impacts for a variety of reasons, including mitigating risk, decreasing costs, and improving brand image and competitiveness.

Divestment - Selling or disposing of shares or other assets. Gained prominence during the boycott of companies doing business in South Africa

Environmental Investing – Sometimes referred to as green investing, this is an investment philosophy that includes criteria relating to the environmental performance and areas of business of companies considered for investment; the three principal areas of focus are: emissions reductions; natural resource usage; and innovative technological improvements

ESG (Environmental, Social, Governance) Investing – This is an investment approach which incorporates environmental, social, and governance factors into the investment process. ESG terminology was developed and promulgated by the United Nations Principles for Responsible Investing (UNPRI)

Ethical Investing - Investment policies and strategies guided by moral values, ethical codes, or religious beliefs. These practices have traditionally been associated with negative screening.

Global Reporting Initiative – The Global Reporting Initiative (GRI) is a network-based organization whose goals include universal disclosure on environmental, social, and governance performance.

Impact Investing – Investing in companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside an investment return

Negative Screening – This term can be used to categorize any investment strategy of avoiding companies whose products and business practices are harmful to individuals, communities, or the environment.  Formerly used exclusively to screen out companies in “bad” or sinful industries, this now also applies to investment strategies incorporating a best-of-breed approach.

Proxy Activism – Actively voting on shareholder resolutions affecting environmental, social, and governance issues of a corporation.

Positive Screening - Screening may involve including strong corporate social responsibility (CSR) performers, or otherwise incorporating CSR factors into the process of investment analysis and management. This starts with a best-of-breed approach and then may overlay more traditional fundamental and price-based factors to create and maintain investment portfolios

Principles for Responsible Investment (PRI) -The United Nations-backed Principles for Responsible Investment Initiative (PRI) is a network of international investors working together to put the six Principles for Responsible Investment into practice. The Principles were devised with input from the global community of responsible investors. They reflect the view that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios and therefore must be given appropriate consideration by investors if they are to fulfill their fiduciary (or equivalent) duty. The Principles provide a voluntary framework by which all investors can incorporate ESG issues into their decision-making and ownership practices and so better align their objectives with those of society at large.

Responsible Investing (RI) -This is the process of integrating data on environmental, social, and corporate governance performance and risk exposures into investment decision-making

Shareholder Activism - Actively voting on shareholder resolutions affecting environmental, social, and governance issues of a corporation

Social Performance – The social performance of a company involves its corporate citizenship and how it benefits or impacts negatively on the areas in which it operates.  Issues include: product responsibility; health and safety; training and development; employment quality; diversity issues; and human rights issues

Socially Responsible Investing (SRI) – This is the process of coordinating investment policies and strategies  with  shared  viewpoints  as  to  what  constitutes  socially  responsible  corporate  behaviors. Today’s SRI investor frequently combines an RI approach with additional screens to eliminate companies in objectionable industries or with “anti-societal” practices.

Sustainability –  Responsible, Impact investing (SRI) is  the process of  integrating personal values, societal concerns, and/or institutional mission into investment decision-making. SRI is an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis. SRI portfolios seek to invest in companies with the strongest demonstrated performance in the areas of environmental, social, and corporate governance issues (commonly referred to as “ESG”)—in both the public and private markets. SRI is also known as “green” or “values-based” or “impact” investing, or simply as “responsible” investing.

Triple Bottom Line – A holistic approach to measuring a company’s performance on environmental, social, and economic issues. The triple bottom line approach to management focuses companies not just on the economic value they add, but also on their exposures to potential positive and negative environmental and social effects and controversies


Bibliography

1.   Bauer, Rob; Derwall, Jeroen; Guenster, Nadja; Koedijk, Kees, “The Economic Value of Corporate Eco-Efficiency,” Academy of Management Research Paper, 25 July 2005

2.   Burnett, Royce; Skousen, Christopher; Wright, Charlotte; “Eco-Effective Management: An Empirical Link between Firm Value and Corporate Sustainability.” Accounting and the Public Interest:” December 2011, Vol. 11, No. 1, pp. 1-15.

3.   Copp, Richard; Kremmer, Michael; and Roca Eduardo, “Socially Responsible Investments in Market Downturns”, Griffith Law Review 2010. Vol 19 no 1

4.   Davis,  Stephen;  Lukomnik, Jon;  and  Pitt-Watson,  David,  “Active  Shareowner  Stewardship:  A  New Paradigm for Capitalism,” Rotman International Journal of Pension Management, Vol. 2, No. 2, Fall 2009

5.   Global Reporting Initiative, “G4 Sustainability Reporting Guidelines”, Pamphlet, 2013

6.   Karnarni, Aneel and Ross, Stephen, “The Case Against Corporate and Social Responsibility”. California Management Review, Vol. 53 (2), Winter 2011

7.   Ribando, Jason and Bonne, George, “A New Quality Factor: Finding Alpha with Asset4 ESG Data,” Starmine Research Note, Thomson Reuters, 2010

8.   Ross,  Stephen,  “Endowment  Portfolios:  Objectives  and  Constraints,”  Financial  Economics  Essays (Prentice-Hall, Inc.), 1982

9.   Wheeler, David; Colbert, Barry; and Freeman, R. Edward, ‘Focusing on Value: Reconciling Corporate Social Responsibility, Sustainability, and a Stakeholder Approach in a Network World”, Journal of General Management, Volume 28, No.3, Spring 2003

 

No! The Yellowstone Volcano is not about to erupt & look at my new selfie!

By Ken Cynar, Exec VP, Governance and Accountability Institute

Social media is fun, entertaining, but not always accurate, responsible or helpful. As a communications tool, distributor of information, and platform for free speech, it is simultaneously a boom and a curse on society. Here is the latest.

Several days ago Yellowstone National Park experienced several tremors and a 4.8 earthquake. Not all that unusual for that part of the country. Preceding the earthquake Leo Leckie, a sales associate of the nonprofit Yellowstone Assn., an educational partner of Yellowstone National Park, filmed an impressive video of a herd of Buffalo scampering through the snow at Yellowstone…apparently for the fun of it. (Animals fleeing Yellowstone spark fears of volcanic eruption, RTUS
But what happen next is laughable, except it highlights the flaws of the social media communications system. (Yellowstone bison-on-run video wrongly triggers volcanic eruption fear, LA Times) What Leckie terms “eruptionists and conspiracists” pirated the video and suggested that the buffalo were running because of the earthquakes and perhaps the big one was on the way. The story was picked up by media outlets and the danger of an imminent major eruption took off. They termed the eruption as being one that could end all of mankind on earth.

Here is the chain: Video of buffalo running into Yellowstone; eruptions take place a few weeks later; “Eruptionists and conspiracists” pirate to indicate that the buffalo were running away from the earthquake; the video goes from 20 hits to over 90,000; major media does stories on the threat to the country and the world…and of course I rant about it.

The power of social media as a force for good should not be belittled, but its flaws include faceless nameless people, creating, twisting and manufacturing news. It creates false fears, damages reputation, embarrasses people and nations, deflates egos and in the “wrong” hands it can be a propaganda tool to feed our prejudices and endanger our freedoms.

Regulate it…certainly not! But view it with a critical eye, absolutely. As we try to build a sustainable society, protect our resources, our people and our future, we need a foundation of truth and accuracy. Social media can be a key tool, but also a chink in our armor.

Now, did I show you the new pictures on Facebook I posted of my grand kids?

That’s the way I see it!