The Alphabet Soup of ESG / Sustainability / Etc Etc Again in Focus – is Triple Bottom Line Obsolete?

Author John W. Maxwell of the Alliance for Research on Corporate Sustainability (ARCS) Board of Directors, and W. George Pinnell Professor of Business Economics and Public Policy Kelley School of Business, Indiana University, looks at “Triple Bottom Line” and asks if it it time for this “frame” of reference to be retired.

A very thoughtful commentary – and a contribution to the very worthwhile discussion going on about nomenclature for the New Normal (to employ still another frame).  Last week at the NASDAQ-hosted event for corporate managers and asset owners, managers & analysts, the topic of nomenclature or frames or terms of reference, or whatever, was front and center.  The event, organized by Skytop Strategies in collaboration with G&A Institute and other partnering organizations, was standing-room-only (“SRO”).  Not only did every registrant come to the party, the usual percentage for no-show was the percentage for “did-show” over the roster of the registered.

ESG / Triple Bottom Line / CR / CSR / CorpGov / SRI / SI / RI …and so forth …were terms of reference and lively discussion for the assembled.  One session:  How do we get companies and investors to use the same vocabulary?  We’ll have more on this landmark meeting in New York City on June 19th for you in the weeks ahead.

For now -– we point you to the commentary on Triple Bottom Line -– thoughtful, with case histories on what is occurring  in the United Kingdom / EU … which is an arena a few years ahead of the United States of America in the “frame of reference” discussion.

Reframing Corporate Sustainability
(Thursday - June 18, 2015)
Source: Huff Post - One of the most famous frames related to corporate sustainability is the triple bottom line. The triple bottom line separates the way we think about business into three broad areas: economic, social and environmental. This frame…

An Important “Flash Report” About the S&P 500® Companies And Their Bedrock Sustainability Reporting…

This week, Governance & Accountability Institute issued a “Flash Report” about the continued expansion of corporate sustainability/responsibility reporting.  Our team led by Louis D. Coppola (EVP of G&A) and his team of five interns determined after careful examination that three-quarters – 75% — of the S&P500 Index ® Companies are now publishing corporate sustainability reports in 2014.

The growth in such reporting among the S&P 500 is dramatic: one-fifth of companies reporting in 2011 (just under 20%); more than half (53%) reporting a year later, in 2012; then 73% reporting by 2013 – 7-in-10 companies among the largest public issuer universe for investors.  And that number is holding steady:  75% reporting in 2014.

 

Thanks to our intern research team working with Lou Coppola [who designed the analysis] to create this important Flash Report:

  • Selene Lawrence (2015 Team Leader)
    Hunter College — BS, Geography
  • Tania Apicella
    Rutgers Business School — MBA
  • Simon Fischweicher
    Bard College — MBA, Sustainability
  • Evan Guyton
    Baruch College, Zicklin School of Business — MBA
  • John Rovetto
    William Paterson, University of New Jersey — BS, Business Management

For more information on our GRI Data Partner Report Analyst Research Interns, please visit www.ga-institute.com/ the-honor-roll.html

We invite you to read the press release – there’s very important information for you that you will be seeing in many references over the coming year.

FLASH REPORT — Seventy-Five Percent (75%) of the S&P 500 Index Published Corporate Sustainability Reports in 2014

(Monday - June 08, 2015)
Source: Governance & Accountability Institute, Inc. - Sustainability reporting has become the clear norm in the U.S. capital markets as represented by our four year study of the S&P 500*. Over the last four years there has been significant uptake in sustainability reporting fromjust 20% in 2011 to 75% in 2015, demonstrating the necessity of measuring and managing ESG issues in response to growing stakeholder and stockholder demands. To put this in context G&A in tracking prior year(s) reporting found that:

  • in 2011, just under 20% of S&P 500 companies had reported;
  • in 2012, 53% (for the first time a majority) of S&P 500 companies were reporting;
  • by 2013, 72% were reporting — that is 7-out-of-10 of all companies in the popular benchmark

Should Public Company Boards Tie ESG Performance Metrics To CEO / C-Suite Compensation & Incentives?

The topic of compensation and incentives for CEOs and close colleagues in the C-suite of public companies has been of interest to the sustainable & responsible investment community, as well as a growing number of mainstream investors, especially since the early 1990s when CEO pay began to rise dramatically.  The board of directors approves the pay package, with consists of cash (salary, often a modest number), options, deferred compensation in the form of shares-to-be-earned, and numerous other benefits.  As discussions about executive compensation became headline news is such venerable media as The Wall Street Journal, focus of investors and numerous stakeholders became more intense.   The legitimate question is:  Exactly what should CEO pay and incentives reflect in large publicly-owned enterprises?

It became a popular trend in board rooms to acknowledge growing investor concerns and responding by establishing “pay-for-performance” approaches.  A CEO may earn more if the share price rises is one example of p-f-p.  (Of course, won’t all shareowners be happy if the share price rises on the CEO’s watch?)  But tying too much of the p-f-p to short-term gains is not a good thing, many engaged institutional investors say.  The board and C-suite should be looking out to the longer term and shaping incentives around the efforts to build a stronger, yes, more sustainable enterprise that will continue to prosper for all stakeholders over the decade, not the immediate reporting period.

The public dialogue on CEO pay began and has endured as part of the focus by activist investors on encouraging more effective corporate governance.  Reflecting the populist concern, the passage of Dodd-Frank reform legislation mandated shareowner voting on executive compensation plans (the vote is still “advisory,” not binding on boards setting pay packages).  Over the past decade, as more asset owners and their managers focused on corporate ESG performance and sustainability achievements, the idea of tying compensation to achievements in ESG performance has slowly entered the discussion about executive compensation. Tip-toed in, we might say.

In theory, what investor would not want to put their trust in the company that has outstanding ESG performance?  Is demonstrably more sustainable?  Ah, but what about the notion of tying CEO pay-for-performance to gains in ESG performance?  How do you reward the leader for leading the company’s achievements in reducing GhG emissions, reducing water use, reducing or eliminating waste-to-landfill?

A relative handful of companies are taking this approach – think of Unilever as a prime global example — but respected sustainability experts like Bennett Freeman (former SVP of the Calvert Group) observes — “Executive Compensation links to sustainability is still an extraordinary, rare phenomenon with large-cap companies…”

We believe there will be increasing discussion going forward among investors, and between investors and boards and company managements, about executive compensation and the relationship to corporate ESG performance. The new element for shareowner activists will be encouraging boards to frame executive compensation within the context of greater ESG performance and corporate sustainability.  We may have a long way to go before this becomes part of the broad discussion on effective corporate governance.  But the “G” in ESG has been steadily rising in importance for investors.

The story linked below presents excellent perspectives on CEO Pay/Sustainability (p-f-p) by reporter Keith Larsen on the GreenBiz platform. The Unilever sustainability p-f-p example is described as well as the efforts of Royal DSM North America, which embraced the concept back in 2010.

Why tying CEO pay to sustainability still isn’t a slam dunk
(Wednesday – May 27, 2015)
Source: GreenBiz - What does a company’s carbon footprint have to do with the paycheck of its chief executive? While sustainability is often categorized as a long-term play to mitigate both reputational and financial risk, a small but increasing…