The NYT Brings Us Encouraging News in the Swelter of Negative Reports as Sustainability Advocates Consider Possible Changes of Course in the New Year for U.S. Federal Government Policies

Leading Business readership publication focuses attention on the dramatic rise of ESG factors in investing over the past five years in wrap up story…

If you have not yet seen the story by Randall J. Smith that appeared in The New York Times Business Section on December 14th, we urge you to read it now, and to share it with your colleagues. Especially those occupants of the C-suite, board room, investor relations office — this will help to make the important case for ESG / sustainable investing. It’s our Top Story this week and the headline puts things in focus: investors are sharpening their focus on “S” and “E” risks to stocks.

This is a front page, Business Section [Deal Book] wrap-up feature that shares news, commentary and important developments at such organizations as MSCI, Vanguard, TIAA-CREF, Goldman Sachs, Perella Weinberg Partners, Rockefeller Brothers Fund, US SIF, Heron Foundation, Parnassus and other leaders in sustainable investing.

“Investing based on ESG factors has mushroomed in recent years,” author Randall Smith explains, “driven in part by big pension funds and European money managers, trying new ways to evaluate potential investments.”  The article helps those not yet familiar with sustainable investing to understand the increasing momentum in “sustainable” or “ESG” or “sustainable, responsible & impact” investing.

The organization MSCI is in sharp focus in the piece, with Linda-Eling Lee (the firm’s able head of global research) interviewed on the company’s approach to ESG research, ratings, equities indexes, and related work.  At MSCI, the assets managed using ESG approaches is now at $8 billion-plus — that’s triple the 2010 level.  ESG-related risks and opportunities are being closely evaluated as MSCI looks at publicly-traded companies, and as explained by the MSCI head of global research, 6,500 companies are followed by 150 analysts working in 14 global offices.

The recent US SIF survey results are heralded — $8.1 trillion in professionally-managed AUM assets in the U.S.A. are determined using ESG factors in analysis and portfolio management (the big driver is client demand).  The TIAA-CREF Social Choice Equity Fund is at $2.3 billion in assets under management — doubling in the past five years.  MSCI’s ESG indexes are at $3 billion — tripling over the past three years.  Vanguard’s social index fund is at $2.4 billion — quadrupling since 2011.  There’s a new CalSTRS low-carbon portfolio (using an MSCI index) set at $2.5 billion.

This article in the Business Section of a leading American daily newspaper provides an encouraging — and very timely! — look at the momentum that’s been building the capital markets signaling mainstream capital markets uptake and dramatic growth in adoption of ESG strategies and approaches for asset owners and asset managers.

As we suggest, it is a wonderful wrap-up of top-line developments in sustainable investing that also underscores the importance of corporate sustainability to individual institutional investors — and should help to make the investing and business cases for top management.

This news article is of course timely as corporate sustainability and sustainable investing professionals consider the potential changes on the horizon with a new administration and the new congress coming to town with a very different agenda – at least what has been publicly proclaimed to date.  There is clearly momentum in the capital markets for consideration of corporate ESG factors as investment dollars are being allocated.  This is good news heading into 2017 and the probable headwinds sustainability professionals will encounter.

Investors Sharpen Focus on Social and Environmental Risks to Stocks
(December 14, 2016)
Source: New York Times - Investing based on so-called E.S.G. factors has mushroomed in recent years, driven in part by big pension funds and European money managers that are trying new ways to evaluate potential investments. The idea has changed over the last three decades from managers’ simple exclusion from their portfolios of “sin stocks” such as tobacco, alcohol and firearms makers to incorporation of E.S.G. analysis into their stock and bond picks.

For Finance / Investing Professionals: “ESG” IN FOCUS IN ALL-DAY WORKSHOP Hosted At Baruch College/CUNY – NYC

The interest in sustainable investing continues to rise in the mainstream investment community.  Numerous data & analytics providers, ratings & rankings organizations, and other influentials are busily shaping new approaches in and for the mainstream investment community. Corporate “ESG” factors are an important addition to the ubiquitous Bloomberg terminals, as example (i.e. the ESG Dashboard).  Mainstream asset managers — notably BlackRock, Morgan Stanley, Goldman Sachs, State Street, and others — are putting sustainable investment approaches in place and launching new products for clients that are demanding “investable” vehicles for “doing well and doing good” with their assets.

As an investment professional, are you up to speed on these developments?  Need to “be more in the know” about sustainable investing?  Here’s a suggestion:  plan to attend an all-day workshop hosted at the Newman Vertical Campus of Baruch College/CUNY and presented by Governance & Accountability Institute and Global Change Associates (GCA). Participants will receive a Certificate of Completion from G&A Institute and GCA.

Mark the Date:  Wednesday, December 14, 2016
The course begins at 8 a.m. and features a full day of lectures from leaders in the field of sustainable investing and corporate sustainability. A networking lunch is included. The topics to be covered include:

  • What is Corporate ESG & Why It Really Matters to Shareowners;
  • ESG Analysis, Rating & Research;
  • What Investors Need to Know about the Rising Importance of Impact Investing;
  • The Sustainable Accounting Standards Board (SASB);
  • Case Study of Corporate Malfeasance — the VW Case;
  • ESG Equity Fundamental – Data Analytics;
  • About the Baruch CSR-Sustainability Monitor Project; 
  • and, Looking Beyond Corporate Sustainability & Financial Performance.

Presenters include:  Samuel Block, MSCI; Kate Starr, Flat World Partners; Eric Kane, SASB (Healthcare); Hideki Suzuki, Bloomberg LP; Mert Demir, PhD, Weissman Center at Baruch College.  And, there’ll be presentations by the principal organizers: Peter Fusaro of Global Change Associates; and, Hank Boerner, Chairman, and Louis D. Coppola, EVP (and co-founders) of G&A Institute.

We look forward to seeing you there, at Baruch College in December! 

CLICK HERE TO REGISTER for the workshop & for more information on the course offering.

New Training Announcement: Introduction to Corporate Environmental, Social, Governance (ESG) for Investment & Finance Professionals Certification

- The Why and How of Applying ESG to Corporate Valuations

New York, NY (November 3, 2016) –  In response to the growing demand for sustainable investing education from asset owners, asset managers, financial analysts and other financial professionals we are pleased to announce a one-day certificate program entitled, “Introduction to Corporate Environmental, Social and Governance (ESG) for Investment and Finance Professionals.” The program is organized by Governance & Accountability Institute (G&A) in collaboration with Global Change Associates (GCA) and hosted by the Zicklin School of Business at Baruch College/CUNY.

The first all-day certification program will be presented on Thursday, December 14, 2016. The program is being hosted at Baruch College’s Newman Vertical Campus (55 Lexington Avenue) in midtown Manhattan.  The course will begin at 8 a.m. with registration and continental breakfast, leading into a full day of lectures from leaders in the sustainable investing field.  A networking lunch is included.  Participants will receive a certificate of completion from G&A and GCA at the 5 p.m. close of the seminar.

AGENDA

Arrival, Registration & Continental Breakfast

What is Corporate ESG and Why It Really Matters to Shareowners
Hank Boerner, Chairman & Co-Founder, Governance & Accountability Institute

Bridging the Perceived Gap Between Corporate Sustainability & Corporate Profitability: Materiality, Risk Management and How Top and Bottom Lines Are Affected
Louis Coppola, EVP & Co-Founder, Governance & Accountability Institute

Coffee Break and Networking

ESG Analysis, Rating, and Research
Samuel Block, Research Analyst – Investment ESG Risk, MSCI

What Investors Need to Know About the Rising Importance of Impact Investing
Kate Starr (Invited), Founder & CIO, Flat World Partners; formerly Vice President-Capital Deployment, Heron Foundation

Networking Lunch

SASB 101: About the Sustainability Accounting Standards Board (SASB) and More Effective 10-k Disclosure
Eric Kane, Sector Analyst – Health Care, SASB

Case Study of Corporate Malfeasance:  The VW Emissions Scandal
Peter Fusaro, Chairman, Global Change Associates

Break

ESG Equity Fundamentals Data Analytics
Hideki Suzuki, ESG Group, Equity Fundamentals Department, Bloomberg LP

About the Baruch CSR-Sustainability Monitor Project
Mert Demir, Ph.D. in Finance, Senior Research Associate, Weismann Center for International Business at Baruch College

Looking Beyond Corporate Sustainability & Financial Performance
Louis Coppola, EVP & Co-Founder, Governance & Accountability Institute
Peter Fusaro, Chairman, Global Change Associates
Lecturers include leading experts in the sustainable investing field and the participants will come away with an understanding of why ESG matters, and how to apply ESG to corporate valuations, reputation, risk, opportunity and other aspects of financial analysis.

For information and to register click the link below: 
https://www.eventbrite.com/e/intro-to-corporate-esg-for-investment-finance-professionals-certification-tickets-29052781652

About Baruch College (http://www.baruch.cuny.edu/)
Baruch College is a senior college in the City University of New York (CUNY) with a total enrollment of more than 18,000 students, who represent 164 countries and speak more than 129 languages. Ranked among the top 15% of U.S. colleges and the No. 5 public regional university, Baruch College is regularly recognized as among the most ethnically diverse colleges in the country. As a public institution with a tradition of academic excellence, Baruch College offers accessibility and opportunity for students from every corner of New York City and from around the world.

About Governance & Accountability Institute, Inc. (www.ga-institute.com)
Governance & Accountability Institute is a New York City-based sustainability research, consulting and educational services company working with corporate sector and investment community clients. Typical engagements include preparation of sustainability, CSR and citizenship reports; peer benchmarking on ESG issues and reporting; customized ESG research (environmental, social and governance performance); strategic materiality analysis; sustainable investor relations; corporate communications around sustainability; and assistance with stakeholder engagements. The company is the exclusive Data Partner for the Global Reporting Initiative (GRI) for the USA, UK and the Republic of Ireland.


About Global Change Associates (www.global-change.com)
Peter C. Fusaro founded Global Change Associates, Inc. in 1991 to focus on the convergence of energy and environmental financial markets. His insights have earned him the international status of “thought leader” in these markets. His advice to client companies who require expert guidance to navigate their way through the multiple impacts of clean energy, natural gas and water technologies has proven invaluable to them. The focus of GCA today is to assist in raising funds for clean energy funds as a Registered Representative and to assist in the commercialization of new energy technologies. Peter holds the highly successful Wall Street Green Summit (www.wsgts.com) now in its 16th year and held in New York City each spring.

Lots of Important Sustainability Events & Training To Tell You About!

Today we call your attention to a number of events and training initiatives that may be of interest if you are:

  1. A corporate manager with responsibilities in the areas of [corporate] citizenship, sustainability, ESG, responsibility, and related areas, or
  2. Working in the capital markets and want to learn more about these topics, or
  3. Working in another field and would like to join a company or investor organization focused on sustainability and sustainable investing…

An important part of the G&A Institute mission since our founding a decade ago is to help educate, inform and share critical information related to the above topics and positions.  As an example we work closely with Skytop Strategies on many events such as the ESG Summit, 21st Century Company, and Future of Corporate Reporting that educate and inform on these subjects.  We’d like to tell you about a few of our most recent initiatives in these areas.

Introduction to the Importance of Corporate ESG for Investment & Finance Professionals at Baruch College 
Watch for announcements soon about a new program offering we’ve organized in partnership with Baruch University and Global Change Associates (headed by G&A Fellow Peter Fusaro) — this is an all-day “Introduction to the Importance of Corporate ESG for Investment and Finance Professionals.”  We’ll have speakers from Bloomberg, MSCI, Sustainability Accounting Standards Board and other organizations sharing valuable information.  Save the date:  December 14th at the Newman Vertical Campus in mid-town Manhattan.

G&A Sustainability Training HQ Platform & CCRSS Course Offering
The “Certification in Corporate Responsibility and Sustainability Strategies” in partnership with Professor Nitish Singh of St Louis University, is the first course offering on the new “G&A Sustainability Training HQ” online training platform.

To learn more about the special introductory G&A Sustainability Training Pioneers Program for this course (including a special discount and extra recognition as a leader in this area), contact Louis Coppola at G&A: lcoppola@ga-institute.com.   Click here for more information and to register for the course.

Join G&A for a Special GRI Standards Launch Event Webinar
We’ve been communicating with you about the important event coming up at Bloomberg Headquarters in New York City– the Global Reporting Initiative’s (GRI) Sustainability Standards Launch Event scheduled for Wednesday, November 3rd.  We’ve learned that the registration for the in-person event is now full and closed.

You can still learn about the new GRI Standards via the convenience of a lunchtime webinar:  Governance & Accountability Institute invites you on behalf of GRI to join us in celebrating the launch of the GRI Sustainability Standards on an informative one-hour webinar led by GRI’s Alyson Genovese on Thursday, November 10th at 12 Noon Eastern Standard Time (EST).

Whether you are new to sustainability reporting or a seasoned veteran, this webinar is designed to provide you with an interactive, detailed overview of the very latest in sustainability reporting. You’ll be guided through the new GRI Standards, important background and benefits, and you’ll be receiving an excellent overview of the changes from the current G4 Guidelines. You’ll have ample opportunity to ask questions to both GRI and G&A (reminder: we’re the exclusive GRI Data Partner in the USA, United Kingdom and Republic of Ireland, member of the GRI Data Consortium, and a Gold Community Member).

To learn more and register for this free event, please visit: 
https://goo.gl/forms/jVPOVUL19Jzd1WnB3

If you have questions or want to learn more, please contact Louis Coppola at lcoppola@ga-institute.com.

Dodd-Frank Act at 5 Years – Not Quite Done in Rulemaking

by Hank Boerner – Chairman – G&A Institute

So Here We Are Five Years on With The Dodd-Frank Act

Summer’s wound down/autumn is here  – while you were sunning at the beach or roaming Europe, there was an important anniversary here in the U.S.A. That was the fifth anniversary of “The Dodd-Frank Act,” the comprehensive package of legislation cobbled together by both houses of the U.S. Congress and signed into law by President Barack Obama on July 21, 2010.

The official name of the Federal law is “The Dodd-Frank Reform and Consumer Protection Act,” Public Law 111-203, H.R. 4173. There are 15 “titles” (important sections) in the legislative package addressing a wide range of issues of concern to investors, consumers, regulators, and other stakeholders.

Remember looking at your banking, investment and other financial services statements …in horror…back in the dark days of 2008-2009?

The banking and securities market crisis of 2008 resulted in an estimated losses of about US$7 trillion of shareholder-owned assets, as well as an estimated loss of $3 trillion ore more of housing equity, creating an historic loss of wealth of more than $10 trillion, according to some market observers.

That may be an under-estimation if we consider the wide range of very negative ripple effects worldwide that resulted from [primarily] reckless behavior in some big investment houses and bank holding companies…rating agencies…and then there were regulators dozing off…huge failures in governance by the biggest names in the business…and therefore the ones that investors would presumably place their trust in.

In response to the 2008 market, housing and wealth crash, two senior lawmakers — U.S. Senator Christopher Dodd of Connecticut and Congressman Barney Frank of Massachusetts — went to work to enact sweeping legislation that would “reform” the securities markets, address vexing issues in investment banking practices, and “right wrongs” in commercial banking, and consumer finance services. (Five years on, both are retired from public office. Congressman Frank is still vocal on the issues surrounding Dodd-Frank.)

After more than a year of hearings – and intense lobbying on both sides of the issues — the The Dodd-Frank Act became the Law of the Land — and the next steps for the Federal government agencies that are charged with oversight of the legislation was development of rules to be followed.

So — in July, we observed the fifth anniversary of Dodd-Frank passage. I didn’t hear of many parties to celebrate the occasion. Five years on, many rules-of-the-road have been issued — but a significant amount of rule-making remains unfinished.

Yes, there has been a lot of work done: there are 22,000-plus pages of rules published (after public process), putting about two-thirds of the statutes to work. But as we write this, about one-third of Dodd-Frank statutes are not yet regulatory releases — for Wall Street, banks, regulators and the business sector to follow.

Is The Wind At Our Back – or Front?

What should we be thinking regarding Dodd-Frank half-a-decade on? Are there positive results as rules get cranked out — what are the negatives? What’s missing?

We consulted with Lisa Woll, the CEO of the influential Forum for Sustainable & Responsible Investment (US SIF), the asset management trade association whose members are engaged in sustainable, responsible and impact investing, and advance investment practices that consider environmental, social and governance criteria.

She shared her thoughts on D-F, and progress made/not made to date: “Congress approved the Act following one of the worst financial crises in our country. The 2008 crash impacted the lives of millions of Americans who lost their homes, jobs and retirement savings. The Dodd-Frank Act helped to bring about much-needed accountability and transparency to the financial markets.”

Examples? Lisa Woll thinks one of the most important achievement was creation of the Consumer Financial Protection Bureau (CFPB), “which is up and running and now one of the most important agencies providing relief to consumers facing abuse from creditors.” She points out that CFPB has handled more than 677,000 complaints since it opened its doors four years ago.

Put this in the “be careful what you wish for” category: You may recall that the buzz in Washington power circles was that Harvard Law School professor Elizabeth Warren was slated to head the new bureau – -which was a concept championed by her. Fierce financial service industry opposition and Republican stonewalling prevented that appointment. Elected Senator from Massachusetts on November 6, 2012, she is now mentioned frequently in the context of the 2016 presidential race.

Continuing the discussion on Dodd-Frank, US SIF’s Lisa Woll points to a recently released regulatory rule that addresses CEO-to-work pay-ration disclosure. This is a “Section” of the voluminous Dodd-Frank package requiring publicly-traded companies (beginning in 2017) to disclose the median of annual total compensation of all employees except the CEO, the total of the CEO compensation, and the ratio of the two amounts.

Says Lisa Woll: “Disclosure of the CEO-to-worker pay ratio is a key measure to ensure sound corporate governance.”

She says in general US SIF members are pleased that the Securities & Exchange Commission (SEC) rule applies to U.S. and non-U.S. employees, as well as full-time, part-time, seasonal and temporary workers employed by the company or any consolidated subsidiaries, with some exceptions: “The rule will provide important information about companies’ compensation strategies and whether CEO pay is out of balance in comparison to what the company pays its workers. Those will be measurable results.”

What Doesn’t Work/ or May be Missing in D-F?

CEO Woll says investors were disappointed that the pay ratio provision (CEO-to-worker) did not include smaller companies and that up to five percent of non-U.S. employees may be excluded from reporting. Her view: “High pay disparities within companies can damage employee morale and productivity and threaten a company’s long-term performance. In a global economy, with increased outsourcing, comprehensive information about a company’s pay and employment practices is material to investors.”

The Conflict Minerals Rule

Another positive example offered by Lisa Woll: The Dodd-Frank Act requirement that companies report on origin of certain minerals that are used, and that originate in conflict zones such as the Democratic Republic of the Congo. (Section 1502 of Dodd-Frank instructed SEC to issue rules to companies to disclose company use of conflict minerals if those minerals are “necessary to the functionality or production of a product manufactured by the company”. This includes tantalum, tin, gold or tungsten.)

Lisa Woll observes: The submission of these reports exposes operational risks that are material to investors. Last year 1,315 companies submitted disclosures, according to Responsible Sourcing Network. We continue to urge more corporate transparency in conflict minerals reporting.”

Dodd-Frank Rule Making Scorecard

The US SIF CEO notes that of 390 rules required to be enacted, 60 rules have yet to be finalized and another 83 have not even been proposed, according to law firm Davis Polk & Wardell LP.

Woll: “One example is the Cardin-Lugar Amendment, requiring any U.S. or foreign company trading on a U.S. stock exchange to publicly disclose resource extraction payment made to governments on a project basis. We are still waiting for SEC to complete the rule.”

CEO Woll sees the ongoing effort by some members of the U.S. Congress to undermine or weaken The Dodd-Frank Act as “very concerning,” and putting investors at risk. “In my own work with our asset management members, I am seeing positive effects in that they have greater access to information in order to make an investment decision in companies. The examples are rules around transparency and disclosure. At the same time, asset managers lack access to information in a number of areas where rules are still pending, such as payment disclosures to companies by extractive companies.”

Of rules not yet adopted (or addressed), Lisa Woll urges continued work by SEC: “We hope to see more of the rules finalized so that we can move toward more transparent financial markets and a more sustainable economy.”

# # #

Notes: The Forum for Sustainable & Responsible Investment (US SIF) is an asset management trade association based in Washington, D.C. Member institutions include Bank of America, UBS Global Asset Management, Bloomberg, Calvert Investments, Legg Mason, Domini Social Investments, Cornerstone Capital, Walden Asset Management, and many other familiar names.

Members are engaged in sustainable, responsible and impact investing, and advance investment practices that consider environmental, social and governance criteria. Lisa Woll has been CEO since 2006.

Disclosure: G&A Institute is a member organization of US SIF and team members participate in SIRAN, the organization’s “Sustainable & Responsible Research Analyst Network.”) Other SIF entities include The International Working Group; Indigenous Peoples Working Group; and Community Investing Working Group. Information is at: http://www.ussif.org/

The DJSI – Analytical Game Changer in 1999 – Sustainable Investing Pacesetter in 2014

by Hank Boerner – Chairman – Chief Strategist, G&A Institute

updated with information provided to me by RobecoSAM for clarification on 17 September 2014.

It was 15 years ago (1999) that an important — and game-changing  ”sustainability investing” resource came in a big way to the global capital markets; that year, S&P Dow Jones Indices and Robeco SAM teamed to create the Dow Jones Sustainability Indices. This is described by the managers as “…the first global index to track the financial performance of the leading sustainability-driven companies worldwide,” based on analysis of financially material economic, environmental and social (societal) factors. Breakthrough, game-changing stuff, no?

Note “financially material” – not “intangible” or “non-financial,” as some capital market holdouts initially (and continue to) described the sustainable investing approach.  There were but handfuls of “sustainability-driven” companies in world capital markets for selection for the World benchmark.  1999 — -that year the Global Reporting Initiative (GRI) was assembling its first comprehensive framework for corporate reporting (G#) byond the numbers alone.  Interfaith Center for Corporate Responsibility (ICCR) was a steadily maturing organization mounting proxy campaigns to challenge the risky behavior of major companies that were polluting the Earth.  The Investor Responsibility Research Center (IRRC) was the go-to source for information on corporate behaviors, particularly related to corporate governance issues.  (And CG issues were rapidly expanding – the governance misbehaviors of unsustainable companies such as of Enron, WorldCom, et al, were not yet as evident as when they collapsed three years later.). Robert Monks and Nell Minow were active in Hermes Lens Asset Management, continuing to target poorly managed companies and encouraging laggard CEOs to move on. (Monks’s book, “The Emperor’s Nightingale,” was just out that year.)

Over the next 15 years, the managers of DJSI benchmarks steadily expanded their analysis and company-picking; the complex now offers choices beyond “World” —  of Dow Jones Sustainability Asia Pacific; Australia; Emerging Markets; Europe; Korea; and North America.

A handful of “sustainability-driven” companies have been aboard “World” for all of the 15 years; this is the honors list for some investors:  Baxter International (USA); Bayer AG; BMW; BT Group PLC; Credit Suisse Group; Deutsche Bank AG; Diageo PLC; Intel (USA); Novo Nordisk; RWE AG; SAP AG; Siemens AG: Storebrand; Unilever; United Health Group (USA).  Updated:  And Sainsbury’s PLC.

Though the DJSI indices have been availble to investors for a decade-and-a-half, it is only in the past few years that we hear more and more from corporate managers that senior executives are paying much closer attention.  “The CEO wants to be in the DJSI,” we frequently hear now.

Each year about this time the DJSI managers select new issues for inclusion and drop some existing component companies.  Selected to be in the World:  Amgen; Commonwealth Bank of Australia; GlaxoSmithKline PLC.  Out of the DJSI World:  Bank of America Corp; General Electric Co; Schlumberger Ltd.

DJSI managers follow a “best-in-lcass” approach, looking closely at companies in all industries that outperform their peers in a growing number of sustainability metrics.  There are about 3,000 companies invited to respond to RobecoSAM’s “Corporate Sustainability Assessment” — effective response can require a considerable commitment of time and resources by participating companies to be considered.  Especially if the enterprise is not yet “sustainability-driven.”  We’ve helped companies to better understand and respond to the DJSI queries; it’s a great exercise for corporate managers to better understand what DJSI managers consider to be “financially material.”  And to help make the case to their senior executives (especially those wanting to be in the DJSI).

updated informationRobecoSAM invites about 2,500 companies in the S&P Global Broad Market Index to participate in the assessment process; these are enterprises in 59 industries as categorized by RobecoSAM, located in 47 countries.

The new G$ framework from GRI, which many companies in the USA, EU and other markets use for their corporate disclosure and reporting, stresses the importance of materiality — it’s at the heart of the enhanced guidelines.  The head of indices for RobecoSAM (Switzerland), Guido Giese, observes:  “Since 1999, we’ve heled investors realize the financial materiality of sustainability and companies continue to tell us that the DJSI provides an excellent tool to measure the effectiveness of their sustainability strategies.”

Sustainability strategies — “strategy” comes down to us through the ages from the Ancient Greek; “stratagem”…the work of generals…the work of the leader…generalship…”  Where top leadership (and board) is involved, the difference (among investment and industry peers) is often quite clear.

At the S&P Dow Jones  Index Committee in the USA, David Blitzer, managing director and chair of the committee, said about the 15 years of indices work: “Both the importance and the understanding of sustainability has grown dramatically over the past decade-and-a-half…the DJSI have been established as the leading benchmark in the field…:”

The best-in-class among the “sustainability-driven” companies that we see in our close monitoring as GRI’s exclusive Data Partner in the USA, UK and Ireland, the company’s senior leadership is involved, committed and actively guiding the company’s sustainability journey.  And that may be among the top contributions to sustainable investing of DJSI managers over these 15 years.

Congratulations and Happy Anniversary to RobecoSAM and S&P Dow Jones Indices (a unit of McGraw Hill Financial).  Well done!  You continue to set the pace for investors and corporates in sustainable investing.

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

 

UN Global Compact Launches Stock Index – And it Outperforms the Market!

by Hank Boerner – Chairman, G&A Institute

The number of Sustainability Indexes available to investors continues to grow — demonstrating the growing interest in Sustainability by investors.  Another major index was announced yesterday under the UN Global Compact brand.  With the recent announcement of the Thomson Reuters Corporate Responsibility Indexes in April, we see this space really heating up.

The “Global Compact 100″ stock index was launched by the UN Global Compact (UNGC) yesterday.  The index is composed of equities  that are committed to the UN’s 10 principles.  The index is also known as the “GC 100″ and was launched in collaboration with the ESG research firm Sustainalytics.  The companies selected adhere to the Global Compact’s 10 principles and also show commitment by “executive leadership and consistent profitability”.

On top of the companies commitment to Sustainability, UNGC says the index has outperformed the FTSE All World Index for 2 years straight, with a 26.4% gain vs a 22.1% (FTSE All World Index) gain in the past 1 year, and a 19.0% gain vs a 17.7%  gain in the last 2 years.  In the past 3 years the index has matched the FTSE All World return at 12% – this illustrates once again the claim that their is no cost to investing in Sustainable companies, and in many cases there is an advantage in the marketplace leading to out-performance of the market.

A proprietary methodology is used that investigates a range of data points devised from the Global Compact’s ten principles in the areas of human rights, labor standards, environmental stewardship, and anti-corruption. Only the Global Compact signatories that are currently covered in Sustainalytics research universe – approximately 722 companies in total were used in creating the index. (The UNGC has just about 8,000 corporate signatories, of which approximately 1,000 are publicly traded companies.)

Here is some info on the Eligibility for the Index and the Constituent Selection Process take n from the UNGC:

Eligibility for the Index:
Companies are eligible for the GC 100 if they or their parent company have been Global Compact signatories for a minimum of one year, are publicly listed, and fall within the research universe of Sustainalytics, which provided the research for the index. As well, they must pass a financial screen that requires positive pre-tax earning on average for the 3 years preceding the index annual review. In the case that a company is already a constituent of the index, it will only be removed if there are two consecutive years of negative 3-year average earnings figures.

Constituent Selection Process:
The constituents of the GC 100 are reviewed on an annual basis in September.

Constituents are chosen for the Index with the dual goal of having a sector representation (free-float market cap weights) within a range of the key, well-known global indexes; and to choose companies that have strong practices and performance in adhering to the principles of the UN Global Compact around management of human rights, labour rights, the environment and anti-corruption. Among the indicators used in the selection of the constituents were the company’s level of reporting in relations to the Global Compact’s required annual Communication on Progress and whether or not the company’s chief executive submitted its required annual letter of support for the UN Global Compact and its principles.

As part of the index annual review, there may be changes in the constituents to better align the sector representation of the GC 100 with global indexes or to replace some constituents due to changes in company practices or performance with respect to implementation of the Global Compact principles.

 Stay tuned to SRI Equity Indexes for investors — this is a growth industry now.

Read the full announcement on Accountability Central here..