Will We See Mandated Corporate Reporting on ESG / Sustainability Issues in the USA?

by Hank Boerner – Chairman – G&A Institute

Maybe…U.S. Companies Will Be Required…or Strongly Advised… to Disclose ESG Data & Related Business Information

Big changes in mandated US corporate disclosure and reporting on ESG factors may be just over the horizon — perhaps later this year? Or perhaps not…

Sustainable & responsible investing advocates have long called for greater disclosure on environmental and social issues that affect corporate financial performance (near and long-term). Their sustained campaigning may soon result in dramatic changes in the information investors and stakeholders will have available from mandated corporate filings.

We are in countdown mode — in mid-April the Securities & Exchange Commission (SEC), the agency that regulates many parts of the capital market operations and especially corporate disclosure and reporting for investors issued a Concept Release with a call for public comments.

Among the issues In focus are potential adjustments, expansions and updating of mandated corporate financial reporting. One of these involves corporate ESG disclosure. The issue of “materiality” is weaved throughout the release.

Among the many considerations put forth by SEC: expanding corporate disclosure requirements for corporate financial and business information to include ESG factors, and to further define “materiality.” Especially the materiality of ESG factors.

The comment period is open for you to weigh in with your opinion on corporate ESG disclosure and reporting rules — or at least strong SEC guidance on the matter.

SEC has been conducting a “Disclosure Effectiveness Initiative,” which includes looking at corporate disclosure and reporting requirements, as well as the forms of presentation and methods of delivery of corporate information made available to investors. (Such as corporate web site content, which most feel needs to be updated as to SEC guidance.)

The umbrella regulatory framework — “Regulation S-K” — has been the dominant approach for corporate reporting since 1977 has been the principal repository (in SEC lingo) for filing corporate financial and business information (such as the familiar 10-K, 10-Q, 8-K, etc.).

Investors Want More Corporate ESG Information

For a number of years now, investment community players have urged SEC to look at mandating or offering strong guidance to public company managements to expand disclosure and reporting to substantially address what some opponents conveniently call “non-financial,” or “intangible” information. An expanding base of investors feel just the opposite — ESG information is quite tangible and has definite financial implications and results for the investor. The key question is but how to do this?

Reforming and Updating Reg S-K

In December 2013 when the JOBS Act (“Jumpstart Our Business Startups”) was passed by Congress, SEC was charged with issuing a report [to Congress] on the state of corporate disclosure rules. The goal of the initiative is to improve corporate disclosure and shareholders’ access to that information.

The Spring 2016 Concept Release is part of that effort. The SEC wants to “comprehensively review” and “facilitate” timely, material disclosure by registrants and improve distribution of that information to investors. Initially, the focus is on Reg S-K requirements. Future efforts will focus on disclosure related to disclosure of compensation and governance information in proxy statements.

Asset managers utilizing ESG analytics and portfolio management tools cheered the SEC move. In the very long Concept Release – Business and Financial Disclosure Required by Regulation S-K, at 341 pages — there is an important section devoted to “public policy and sustainability” topics. (Pages 204-215).

ESG / Sustainability in Focus For Review and Action

In the Concept Release  SEC states: In seeking public input on sustainability and public policy disclosures (such as related to climate change) we recognize that some registrants (public companies) have not considered this information material.

Some observers continue to share this view.

The Concept Release poses these questions as part of the consideration of balancing those views with those of proponents of greater disclosure including ESG information:

• Are there specific public policy issues important to informed voting and investment decisions?

• If the SEC adopted rules for sustainability and public policy disclosure, how could the rules result in meaningful disclosures (for investors)?

• Would line items about sustainability or public policy issues cause registrations to disclose information that is not material to investors?

• There is already sustainability and ESG information available outside of Commission (S-K) filings — why do some companies publish sustainability, citizenship, CSR reports…and is the information sufficient to address investor needs? What are the advantages and disadvantages of these types of reports (such as being available on corporate web sites)?

• What challenges would corporate reporters face if ESG / sustaianbility / public policy reporting were mandated — what would the additional costs be? (Federal rule making agencies must balance cost-benefit.)

• Third party organizations — such as GRI and SASB for U.S. company reporting — offer frameworks for this type of reporting. If ESG reporting is mandated, should existing standards or frameworks be considered? Which standards?

The Commission has received numerous comments about the inadequacy of current disclosure regarding climate change matters. And so the Concept Release asks: Are existing disclosure requirements adequate to elicit the information that would permit investors to evaluate material climate change risk? Why — or why not? What additional disclosure requirements– or SEC guidance — would be appropriate?

Influential Voices Added to the Debate

The subject of expanded disclosure of corporate ESG, sustainability, responsibility, citizenship, and related information has a number of voices weighing in. Among those organizations contributing information and commentary to the SEC are these: GRI; SASB; Ceres; IEHN; ICCR; PRI; CFA Institute; PWC; E&Y; ISS; IIRC; BlackRock Institute; Bloomberg; World Federation of Exchanges; US SIF.

The overwhelming view on record now with SEC is that investor consideration of ESG matters is important and that change is needed in the existing corporate reporting and disclosure requirements. You can add your voice to the debate.

For Your Action:

I urge your reading of the Concept Release, particularly the pages 204 through 215, to get a better understanding of what is being considered, especially as proposed by proponents; and, I encourage you to weigh in during the open public comment period with your views.

You can help to ensure the SEC commissioners, staff and related stakeholders understand the issues involved in expanding corporate disclosure on ESG matters and how to change the rules — or offer strong SEC guidance. Let the SEC know that ESG information is needed to help investors better understand the risks and opportunities inherent in the ESG profiles of companies they do or might invest in.

SEC rules or strong guidance on ESG disclosure would be a huge step forward in advancing sustainability and ESG consideration by mainstream capital market players.

Information sources:

The SEC release was on 13 April 2016; this means the comment period is open for 90 days, to mid-July.

Helpful Background For You

Back in 1975 as the public focus on environmental matters continued to increase (all kinds of federal “E” laws were being passed, such as the Clean Air Act and Clean Water Act), stakeholders asked SEC to address the disclosure aspects of corporate environmental matters.

The initial proposal was deemed to have exceeded the commission’s statutory authority.

In 1974 the ERISA legislation had been passed by Congress, and pension funds, foundations and other fiduciaries were dramatically changing the makeup of the investor community, dwarfing the influence of one once-dominant individual investor. After ERISA and the easing of “prudent man” guidelines for fiduciaries, institutional investors rapidly expanded their asset holdings to include many more corporate equities.

And the institutions were increasingly focused on the “E,” “S” and :”G” aspects of corporate operations — and the real or potential influence of ESG performance on the financials. Over time, asset owners began to view the company’s ESG factors as a proxy for (effective or not) management.

While the 1975 draft requirements for companies to expand “E” and “S” information was eventually shelved by SEC, over the years there was a steady series of advances in accounting rules that did address especially “E” and some “S” matters.

FAS 5 issued by FASB in March 1975 addressed the “Accounting for Contingency” costs of corporate environmental liability FASB Interpretation FIN 14 regarding FAS 5 a year later (September 1976) addressed interpretations of “reasonable estimations of losses.” SEC Staff Bulletins helped to move the needle in the direction of what sustainable & responsible investors were demanding. Passage of Sarbanes-Oxley statutes in July 2002 with emphasis on greater transparency moved the needle some more.

But there was always a lag in the regulatory structure that enables SEC to keep up with the changes in investment expectations that public companies would be more forthcoming with ESG data and other information. And there was of course organized corporate opposition.

(SEC must derive its authority from landmark 1933 and 1934 legislation, expansions and updates in 1940, 2002, 2010 legislation, and so on. Rules must reflect what is intended in the statutes passed by Congress and signed into law by the President. And opponents of proposals can leverage what is/is not in the laws to push back on SEC proposals.)

There is an informative CFO magazine article on the subject of corporate environmental disclosure, published September 9, 2004, after the Enron collapse, two years after Sarbanes-Oxley became the law of the land, and 15+ years after the SEC focused on environmental disclosure enhancements. Author Marie Leone set out to answer the question, “are companies being forthright about their environmental liabilities?” Check out “The Greening of GAAP” at: http://ww2.cfo.com/accounting-tax/2004/09/the-greening-of-gaap/

And we add this important aspect to corporate ESG disclosure: Beginning in 1990 and in the years that followed, the G1 through G4 frameworks provided to corporate reporters by the Global Reporting Initiative (GRI) helped to address the investor-side demand for more ESG information and the corporate side challenge of providing material information related to their ESG strategies, programs, actions and achievements.

The G&A Institute team sees the significant progress made by public companies in the volume of data and narratives related to corporate ESG performance and achievements in the 1,500 and more reports that we analyze each year as the exclusive data partner for The GRI in the United States, United Kingdom, and The Republic of Ireland.

We have come a very long way since the 1970s and the SEC Concept Release provides a very comprehensive foundation for dialogue and action — soon!

Please remember to take action and leave your comments here:

http://www.sec.gov/rules/concept.shtml

Big News Out of the U.S. Department of Labor For Fiduciaries — Opportunity to Utilize ESG Factors in Investment Analysis and Portfolio Management

by Hank Boerner – G&A Institute Chairman

Back in the late-1960s and early 1970s, as allegations of older worker retirement abuses gained wide media attention, members of the U.S. Congress focused on “retirement security” issues. After high-profile committee hearings, the Congress passed the Employee Retirement Income Security Act of 1974, signed into law by our 40th CEO, President Gerald Ford. The U.S. Department of Labor was assigned to develop and oversee the operating rules-of-the road for retirement plan fiduciaries — including public employee pension systems; corporate retirement plans; endowments; foundations; trusts.

Over the next 30 years the Department of Labor’s operating arms for regulating “ERISA” — especially including the Employee Benefits Security Administration — tweaked the rules & regulations with such actions as clarifying letters (such as to the Pacific Coast Roofers Pension Plan and the Northwestern Ohio Building Trades and Employer Construction Industry Investment Plan) and a series of “interpretive bulletins” to clarify the rules for fiduciaries.

The passage of ERISA was a great boon for many Americans. The law opened the door for institutional investors to dramatically expand their investments in other than the traditional “prudent man” vehicles of old, like U.S. Treasury notes, bills and bonds and municipal bond issues. Trillions’ of dollars flowed into the equities market after the 1970s and trading volume (at exchanges) soared.

Many of us benefited directly and indirectly from ERISA, including individuals opening 401-k plans made possible by the legislation. The portfolios of public pension funds in particular soared in total value. (CalPERS, the California public employee plan, has US$300 billion in AUM; $150 billion of these assets are in public equity.)

The financial good times rolled, in large measure due to ERISA!

Periodically, the ERISA officials (working under the political appointees of various U.S. Presidents) would issue guidance. The cottage industry of law firms, accounting firms, pension consultants, actuaries and other ERISA-focused professionals grew by leaps and bounds. And, from the early 1980s on, there was steadily growing embrace of new approaches to investing, and new products ginned up with retirement “security” in mind.

Game Changer: The Emergence of Sustainable Investing

The new approaches included embrace of ESG performance for greater analysis [by asset owners and asset managers], and greater focus on and inclusion of ESG-related products offered by financial services firms for fiduciaries’ portfolios (mutual fund, indexes, benchmarks, etc). The latest survey by the Forum for Sustainable & Responsible Investing (US SIF) established a high water mark: a total of US$6.2 trillion in Assets Under Management were managed using ESG approaches as we entered 2014; that’s $1 in $6 in U.S. equity markets. The US SIF was in the vanguard in getting the Department of Labor guidance clarified regarding ESG investment.

Emblematic of the changes taking place as the Department of Labor prepared its latest guidance, S&P Dow Jones Indices (part of McGraw Hill Financial) busily announced three new climate change index series — two focused on carbon efficiency, and a fossil fuel free index. “Climate change and its impact present a challenge from an investment perspective,” said the index company.

2008 ERISA Guidance — Chilling Effect for ESG

In October 2008, in the waning days of President George W. Bush’s Administration, the Department of Labor issued its Interpretive Bulletin Relating to the Fiduciary Standard in Considering Economically Targeted Investments (“ETIs” in government-ese). The regulators’ guidance was interpreted by many investors as saying that only financial risk and return could be considered by the tens of thousands of fiduciaries in the USA overseeing pension funds, etc. “Other” considerations, such as a company’s ESG performance, were not acceptable.

Never mind that sustainable investing was growing significantly in importance in the U.S. and global capital markets. Never mind that the collapse of the stock market in 2008, thanks to the reckless behavior of the big bank holding companies, and look-the-other way regulators. The dives of stock prices would drive investors to the safety offered by sustainable investing products and instruments. Never mind that a growing army of stakeholders saw sustainable investing — that is, investing with collateral interests as well as the traditional financials — was becoming mainstream.

October 2015 ERISA Guidance – Encouraging!

Institutional investors (asset owners) and professional asset managers began engaging with Department of Labor officials soon after President Barack Obama took office to discuss DoL guidance for plan fiduciaries. Since 2009, of course, ESG-focused investments have soared in volume. One after another academic studies have been published to provide evidence that sustainable investment has clear financial payoff as well as “collateral” benefits. (Think:  Who would not encourage company managements to lower their environmental liabilities, create more “green” products that consumers want, improve policies and actions involving the diversity of their enterprises, avoid regulatory costs including fines, and more, more, more in terms of becoming a more sustainable company attractive to a greater number of investors?)

In late-October, the DoL’s Employee Benefits Security Administration issued an updated Interpretive Bulletin — this time, clearly stating that terms like socially responsible investing, sustainable & responsible investing, ESG investing, impact investing, and economically targeted investing (ETI), while not uniform in meaning…are related to any investment that is selected in party for its collateral benefits apart from investment return to the investor.

The Bulletin is being distributed via the Federal Register now to explain to fiduciaries that the 2008 Bulletin is officially withdrawn and replaced with language that reinstates the language dating back to 1994 (setting out the basic advice that fiduciaries should act prudently to diversify their plan to minimize the risk of large losses).

Highlights of the new DoL ERISA guidance:

• In updated terms, guidance includes plan consideration of ESG factors such as environmental, social or corporate governance (ESG) — these do not need special scrutiny (as the 2008 guidance implied). The 2015 Bulletin specifically refers to such current terms-of-art as sustainable & responsible investing.

• Fiduciaries should not be dissuaded from pursuing [such] investment strategies as those that consider ESG factors, even when they are used solely to evaluate the economic benefits of investments and identify economically superior instruments and investing in ETIs [where they are economically equivalent].

• When a fiduciary prudently concludes that such an investment is justified solely on the economic merits of the investment, there is no need to evaluate collateral goals as “tie breakers.” And, setting aside the 2008 advice, there is no need for considerable documentation as to why (for example an ESG investment) was chosen.

• The Labor Department does not believe ERISA (the 1974 law and subsequent rules & regulations, and opinions) prohibits a fiduciary from addressing ETIs or incorporating ESG factors in investment policy statements or integrated ESG-related tools, metrics and analyses to evaluate an investment’s risk or return or choose among otherwise equivalent investments.

Cautionary guidance: In issuing the October 2015 Bulletin the DoL staff reminds fiduciaries that section 403 and 404 of ERISA do not permit fiduciaries to sacrifice the economic interests of the plan participants in receiving their promised benefits in order for the plan to pursue collateral goals. BUT — the DoL has “consistently recognized” that fiduciaries MAY consider collateral goals as tie-breakers when choosing between investment alternatives that are otherwise equal with respect to risk and return over the appropriate time horizon.

ERISA does not direct investment choice where investment alternatives are equivalent and the economic interests of the plan’s participants and beneficiaries are protected if the selected investment in economically equivalent to competing instruments.

Setting the Record Straight

The 2008 guidance appeared to say that investing with collateral goals in mind should be rare, and had to be documented to demonstrate compliance with ERISA’s “rigorous standards.” The 2015 guidance sets the record straight: “Plan fiduciaries should appropriately consider factors that potentially influence risk and return — ESG issues may have a direct relationship in the economic value of the plan investment. These issues are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”

Again, underscoring for the record: The Department does not believe ERISA prohibits a fiduciary from addressing ETIs or incorporate ESG factors in investments….

We could say that investors encouraging such actions as fiduciaries divesting fossil fuel companies because of concerns about “stranded assets” left in the ground (and not be counted as reserves) can breathe easier with the new DoL guidance.

John K.S. Wilson, head of corporate governance and engagement at Cornerstone Capital Group noted in response to the guidance: “An important purpose of this Interpretive Bulletin is to clarify that plan fiduciaries should appropriately consider factors that potentially influence risk and return. Environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investments. Collateral benefits include environmental protection, social equity and financial stability, which Cornerstone considers necessary outcomes for the mitigation of long-term macroeconomic investment risk.” (Wilson is the former director of corporate governance at TIAA-CREF, where he oversaw voting of proxies at the CREF portfolio (8,000 companies.)

Sending a Clear Signal to Plan Fiduciaries

We see the Interpretive Bulletin as sending a clear signal to U.S. fiduciaries that considering ESG factors is recognized as an important part of the fiduciary’s duty in evaluating risk and return. As Social Finance commented in its reaction — “US DOL Announced ERISA Guidance to Unlock Impact Investments.” Over time — the guidance will (unlock ESG investing’s power. that is)!

You can read the U.S. Department of Labor Interpretive Bulletin summary at: http://www.dol.gov/opa/media/press/ebsa/EBSA20152045.htm

# # #

Congratulations to US SIF chief executive officer Lisa Woll and her colleagues in continuing the long engagement with the Department of Labor to get clear guidance on ESG investing. Sustainable investing champions involved in the long engagement with the Department of Labor include Adam Kanzer (Domini Fund); Jonas Kron (Trillium); Meg Voorhes (SIF); Tim Smith (Walden Asset Management).

Governance & Accountability Institute: INTERNSHIP AVAILABLE – GRI Data Partner Reports Analyst

The opportunity:  Learn to Analyze Data and Interpret Content from Global Reporting Initiative Sustainability Reporting

Position:  GRI Data Partner – Sustainability Report Analyst Internship Available

Location: Virtual (our offices are in NYC).  Most work will be done remotely with a flexible work schedule – at your own location.  Initial training via Web.

Time Requirements: This position will require approximately 10 hours a week and would begin ASAP.  The timing of the work is flexible and can be done remotely for a majority of the time required.

Description

The Governance & Accountability Institute is a New York City-based company that specializes in research, communication, strategies and other services focused on corporate sustainability and corporate ESG performance (“Environmental, Social, Governance”) issues.  GAI is offering the opportunity for an internship for a qualified student interested in learning more about these topics.

This is a very fast growing area of interest to corporations, and Wall Street interests.  The GRI reporting framework is the most widely used in the world for these types of reports.

G&A is the exclusive data partner for the United States, United Kingdom and Republic of Ireland for the Global Reporting Initiative (GRI).  The Global Reporting Initiative is a non-profit organization that promotes the use of sustainability reporting as a way for organizations to become more sustainable and contribute to sustainable development.

GRI provides all companies and organizations with a comprehensive sustainability reporting framework that is the most widely used and respected around the world.  Currently thousands of global organizations use the GRI to report on their Environmental, Social, and Corporate Governance strategies, impacts, opportunities and engagements.  (www.globalreporting.org).  The G&A Institute interns learn important elements about GRI reporting that can be used in their future work situations.

As the exclusive US, UK and Ireland data partner of the GRI, The Governance & Accountability Institute’s role is to collect, organize, and analyze sustainability reports that are issued by corporations, public entities, not-for-profits and other entities in The United States, United Kingdom and Republic of Ireland for the benefit of all stakeholders.  In this role the analyst will work as part of a team to analyze these reports for inclusion in the largest global database of Sustainability reports, the GRI’s Sustainability Disclosure Database (database.globalreporting.org).

The Intern Opportunity

Learning to read, analyze, use, and structure data from reports using the GRI G3, GRI G3.1, GRI G4, GRI-Reference as well as NON-GRI corporate and institutional reports will comprise the majority of this assignment.  The research will also contribute to several published research reports on various trends in sustainability reporting which are widely referenced by media, academics, business, capital markets players and other important sustainability stakeholders.

The student(s) selected will have the opportunity to experience a fast-paced, highly-adaptive (and nurturing) culture in a small but growing company with a unique niche. This is a hands-on position with considerable learning opportunity for those headed for a career in corporate responsibility.

Applicants should demonstrate a strong background and keen interest in ESG and Sustainability issues and topics.   A plus: strong technical, communication, and organizational skills.  Basic skills in Excel and researching on Google are required. Applicants with writing and editing abilities will have preference.

Interested students should send a resume outlining education and skill sets. As an option, a one to two page introduction essay on what you would like to learn more about (in terms of your career goals), what your interests are, and anything else you feel may be relevant to the job/our organization will also be welcomed.    Samples of writing or research on sustainability or other topics are also a plus.

G&A interns get public recognition for their work in our published reports, on our web platform and in other ways. To see what other interns have been doing (and their backgrounds) check out the intern Honor Roll at http://www.ga-institute.com/the-honor-roll/

Contact Information
Louis D Coppola
Governance & Accountability Institute,
845 Third Ave, 6th Floor, NY, NY  10022
Email: lcoppola@ga-institute.com
Ph: 646-430-8230 x14

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

 

Does the Draft EU Directive for Mandatory Sustainability Reporting Apply to US Companies? AND – Stock Exchanges Move One Big Step Closer Towards GLOBAL Mandatory Reporting As Well

By Louis D Coppola @ G&A Institute..

I received an overwhelming response to the post on March 17, 2014 concerning the European Unions moves to make Sustainability / CSR reporting mandatory.  For those of you that have not read my original post you can take a look here:

http://ga-institute.com/Sustainability-Update/2014/03/17/european-union-moves-closer-to-make-sustainability-csr-reporting-mandatory-in-all-28-member-countries/

A question that came up a lot was whether or not this would apply to US companies operating in the European Union with more than 500 employees.  This is a great question and although I had heard through the grapevine that it would apply, I did not feel certain enough to state that fact because I could not find an official statement or clause that I had found in draft directives.  I had only heard this from other practitioners, in other articles etc that it would impact US companies.

Then I received an email from Carly Greenberg and Tim Smith at Boston Trust thanking me for the post, and calling my post “informative”.  I am very fond of Tim Smith and a real fan of his tremendous work in driving SRI over his entire 40+ year career with ICCR and now with Walden Asset Management – I sometimes refer to him as one of the Godfathers (Hey – I’m Italian and from NY so.. forgive me )  of SRI so I was very humbled to get this email and I knew that I had to find the answer to this question.  I consider myself lucky that over my relatively short career in Sustainability (14 years) Tim and I have crossed paths, shared panels, and discussed issues in some depth.  He has truly impacted the field more than almost anyone (and continues to today), and has impacted my career / thoughts etc dramatically.  (Thanks Tim!)

EUREKA! – I did find the copy of the draft directive itself and after reading through it with a fine toothed comb I came across a clause which I believe to be the smoking gun which was under section 3 “LEGAL ELEMENTS OF THE PROPOSAL” (the bold part is the important part):

The Accounting Directives regulate the information provided in the financial statements of all limited liability companies which are incorporated under the law of a Member State or European Economic Area (EEA). As Article 4(5) of the Transparency Directive refers to Article 46 of the Fourth Directive and to Article 36 of the Seventh Directive, the amendements proposed to these provisions will also cover companies listed on EU regulated markets even if they are registered in a third country.

Based on this clause, any company that trades on at least one of the many stock exchanges in the European Union (most global companies) which you can see in this list taken from a Wikipedia article number over 100+:

Economy Exchange Location Founded Listings Link
European Union European Union Euronext Amsterdam 2000 1154 Euronext
GXG Markets Horsens 1998 GXG
Albania Albania Tirana Stock Exchange Tirana 1996 TSE
Armenia Armenia Armenian Stock Exchange Yerevan 2001 12 NASDAQ OMX Armenia
Austria Austria Vienna Stock Exchange Vienna 1771 99 WB
Azerbaijan Azerbaijan Baku Stock Exchange Baku 2000 BFB
Belarus Belarus Belarus Currency and Stock Exchange Minsk 1998 BVFB
Belgium Belgium Euronext Brussels Brussels 1801 213
Bosnia and Herzegovina Bosnia and Herzegovina
Bosnia and HerzegovinaFederation of Bosnia and Herzegovina Sarajevo Stock Exchange Sarajevo 2001 SASE
Republika Srpska Republika Srpska Banja Luka Stock Exchange Banja Luka 2001 BB
Bulgaria Bulgaria Bulgarian Stock Exchange Sofia 1914 BFB
GuernseyJerseyChannel Islands Channel Islands Stock Exchange Guernsey 1987 1000 CISX
Croatia Croatia Zagreb Stock Exchange Zagreb 1991 ZB
Cyprus Cyprus Cyprus Stock Exchange Nicosia 1996 HAK
Czech Republic Czech Republic Prague Stock Exchange Prague 1861 29 PX
Denmark Denmark Copenhagen Stock Exchange Copenhagen 1620 172 OMX Nordic Market
GXG Markets Horsens 1998 GXG Markets
Estonia Estonia Tallinn Stock Exchange Tallinn 1920 OMX Baltic Market
Faroe Islands Faroe Islands Faroese Securities Market Tórshavn 2004 VMF
Finland Finland Helsinki Stock Exchange Helsinki 1912 130 OMX Nordic Market
France France Euronext Paris Paris 1724 1301 Euronext Paris
MATIF Paris 1986 MATIF (Euronext)
Georgia (country) Georgia Georgian Stock Exchange Tbilisi 1999 261 SSB
Germany Germany Berliner Börse Berlin 1685 Börse Berlin
Börsen Hamburg und Hannover Hamburg/Hanover BÖAG
Börse München München 1830 Börse München
Börse Stuttgart Stuttgart 1861 Börse Stuttgart
Deutsche Börse Group Frankfurt Deutsche Börse Group
Eurex Frankfurt 1998 EUREX
Frankfurt Stock Exchange Frankfurt 1585 FWB
Gibraltar Gibraltar Gibraltar Stock Exchange Gibraltar 2006 GibEX
Greece Greece Athens Stock Exchange Athens 1876 ATHEX
Hungary Hungary Budapest Stock Exchange Budapest 1864 52 BET
Iceland Iceland Iceland Stock Exchange Reykjavík 1985 11 OMX Nordic Market
ICEX
Republic of Ireland Ireland Irish Stock Exchange Dublin 1793 ISE or ISEQ
Irish Enterprise Exchange Dublin 2005 IEX
Italy Italy Borsa Italiana Milan 1808 BIt
Kazakhstan Kazakhstan Kazakhstan Stock Exchange Almaty 1993 KASE
Latvia Latvia Riga Stock Exchange Riga 1816 OMX Baltic Market
Lithuania Lithuania Vilnius Stock Exchange Vilnius 1993 OMXV
Luxembourg Luxembourg Luxembourg Stock Exchange Luxembourg (city) 1927 Bourse de Luxembourg
Republic of Macedonia Macedonia Macedonia Stock Exchange Skopje 1995 MSE
Malta Malta Malta Stock Exchange Valletta 1992 Borza Malta
Moldova Moldova Moldova Stock Exchange Chişinău 1994 BVM
Montenegro Montenegro Montenegro Stock Exchange Podgorica 1993 MNSE
Netherlands Netherlands Euronext Amsterdam Amsterdam 1602 Euronext Amsterdam
Norway Norway Oslo Stock Exchange Oslo 1819 Oslo Børs
Poland Poland Warsaw Stock Exchange Warsaw 1817 439 WSE
Portugal Portugal Euronext Lisbon Lisbon 1769 66 Euronext Lisbon
OPEX Lisbon 2003 OPEX
Romania Romania Bucharest Stock Exchange Bucharest 1882 70 BVB
RASDAQ Bucharest 1996 1486 BVB
Sibiu Stock Exchange (futures) Sibiu 1997 BMFMS
Russia Russia Moscow Interbank Currency Exchange Moscow 1992 MICEX
Russian Trading System Moscow 1995 RTS
Saint Petersburg Stock Exchange Saint Petersburg 1811 SPBEX
Serbia Serbia Belgrade Stock Exchange Belgrade 1894 BELEX
Slovakia Slovakia Bratislava Stock Exchange Bratislava 1991 BSSE
Slovenia Slovenia Ljubljana Stock Exchange Ljubljana 1989 61 LJSE
Spain Spain Bolsa de Valores de Barcelona Barcelona Bolsa de Barcelona
Bolsa de Valores de Bilbao Bilbao Bolsa de Bilbao
Madrid Stock Exchange Madrid 1831 Bolsa de Madrid
Mercado Oficial Español de Futuros y Opciones Madrid 1989 MEFF
Bolsa de Valores de Valencia Valencia Bolsa de Valencia
Sweden Sweden Nordic Growth Market Stockholm 2003 NGM
Stockholm Stock Exchange Stockholm 1863 289 OMX Nordic Market
Switzerland Switzerland SIX Swiss Exchange Zürich 1850 SIX Swiss Exchange
Bern eXchange Bern 1888 BX
Turkey Turkey Borsa Istanbul Istanbul 1985 417 BIST
Ukraine Ukraine PFTS Ukraine Stock Exchange Kiev 2002 PFTS Stock Exchange
Ukrainian Exchange Kiev 2008 UX
United Kingdom United Kingdom London Stock Exchange London 1801 2800 LSE
PLUS Markets London 2004 [N 1] PLUS Markets

 

If you are a publicly traded company and trade on any of the exchanges above you will be affected by this directive.

Also, it is interesting to see that NYSE and NASDAQ both are represented in some ways on this list above. For example NYSE and Euronext are owned by the same parent company – The IntercontinentalExchange Group (ICE).  Euronext has connections to the markets in Belgium, France, the Netherlands, Portugal, and the UK.

The NASDAQ OMX seems to have its name (both OMX and NASDAQ) associated with several exchanges above including Armenia, Denmark, Estonia, Finland, Iceland, Sweden etc.

I’m not sure how these connections tie into this directive, but I think its interesting to point them out as the world becomes more global and exchanges become truly global how do regulations like the EU directive, with the clause above effect these global exchanges?  And what does that mean going forward?

It gets even more interesting when you look at the fact that the NYSE and the NASDAQ are both signatories of the Sustainable Stock Exchanges Initiative (SSEI): http://www.sseinitiative.org/.

The initiative comes from a collaboration between PRI, UNEP, UNCTAD, and UNGC and many of the partners in the initiative already have listing requirements for Sustainability reporting (ex, JSE , BM&F Bovespa).

To become a partner exchange SSEI asks that the exchange publicly endorses the following statement:

We voluntarily commit, through dialogue with investors, companies and regulators, to promoting long term sustainable investment and improved environmental, social and corporate governance disclosure and performance among companies listed on our exchange.

They have also both done their own GRI Sustainability Reports:

NASDAQ: http://www.nasdaqomx.com/digitalAssets/84/84295_2012nasdaqomxsustainabilityreportv2.pdf

NYSE: https://www.nyx.com/sites/www.nyx.com/files/14977_2012_cr_report_130803.pdf

AND

BREAKING NEWS out of Boston (Mar 26th, 2014) – as I write this article CERES, BlackRock (the largest asset manager in the world) and other major institutional investors released their recommendations for listing requirements on exchanges titled:

Investor Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting

These standards will be sent directly to the World Federation of Exchanges (WFE – the trade group for exchanges) who has launched a Sustainability Working Group to discuss and debate sustainability disclosure issues with member exchanges (virtually all global exchanges in the world).

Here’s what NASDAQ had to say:

“We need a joint solution that will help bring more consistent and comparable information to all markets, and will not leave any one exchange at a competitive disadvantage for taking leadership in this space,” NASDAQ OMX CEO Robert Greifeld said, speaking of the sustainability disclosure engagement process. NASDAQ OMX and Ceres have been working together for almost two years on this issue. 

NASDAQ OMX Vice Chairman Meyer “Sandy” Frucher stressed, “What we hope comes out of this process is strong support by exchanges around the globe to move together to create a more uniform approach to sustainability reporting.

“We committed last year, at the urging of institutional investors within Ceres’ Investor Network on Climate Risk, to provide thought leadership for our listed companies on sustainability reporting guidance,” Frucher continued. “To provide us with greater clarity on what investors want in such guidance, INCR, with support from the Principles for Responsible Investment, launched a global consultation among investors, and presented us with a proposal that we are now discussing with other exchanges.”

Here’s what BlackRock had to say:

“Cross border collaboration by stock exchanges will help shift public companies towards more comparable and meaningful disclosure of ESG (environmental, social and governance) risk factors,” said Gwen Le Berre, Vice President of Corporate Governance and Responsible Investment at BlackRock, the world’s largest asset manager with $4.3 trillion in assets under management. “This will enable investors to more accurately value companies and make better informed investment decisions.”

 

Here is the full release which has many other quotes from very important people in very important places demonstrating their commitment to moving this forward:

http://www.ceres.org/press/press-releases/world2019s-largest-investors-launch-effort-to-engage-global-stock-exchanges-on-sustainability-reporting-standard-for-companies

To read the release on the WFE launching its Sustainability Working Group, visit: http://www.businesswire.com/news/home/20140325006381/en/World-Federation-Exchanges-WFE-Launches-Sustainability-Working#.UzL2styt-_Y

The following exchanges came together to initially launch the WG:

  • BM&FBOVESPA
  • Borsa Istanbul
  • Borsa Malaysia
  • CBOE
  • CME
  • Deutsche Börse
  • InterContinental Exchange/NYSE
  • Johannesburg Stock Exchange
  • NASDAQ OMX
  • National Stock Exchange of India
  • Shenzhen Stock Exchange

So when you take all of this into account, why are you still reading this article, and why haven’t you already started working with me to get started on Sustainability reporting? ;)

That was a joke of course, but seriously – one way or another you will be affected – so get in front of these coming regulations/mandates because if you are not, you will be scrambling to get in compliance, and in a position of weakness compared to any competitors that are already doing it.  If you are already reporting, kudos to you, and you will be in a position of strength against your competitors – you have strategically positioned yourself well in the new global environment.   Just make sure you are covering all your bases and your reporting is in-line with whats expected and global standards.

This is not to mention the additional pressures for disclosure and transparency coming from:

  • Key Customers
  • Employees
  • Suppliers
  • NGOs
  • Investors
  • Government
  • Community
  • and other Stakeholders

Which I could write a whole additional book about.

I think its clear to see that the question is not SHOULD you start reporting, its HOW will you get started as quickly as possible.  Your window of opportunity to be prepared is closing, and the time is now to move on this if you have been questioning whether or not to get started.

At G&A we continue to watch these trends shaping the global markets.  We position ourselves at the intersection of corporations and the capital market.  We monitor the groups that shaping corporate valuation and reputation in today’s modern global marketplace.  If you have any questions or would like to talk more about these topics please reach out to me at lcoppola@ga-institute.com.

Best,

Louis D Coppola

For your reference here is a copy of the EU draft directive in full:
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52013PC0207

And Here is the EU portal for non-financial disclosures:
http://ec.europa.eu/internal_market/accounting/non-financial_reporting/index_en.htm

 

 

World Bank – G4 Reporting Pioneer!

559719_615384138487346_109625660_a[1]by Hank Boerner – Chairman, G&A Institute

Stay Tuned to the World Bank – it’s a Pioneer in G4 Sustainability Reporting!

The World Bank, composed of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), is a vital source of financial and technical assistance to developing countries around the world.
Since its inception in 1944, the World Bank has expanded from a single institution to a closely associated group of five development institutions.

Their mission evolved from the International Bank for Reconstruction and Development (IBRD) as facilitator of post-war reconstruction and development to the present-day mandate of worldwide poverty alleviation in close coordination with their affiliate, the International Development Association, and other members of the World Bank Group: the International Finance Corporation (IFC), the Multilateral Guarantee Agency (MIGA), and the International Centre for the Settlement of Investment Disputes (ICSID). Today the institution has a staff of engineers, financial analysts, economists, sector experts, public policy experts, and social scientists.

The newly-endorsed goals of the Bank are to end extreme poverty and promote shared prosperity by fostering growth at the bottom 40 percent of every country. To accomplish this, the World Bank — operating in over 130 countries around the world — offers its members low interest loans, interest-free credits, and grants as well as a wealth of technical assistance and knowledge sharing.

The World Bank sets an example for its clients and partners in reporting and public accountability.

So it is fitting that one of the first institutions to embrace the new GRI G4 (fourth generation) guidelines would be the World Bank. Spearheading the effort is Monika Kumar, the Bank’s sustainability coordinator. When the report landed on our platform, we reached out to Monika to ask her about the effort – here are highlights of our conversation.

G&A Institute: Monika, congratulations on being one of the first U.S. based institutions to embrace G4 for reporting. What was the experience like, moving from G3.1?

Monika Kumar: We started with the premise that the G4 would be similar to the G3.1, simply with a few additional indicators, but were pleasantly surprised. The emphasis on materiality was something that we had to understand better, and inform our internal stakeholders about. In our preparation, we reviewed each and every one of the Aspects and Indicators to assess the relevance to the World Bank, which falls within this unique mix of a public-financial-development institution. We also had to ensure to link content material to the Bank as a development institution, such as how we address issues of food security in our client countries, with the appropriate GRI indicators.

G&A: How long has the World Bank been reporting?

MK: Our first report was published in 2005, covering our 2004 fiscal year. We began first using G3 and then shifted to G3.1 for our Content Index and over time included the Financial Services and the Public Agencies Sector Supplements. In 2008, we moved to an on-line platform, with a standalone GRI index report where we addressed every GRI indicator, explaining inapplicable indicators where needed. So, every year, we’ve learned from our experience – trying to make our reporting process more efficient and the report more reader friendly.

G&A: Talk about your Materiality process – what is involved?

MK: G4 required that we dedicate a considerable amount of time to carrying out a materiality assessment and disclose that methodology in the specific indicator responses (G4-19-21).

We had to develop a methodology that applied to our development-oriented business model, incorporated feedback from our myriad stakeholder groups (clients, civil society, investors, to name a few), and simultaneously allowed us to determine the sustainability impact of the aspect considered.

We looked at the AA 1000 five-step process, ISO 14001, and the Natural Step process, and then created our own approach to meet our specific needs – one that looks at financial and reputational risk, stakeholder concern, and sustainability impact. This is the first time that we applied the approach and since G4 is so new, we really had no good examples to follow. You will note we have a simplified version of the methodology on our website currently. We hope next year to validate the process and upload a more robust response.

G&A: What’s the worldview of the institution as you prepare your “progress report” for the user base?

MK: Lots of exciting things are happening at the Bank right now. We are undergoing a period of change, one that would help us achieve the two goals we have set: reducing extreme poverty globally to 3 percent by 2030, and boosting incomes for the bottom 40 of the population in developing countries. President Kim has made it clear that sustainability frames these two goals – a sustainable path of development and poverty reduction would be one that: (i) manages the resources of our planet for future generations, (ii) ensures social inclusion, and (iii) adopts fiscally responsible policies that limit future debt burden.

In this effort, addressing climate change is key. We are currently working with 130 countries to take action on climate change—helping cities to adopt green growth strategies and develop resilience to climate change, developing climate-smart agricultural practices, finding innovative ways to improve both energy efficiency and the performance of renewable energies, and assisting governments to reduce fossil fuel subsidies and put in place policies that will eventually lead to a stable price on carbon.

A lot is happening, but I’m really excited that we began tracking the GHG footprint for specific sectors including energy and forestry within our lending portfolio. Within the next three years we expect to be publishing this information – as currently we only report on our corporate carbon footprint – in both our annual sustainability review and the Carbon Disclosure Project (CDP). We are working towards more comprehensive reporting.

This is important, not just for us being a model of a sustainable institution, but also for our stakeholders, especially sustainable and responsible investors who invest in our “green bonds,” that benefit projects related to climate change.

We are proud to say that the World Bank helped start the development of the quickly-expanding green bond market – the program recently reached a milestone of USD 4 billion in issuance, helping create and develop a market that raises funds to support climate activities – one that will support future climate finance.

I’ll stop there and urge the reader to read more about the Bank’s efforts to achieve its ambitious goals in the Sustainability Review online (http://crinfo.worldbank.org).

G&A: Thank you Monika. We will be watching as other financial sector institutions transition to G4 guidelines over the next two years. The World Bank example will be helpful to the financial sector partners, we’re sure.

Footnote: As we prepared this blog post, news came from the Global Reporting Initiative (GRI) that as of November 4, 2013, 84 organizations had signed on to the new initiative – the G4 Pioneers Program. Organizational Stakeholders (OS), organizations that support the GRI, commit to producing a G4 report in their next (reporting) cycle. The program is interactive, and designed to be knowledge-sharing (webinars, focus groups). We will be following the Pioneers and will bring you updates on the program’s progress.

Erika Karp of UBS in the Spotlight / Farewells

The June 6, 2013 UBS Message:
Tonight marks the last edition of the UBS Global Portfolio Manager’s Spotlight…

Farewell to UBS’ Spotlight — Erika Karp in the Sustainability Spotlight

One of the driving forces in gaining greater recognition for and appreciation of sustainable investing is Erika Karp, Head of Global Sector Research – UBS Investment Bank. Her weekly newsletter “spotlighted” capital market trends and always included value-added information about ESG considerations and focus on sustainable investing – the term that Erika has championed in public discussions. Continue reading

A “Grade A” and Other Recognitions for CalPERS

One of the state public employee systems that we track is CalPERS — long a leader in advancing effective corporate governance and now a leader in embracing and communicating about ESG performance as part of their investment strategy.

The California Public Employees Retirement System (CalPERS) is the largest state investment fund in the USA, with Assets Under Management of US$257 billion as of March 31, 2103. More than 1.5 million public employees are covered by the system (including 550,000 retirees). Continue reading

Call It What You Like – Guest Comments from Lisa Woll – US SIF

G&A Institute is a member of the Forum for Sustainable and Responsible Investment (US SIF) in the U.S.A. As the organization convened for its annual conference, US SIF CEO Lisa Woll published this update – we are sharing it with you today.

More than 11 percent of investments under U.S. Professional management were selected for companies’ financial performance and their social and environmental responsibility in 2012.

Continue reading