Proof of Concept for Sustainable Investing: The Influential Barron’s Names the Inaugural “The Top 100 Sustainable Companies — Big Corporations With The Best ESG Policies Have Been Beating the Stock Market.”

By Hank Boerner – Chairman and Chief Strategist, G&A Institute

Barron’s 100 Most Sustainable Companies

Barron’s is one of the most influential of investor-focused publications (in print and digital format) and a few months ago (in October), the editors published the first of an ongoing series of articles that will focus on ESG performance and sustainable investing, initially making these points:

  • Barron’s plans to cover this burgeoning style of investing on a more regular basis. A lot of possible content that was developed was left on the cutting room floor, the editors note.
  • Says Barron’s: “We are only in Version 1.0 of sustainable investing. 2.0 is where ESG is not a separate category but a natural part of active management.”
  • And:  “Given the corporate scandals of recent days (Wells Fargo, Equifax, Chipotle, Volkswagen, Valeant Pharmaceuticals), it is clear that focus on companies with good ESG policies is the pathway to greater returns for investors!”

The current issue of Barron’s (Feb 5, 2018) has a feature article and comprehensive charting with this cover description:

The Top 100 Sustainable Companies – Big Corporations With the Best ESG Policies Have Been Beating the Market.”

Think of this as proof of concept: The S&P 500® Index Companies returned 22% for the year 2017 and the Barron’s Top 100 Sustainable Companies average return was 29%.

The 100 U.S. companies were ranked in five categories considering 300 performance indicators.  Barron’s asked Calvert Research and Management, a unit of Eaton Vance, to develop the list of the Top 100 from the universe of 1,000 largest publicly-held companies by market value, all headquartered in the United States.

Calvert looked at the 300 performance indicators that were provided by three key data and analytic providers that serve a broad base of institutional investors:

  • Sustainalytics,
  • Institutional Shareholder Services (ISS)
  • and Thomson Reuters ASSET4 unit.

Five umbrella categories were considered:

  • Shareholders
  • Employees
  • Customers
  • Planet
  • Community

There were items considered in the “shareholders” category, like accounting policies and board structure; employee workplace diversity and labor relations; customer, business ethics and product safety; planet; community; GHG emissions; human rights and supply chain.

We can say here that “good governance” (the “G” in ESG) is now much more broadly defined by shareholders and includes the “S” and “E” performance indicators (and management thereof), not the formerly-narrow definitions of governance. Senior managers and board, take notice.

Every company was ranked from 1-to-100, including even those firms manufacturing weapons (these firms are usually excluded from other indexes and best-of lists, and a number of third party recognitions).

Materiality is key: the analysts adjusted the weighting of each category for how material it was for each industry. (Example: “planet” is more material for chip makers using water in manufacturing, vs. water for banking institutions – each company is weighted this way.)

The Top 100 list has each company’s weighted score and other information and is organized by sector and categories; the complete list and information about the methodology is found at Barron’s.com.

The Top 5 Companies overall were:

  • Cisco Systems (CSCO)
  • salesforce.com (CRM)
  • Best Buy (BBY)
  • Intuit (INTU)
  • HP (HPQ)

The 100 roster is organized in categories:

  • The Most Sustainable Consumer Discretionary Companies (Best Buy is at #1)
  • The Most Sustainable Financials (Northern Trust is #1) – Barron’s notes that there are few banks in the Top 100. Exceptions: PNC Financial Services Group and State Street.
  • The Most Sustainable Industrials (Oshkosh is ranked #1)
  • The Most Sustainable Tech Outfits (Cisco is at the top)

Familiar companies names in the roster include Adobe Systems, Colgate-Palmolive, PepsiCo, Deer, UPS, Target, Kellogg, Apple, and Henry Schein.

Singled out for their perspectives to be shared in the Barron’s feature commenting on the ESG trends: John Wilson, Cornerstone Capital; John Streur, Calvert; Calvet Analyst Chris Madden; Paul Smith, CEO of CFA Institute; Jon Hale, Head of Sustainability Research at Morningstar.

Calvert CEO John Streur noted: “This list gives people insight into companies addressing future risks and into the quality of management.”

Top-ranked Cisco is an example of quality of management and management of risk: The company reduced Scope 1 and 2 GHG emissions by 41% since 2007 and gets 80% of its electricity from renewable sources.

This is a feature article by Leslie P. Norton, along with a chart of the Top 100 Companies.

She writes: “…Barron’s offers our first ranking of the most sustainable companies in the U.S. We have always aimed to provide information about what keenly interests investors – and what affects investment risk and performance…” And…”what began as an expression of values (“SRI”) is finding wider currency as good corporate practices…”

The complete list of the top companies is at Barron’s com. (The issue is dated February 5th, 2018)  You will need a password (for subscribers) to access the text and accompanying chart.

For in-depth information: We prepared a comprehensive management brief in October 2017 on Barron’s sustainable coverage for our “G&A Institute’s To the Point!” web platform: https://ga-institute.com/to-the-point/proof-of-concept-for-sustainable-investing-barrons-weighs-in-with-inaugural-list-of-top-100-sustainable-companies/

A Big Year, 2018 – Tipping Points For Developments in Corporate Sustainability & Sustainable Investing…

by Hank Boerner – Chair and Chief Strategist – G&A Institute

Volume & Velocity!
Those may be well the key characteristics of developments in corporate sustainability and in sustainable in the year 2018.

Linda-Eling Lee, Global Head of Research for MSCI’s ESG Research Group and her colleague Matt Moscardi (Head of Research Financial Sector, ESG) this week described what they are projecting in the traditional early-in-the-year setting out of key ESG trends to watch by the influential MSCI ESG team:

Bigger, faster, more – that’s how Linda describes the “onslaught of challenges happening soon and more dramatically that many could have imagined” in the corporate sector” (including public policy, technology, and climate change as key factors).

Investors (in turn) are looking for ways to better position their portfolios to navigate the uncertainty of the 2018 operating environment in the corporate sector.

As the “heads up” for investors and companies– the five key 2018 trends projected by MSCI’s ESG researchers/analysts:

  • Investors will be using ESG “signals” to navigate the size/shape of the Emerging Markets investment universe to pick the winners for portfolios.
  • The first steps are coming in “scenario testing” for climate change (this is systematically looking at risks emanating from company carbon footprints across asset classes, with short- and long-term transition scenarios).
  • The fixed-income universe will see acceleration (velocity) with the alignment of ESG frameworks by investors across all asset classes.
  • And this is very important for the corporate sector:

Investors are looking beyond the growing volume of corporate disclosure and reporting for data.
Keep In Mind: 65% of a company’s rating by MSCI is based on data sources beyond the corporate reporting!

 

  • MSCI sees 2018 as the Year of the Human – it’s about human talent, talent, talent!  That is, what companies do to help in the transitioning to new working environments (with the changes brought about by automation, artificial intelligence, robotics) that will be factored into the analysis of public companies by the MSCI ESG team, and measured over time (for outcomes over a 3-year horizon).

Linda Eling-Lee observed:  These are the major trends that we think will shape how investors approach the risks and opportunities in 2018.

Already, at the Davos meetings this week, major global firms in IT are creating an initiative to “tech-reskill” one million people to meet the global skills gap challenge inherent in the “Fourth Industrial Revolution” (firms are Cisco, Accenture, CA Technologies, HP, Infosys, Salesforce, SAP, Tata Consultancy, others).

What we think company managements / boards should expect in the “volume and velocity” context:  many more investors (the volume / especially large fiduciaries) are embracing comprehensive ESG factors in their analysis and portfolio management approaches with a faster uptake of this trend among the mainstream elements of the capital markets players (the velocity).

Voluntary reporting by companies has its limits in providing a full picture of the companies’ ESG risks,” the MSCI ESG researchers note. “In 2018 we anticipate that the disclosure movement reaches a tipping point, as investors seek broader data sources that balance the corporate narrative and yield better signals for understanding the ESG risk landscape actually faced by portfolio companies”

# # #

Buzzing:  The Larry Fink CEO-to-CEO Message for 2018

Speaking of significant influence, the head of the world’s largest asset management firm sent an important CEO-to-CEO letter to stress the importance of companies having “a social purpose”

Background:  BlackRock engages with about 1,500 companies a year on a range of ESG issues, meeting with boards of directors and CEOs, and other shareholders when that is needed.

Each year, CEO Fink reaches out to the CEOs of companies in portfolio to alert them to the key issues in focus for BlackRock (as fiduciary).

For 2017-2018, the key Investment Stewardship priorities are:

  • Corporate Governance / Accountability
  • Corporate Strategy
  • Executive Compensation Policies
  • Human Capital (again — there’s the focus on talent management)
  • Climate Risk Disclosure

Larry Fink is the Founder, Chair, and CEO of BlackRock and heads the firm’s “Global Executive Committee.” BlackRock is about to celebrate its 30th anniversary in 2018.  It now manages more than US$6 trillion (Assets Under Management-AUM).

Of this, $1.7 trillion is in active funds managed by the company.  As one of the world’s most important and influential (and trend-setting) fiduciaries BlackRock engages with company management to drive the sustainable, long-term growth clients need to meet their goals.

“Indeed,” CEO Fink said in his letter to CEOs, ”the public expectations of your company has never been higher.”

“Society is demanding that companies, both public and private, serve a social purpose…to prosper over time, every company must show it makes a positive contribution to society.”

“Without a sense of purpose, no company…can achieve its full potential…it will ultimately lose the license to operate from key stakeholders…”

# # #

The Key Word on Responsible Investing Growth is Global, RBC Reported

In October 2017, RBC Global Asset Management (RBC GAM) conducted its second annual global survey of asset managers.  Two-out-of-three respondents said they used ESG considerations, and 25% will increase their allocations to managers with ESG investment strategies to offer in 2018.

Does ESG mitigate risk…or drive alpha?  Answers were mixed.  Some asset managers are increasing their allocation and others are skeptical, especially about the accuracy and value of the available data on corporate ESG performance.

For 2018:  RBC sees responsible investing as a global trend, with many managers incorporating ESG in analysis and portfolio management due to client (asset owner) demand.

# # #

Tracking Company Behaviors – The RepRisk ESG Risk Platform

One of the leading producers of research and business intelligence for the banking and investment communities is RepRisk, based in Zurich, Switzerland. The firm started in 2006 to serve bank clients wanting to be alerted to real or possible risk issues in the corporate sector.

RepRisk developed artificial intelligence and data mining tools, that along with human analysis, “reduces blind spots and sheds light on risks that can have reputational, compliance and financial impacts on a company…”

Today, there are 100,000-plus companies in the RepRisk database (both listed and non-listed, from all countries and sectors). The firm started out monitoring 100 companies for clients.  The daily screening is delivered in 16 languages and about 50 companies a day are added for screening.  Is your company one of those tracked?  What are the risks tracked?

# # #

Does Adoption of ESG Approaches Sacrifice Corporate Performance?

Robeco, one of the world’s leading financial services firms (based on The Netherlands), and a sister company of RobecoSAM, managers of the Dow Jones Sustainability Indexes, looked at the question of whether or not the adoption of ESG / sustainability approaches “cost” the company performance.

Adopting sustainability approaches does require investment, but companies with poor ESG performance also have greater risks and “seriously under-perform” their peers.  And investors “win” by investing in the better performers (that reduce risk, strategize around climate change, reduce bad behaviors).

Says Robeco:  “…a growing body of evidence concludes that companies which are progressively more sustainable today will reap the rewards of the future…and it may save their businesses…”

The Company’s positioning:  “Robeco is an international asset manager offering an extensive range of active investments, from equities to bonds. Research lies at the heart of everything we do, with a ‘pioneering but cautious’ approach that has been in our DNA since our foundation in Rotterdam in 1929. We believe strongly in sustainability investing, quantitative techniques and constant innovation.”

# # #

CalPERS, America’s Leading Public Employee System – Corporate Engagement on Diversity Issues

“CalPERS: is the California Public Employee’s Retirement System, the largest state investment fund in the United States with about $350 billion in total fund market AUM.

CalPERS sent letters to 504 companies in the Russell 3000 Index to engage on the issue of diversity on the companies’ boards of directors.

CalPERS request:  the company should develop and then disclose their corporate board diversity policy, and the details of the plan’s implementation (to address what CalPERS sees as lack of diversity in the companies).

“Simply put, board diversity is good for business,” said Anne Simpson, CalPERS’ investment director for sustainability.

Starting in Fall 2017 and into 2018, CalPERS is monitoring companies’ progress on the matter and making it a topic for engagement discussions.  If a company lags in progress, CalPERS will consider withholding votes from director-candidates at annual voting time (at annual meetings).

# # #

The Climate Action 100+ Investor Initiative

 Sign of the times: More than 200 investors supporting action on climate change by the corporate sector are focusing on the board room of such companies as ExxonMobil, Boeing, GE, P&G, Ford, Volvo, PepsiCo, BP, Shell, Nestle, Airbus, and  other  enterprises (the “100” plus companies in focus) to dialogue on their GhG emissions as contributions to global warming.

The 100 corporates are said to account for 85% of the total GhG emissions worldwide – they need to step up, says the Coalition, and develop strategies and take action (and disclose!) to address the issue.  The investors manage more than $26 trillion in AUM, and are coordinating their efforts through five partnerships…

# # #

McKinsey Weighs In – ESG No Longer “Niche” – Assets Are Soaring

The McKinsey & Co. experts studied ESG investing and reported to corporate clients that of the $88 trillion in AUM in the world’s capital markets (in late-October), more than $1-in-$4 (25%-plus) are invested according to ESG principles.  That’s a growth of 17% a year, and ESG has become “a large and fast-growing market segment.”

# # #

Investors Are Not Forgetting – Rana Plaza Still in Focus

One of the characteristics of the sustainable investing market players is having-the-memory-of-the-elephant.  Do you remember the Rana Plaza apparel factory tragedy of five years ago?  Most media reporters and commentators have moved on to other crisis events.

Investors are signing on to a statement – “Investors Call on Global Brands to Re-commit to the Bangladesh Accord for Fire and Building Safety” – with focus on the upcoming fifth anniversary of the statement signed (in May 2013) after the accident that killed more than 1,000 workers in Bangladesh.

Reforms were promised in the Accord by industry participants and trade unions.

# # #

Another Example of Investor Action – McDonald’s

“In a win for the health of the world’s oceans,” began the As You Sow shareholder advocacy group announcement, “McDonald’s Corp. agreed to end the use of polystyrene foam packaging – worldwide! – – by the end of 2018.

The advocacy group had campaigned to have the fast food retailer stop using foam cups and takeout containers.

A shareholder proposal filed by As You Sow in May 2017 requested the company stop using polystyrene and 32% of shares voted (worth $26 billion at the time) voted to support.

# # #

Finally – What a Low-Carbon Economy Looks Like – California Dreamin’

The State of California is the world’s sixth largest economy all by itself!

While President Donald Trump upon taking office fulfilled one of his signature campaign promises – beginning the process of withdrawal from the historic COP 21 Paris Accord on climate change – California Governor Edmund (Jerry) G. Brown, Jr is moving ahead with his state’s plans to move to a low-carbon economy.

The Global Climate Change Action Summit is scheduled for September 2018 in San Francisco, California.

The theme, as described by the governor:  “Sub-national governments” (cities & states), business sector leaders, investors and civil society leaders will gather to “demonstrate the groundswell of innovative, ambitious climate action from leaders around the world, highlight economic and environmental transition already underway and spur deeper commitment from all parties, including national governments.”

Says the governor: “California remains committed to a clean energy future and we welcome the responsibility to lead on America’s behalf…”

# # #

Coming:  ISS QualityScores for “E” and “S” for 1,500 Companies

As we communicated in early January, Institutional Shareholder Services (ISS) has expanded its long-term focus on corporate governance to encompass “E” and “S” issues for its QualityScore product for fiduciaries (its client base).  In late-January it is expected that ISS will issue the first wave of scores for 1,500 companies in six industries, expanding to 5,000 companies in additional industries by mid-year 2018.

The first 1,500 companies to be scored are in Autos & Components; Capital Goods; Consumer Durables & Apparel; Energy; Materials; and, Transportation.

The QualityScore is a Disclosure and Transparency Signal that investor-clients are seeking, says ISS, and an important resource for investors to conduct comparisons with corporate peers.

Keep in mind:  ISS serves its 1,700 clients with coverage in 117 global markets.

# # #

There’s much more information on this and other critical 2018 tipping points for corporate managers and investment professionals in the comprehensive management brief from the G&A Institute team posted on our G&A Institute’s “To the Point!” platform for you.

We’re presenting here more details on the MSCI trends forecast, the BlackRock CEO-to-CEO letter about Social Purpose for the Corporation, California’s move toward a low-carbon economy,  RepRisk’s focus areas for corporate behavior…and a host of additional important developments at the start of the year 2018 that will shape the operating environment throughout the year – and beyond! Read the brief here!

The Important Group of ESG Rankers for Institutional Investors Expands to a Significant Player — Institutional Shareholder Services (ISS)

Traditional Corporate Governance Focus Expanding to Encompass  ISS Environmental & Social QualityScores for 1,500 Public Companies Coming in January… Expanding to 5,000 Companies in Q2…

by Hank Boerner – G&A Institute Chair

A significant new player is now entering the mix of the growing number of organizations providing institutional investors with ESG rankings and data.

At G&A Institute, we’ve been tracking the growth of these organizations (such as MSCI, Sustainalytics, RobecoSAM, Bloomberg, Thomson Reuters, and others) and work with our clients to help managements understand, optimize and utilize these important intelligence points coming from the rapidly-growing number of investors considering ESG.

Founded in 1985 as Institutional Shareholder Services Inc., ISS is the world’s leading provider of corporate governance and responsible investment solutions for asset owners, asset managers, hedge funds, and asset service providers. Institutional investors today rely on ISS’ expertise to help them make informed corporate governance decisions, integrate responsible investing policies and practices into their strategy, and execute upon these policies through end-to-end voting.

Among the issues monitored, analyzed and perspectives and opinions offered to the investors by ISS:  board room makeup; qualifications of individual board candidates standing for election; CEO compensation; separation of the posts of chair of the board and chief executive officer; proposed transactions such as merger or acquisition; shareholder rights; transparency and disclosure of board and C-suite activities; “over-boarding by directors”…and more.

Over the decades ISS has been a powerful and very visible force in annual corporate proxy voting issues, offering advice to the client base to help the institutions exercise their fiduciary duties, including the mechanics of the voting process during the annual electoral season.

Consider the influence of ISS in the capital markets:  117 global markets covered; 40,000 corporate meetings reviewed; on behalf of 1,700 global institutional investor clients.

Now, “E” and “S” along with “G” issues are coming into sharp focus for ISS – due to the demand of its institutional clients – and included in the QualityScore process.

Tune in now to an important development that significantly expands the influence of ISS and communicates new dimensions of “G” (governance) into the ESG space (E=environmental, S=social, societal issues).  The E and S QualityScore builds on ISS’s market-leading Governance QualityScore, which provides a measure of governance risk, performance, disclosure and transparency in Board Structure, Compensation, Shareholder Right, and Audit & Risk Oversight.

The E&S QualityScore, says ISS, provides a measure of corporate disclosure practices and transparency to shareholders and stakeholders.  This is the Disclosure and Transparency Signal that investor-clients seek, and is a resource that enables effective comparison with company peers.

ISS had been an independent organization, then was acquired by MSCI, and later divested, becoming a unit of the P/E firm Vestar Capital; it was purchased by Genstar Capital in October 2017.  To rebuild the firm’s ESG capabilities lost as a result of the 2014 spinoff from MSCI,  ISS in September 2015 acquired Ethix SRI Advisors, one of Europe’s leading ESG analytics and advisory firms with offices in Scandinavia.

In January 2017, ISS also acquired IW Financial, one of the leading ESG analytics firms in the United States (based in Maine), and in June of 2017 acquired the climate investment data unit of Zurich-based South Pole Group.

ISS’s initial expansion beyond “G” to include Environmental and Social issues in the QualityScore, which will be announced on January 18, covers companies in six industries:  (1) Autos and Components; (2) Capital Goods; (3) Consumer Durables & Apparel; (4) Energy; (5) Materials; and, (6) Transportation – roughly 1,500 companies in all.

Public company managements have been invited to respond to the new “E&S” data verification process for their company (the period ends January 12th).

In 2Q the program expands to include 3,500 more corporate entities in other industries (the total corporate universe in focus by mid-year will be 5,000-plus public companies).

These ratings will be a critical part of a company’s ESG profile for the rapidly expanding number investors with Assets Under Management (AUM) that are considering ESG in their investment decision-making.  This number, as of the latest 2016 US SIF survey includes US$8.72 trillion out of $40.3 trillion total AUM in the United States.  This is now $1-out-of-every-$5   in the U.S. capital markets –and globally the numbers are even more striking with the latest GSIA report showing even larger percentages and rapid expansion in every other part of the world.

The G&A Institute team will be communicating much more detail about this important new initiative by ISS in the weeks ahead, through our various communications channels.  For more information, contact EVP Louis D. Coppola at: lcoppola@ga-institute.com or ISS at ESGHelpdesk@Issethix.com

There are details here on the ESG QualityScore:
https://www.issgovernance.com/file/faq/es-key-issues-discloure-transparency-qualityscore.pdf

For those interested in the Quality Score for Core Corporate Governance Practices in Focus:https://www.issgovernance.com/file/products/1_QS-2017-Methodology-Update-27Oct2017.pdf

Information on ISS Corporate Solutions is here:  https://login.isscorporatesolutions.com/galp/login

AN IMPORTANT UPDATE ON ISS’ EXPANSION INTO ESG
A thorough exploration of ISS’ new E and S QualityScores is available on the G&A Institute’s To The Point! platform including a conversation with Marija Kramer, Head of ISS’ Responsible Investment Business. This important brief is available without subscription, with our compliments by clicking here.

SEC Proposes Important Amendments to Corporate Disclosure & Reporting – Changes Are in the Wind — But Corporate ESG Disclosure Is Not Addressed in the SEC Proposals …

October 12 2017 – by Hank Boerner – Chair, G&A Institute

On October 11, 2017 important news was coming from the Securities Exchange Commission (in Washington DC) for corporate leaders and investment professionals: a comprehensive package of proposed changes (amendments) to existing rules for corporate disclosure and reporting was released for public examination and comment.

There are more than 250 pages of proposed changes and adjustments released for your reading (the document will be published now in the Federal Register for broad communication to stakeholders).

You’ll remember the April 2016 activities as SEC released a 200-plus page Concept Release that addressed a range of issues that could result in revamping the overarching parts of Regulation S-K and parts of Regulation Fair Disclosure (“Reg FD“) and other corporate disclosures required by Federal statutes.

We told you about this in our post of May 13, 2016.
Link: http://ga-institute.com/Sustainability-Update/tag/sec-concept-release/

We said then: Maybe…U.S. Companies will be required…or strongly advised…to disclose ESG Data and related business information…

There were great hopes raised when the Commission in circulating the Concept Release document devoted more than a dozen pages to discussion about ESG, sustainable investing, the possibility of “guidance” or perhaps amending rules to meet investors’ expectations that public companies would begin, expand, improve on, ESG disclosure.

Numerous investor interests provided comments to the SEC in support of the possibilities raised by SEC in the dozen pages of the Concept Release devoted to ESG et al.

The US SIF — the Forum for Sustainable and Responsible Investing, a very influential trade association of asset owners and managers — provided important input, as did the CFA Institute (the U.S.-based, global certification organization for financial analysts and portfolio managers worldwide).

Disclosure of material ESG issues was a key concern of the numerous responders in the public comment period.

This week’s development: The SEC Commission proposed amendments to existing regulations that are part of the “Modernization and Simplification of Regulation S-K,” citing a different package of legislation. (The FAST Act Modernization, which in part will the sponsors said will attempt to “prune the regulatory orchard” — this is part of the Fixing America’s Surface Transportation Act or “FAST”.)

The Commission referred to the proposals as an important step “…to modernize and simplify disclosure requirements for public companies, investment advisors and mutual fund (investment) companies under the FAST Act…”

This, said recently-appointed SEC Chair Jay Clayton, “…is the most effective way to update SEC rules, simplify forms and utilize technology to make disclosure more accessible…”

The proposed amendments were characterized as part of the overall, long-term review of the SEC’s disclosure system. Thus, the SEC said the proposed amendments reflect “perspectives developed during the staff’s broader review…including public input on the prior Concept Release.

The details are available for you in a new 253-page document, at: https://www.sec.gov/rules/proposed/2017/33-10425.pdf

You have 60 days of open comment period ahead during which to express your views on the proposals.

The proposed amendments mostly address corporate governance (G”) issues that if adopted would:

• Change such items as Description of Property**; the MD&A; Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act; Outside Cover Page of the Prospectus.

• Revise rules and forms to update, streamline and improve the SEC disclosure framework by eliminating risk factor examples listed in the disclosure requirement and revising the description of “the property requirement” to emphasize the materiality threshold**”.

Note that while “property” is usually a facility, this does not always apply to the service sectors.

• Update rules as needed to reflect changes since the rules were first adopted or last amended. (Including, “corporate governance” items, such as for Board Auditing, Compensation Committee operations.)

• Simplify the overall disclosure process, including treatment of confidential information; also, changes would be made to the MD&A to allow for “flexibility in discussing historical periods”. (The discussion on confidential info runs for pages – important to read for corporate managers involved in disclosure.)

• Treatment of subsidiaries.

• Incorporate technology to improve access to information requiring data tagging (XBRL) for items on the cover page and use of hyperlinks (HTML) by reference and in the EDGAR system.

Again – the public now has 60 days to submit comments on the proposed amendments (to such statutory authority as the Securities Act of 1933; Securities Exchange Act of 1934; Investment Company Act of 1940; and, regulations under these landmark securities protection laws of the land).

There are numerous sections within the proposed amendment document where the Commission is inviting public comment. To submit your comments, see: http://www.sec.gov/rules/proposed.shtml — file#S7-08-17

Disappointing News: There is no mention that we could find in the proposal document that addressed the many comments that were directed to the SEC staff in response to the earlier Concept Release by sustainable & responsible investor interests. And, in many investor conversations with SEC staff that acknowledged the growing importance of disclosure regarding corporate sustainability and ESG performance.

No mention of: Climate Change. ESG. Responsible Investment.

This is very troubling — no doubt members of the investment community and corporate leaders well along on their sustainability journey will be providing their perspectives to SEC — and the media, and elected officials — on this important oversight.

SEC guidance for corporate reporters regarding their ESG, sustainability, responsibility, citizenship, etc disclosures and reporting activities would be very helpful – right?  Of course, we are in a new political environment now, and perhaps that is helping to shape the agenda at the Commission as “reforms” are drafted and distributed for public consumption.

There is much more news to come when the response to the announcement begins. Stay Tuned!

P.S. – if you/your organization responds to the draft proposals, please do let G&A know so we can publicize your perspectives.

Musing About the Alphabet Soup of ESG – SRI – CSR … et al!

Blog post

March 16, 2017

by Hank Boerner and Louis CoppolaG&A Institute

Often in our conversations with managers at companies that are new to corporate sustainability and especially new to publishing corporate sustainability reports, we often move into exploration of the various terms and titles applied to corporate sustainability.

SRI.  ESG.  Sustainability.  Corporate Citizenship.  Corporate Responsibility. 

Or, Corporate Social Responsibility.  Shorthand:  CSR, CR.  What else!

And on the investment side, in our discussions with financial analysts, or asset managers, we’re discussing socially responsible investing, sustainable & responsible investing (both SRI) and more recently, sustainable & responsible & impact investing — the “S&R&I”).

This alphabet soup of titles, characterizations, approach classifications and so on is usually confusing to corporate managers not well versed in matters related to corporate sustainability.

And, to investors new to sustainable investing, sustainable & responsible investing, impact investing, analyzing corporate ESG analytics…those managers also have questions on what all these terms really mean (And ask: is there a substantive difference between terms?).

Each year as the data partners for the Global Reporting Initiative (GRI) in the U.S.A., United Kingdom and Republic of Ireland, we analyze and database more than 1,500 reports each year (most are published by corporations; there are also institutional and public sector reports). Here we see firsthand every day this alphabet soup of terms playing out:

  • Corporate Responsibility / Corporate Social Responsibility (CR/CSR)
  • Corporate Citizenship (an older but still popular titling, especially among large-caps)
  • Corporate Sustainability (more often leaning toward environmental management, growing out of the traditional EHS functions at operating companies)
  • Environmental Update / Progress Report
  • Corporate Ethics

The Investment Community Point-of-View

And for investors:  There is also Faith-based investing and ethical investing, and a few other terms.  (“Green Bonds” are coming on strong!)

Many institutional investor  — asset owners and their managers, and their analysts — are seeming to favor “ESG” because it better captures the entirety of the three main issues buckets (Corporate Environmental, Social and Corporate Governance strategies, performance and issues) that make up what most investors consider to be a pretty good definition of corporate sustainability.

As corporate sustainability consultants and advisors, working closely with managements to help them effectively engage with investors on ESG issues, and so we see the term ESG becoming more and more of a preferred term for these discussions.

Consider, too, the familiar Bloomberg terminal on the desks of many investors is helping to bring volumes of corporate ESG data through the Bloomberg ESG Dashboard.

The Views of the Professional Analyst

The CFA Institute, the global education, training, testing and certification, and professional standards organization for financial analysts (“Charterholders” use the CFA professional designation) addressed this alphabet soup in its recent guide for investment professionals — “Environmental, Social and Governance Issues in Investing” (published in 2016).

The guide authors explain:  “The practice of environmental, social and governance issues in investing has evolved significantly from its origins in the exclusionary screening of listed equities on the basis of moral values. A variety of methods are now being used by both value-motivated and values-motivated investors considering ESG issues across asset classes.”

(The guide was authored by Usman Hayet, CFA; Matt Orsagh, CFA, CIPM; with contributions by Kurt N. Schacht, JD, CFA; and Rebecca A. Fender, CFA.)  Consider their views:

E:  Looking at the environmental components (the “E”), CFA Institute, investor concerns include climate change and fossil fuel assets [becoming stranded], water stress…that means that corporate ESG KPIs should be carefully examined.

S:  Looking at the social (“S”), the authors point out that labor relations can have a direct and significant impact on financial performance.

G:  Looking at corporate governance (“G”), the authors note that these were previously seen as a concern for value-motivated investment, and the E and S issues were relevant mainly for values-motivated investors.  Not anymore  — ESG issues are relevant for all long-term investors.

The CFA authors explain that there are various labels for the same issues and ESG common theme underlying the various labels is an emphasis is on ESG issues.

We Are Leaning in the Direction of….

In our work we prefer to use “Sustainability” or “ESG”, which we think best encapsulates the entirety of what we consider to be the issues in focus for institutional and individual investors.  And therefore we advise that the company’s ESG key performance indicators should be a priority concern for the board, C-suite and various level of management and corporate function areas, because of the importance of access to capital, cost of capital, and so on.

The corporate ESG performance and reporting on same might be positioned under an oversight umbrella in the corporate structure. We see these ESG activities being in the province of legal, public affairs, human resources, supply chain management, operations, EHS, investor relations, finance, corporate communications, and so on.

At times, however, we do find that some people in the corporate community hear the term “Sustainability” they automatically think only of environmental-related issues — (“E”) which of course, are just one part of what we consider sustainability to be.

And yes, all of this is still not clear cut, is it?  Varying terms and titles will probably be used for a while.

As explained, we prefer ESG when we are working with our sustainability consulting clients because this term includes the three main issue areas or buckets of issues — and says what it means. Using “ESG” tends to  make sure that it’s clear that our work includes three “bucket” areas – Environmental, Social and Corporate Governance.  (Not just Environmental!)

And the clearer we can be with our terminology, and more specific, the better off we will all be.

But Investors Are Not Asking….

Managers at many companies that we communicate with, especially in our investor relations sustainability consulting, will say, “Why don’t our analysts ask questions about sustainability on our quarterly calls?”

Erika Karp, formerly of UBS and founder of Cornerstone Capital in New York City often responds to this key question during her public presentations (Cornerstone is an ESG-focused investment firm.)

Erika:  “You’re wrong, they are asking!  If you peel back the layers of the “E” (climate, biodiversity, water, energy, waste etc); the “S” (employee retention, training, community engagement, human rights, labor contracts, benefits); and the “G” (executive compensation, proxy resolutions, board makeup, board independence, board skills, board diversity, critical issues management, and oversight of the company’s key functions) — then you can listen to the quarterly calls and you will see that you are in fact getting questions on sustainability (or ESG issues).”

We agree with Erika!  And this line of discussion points even more to the problems with our terminology in this space.

Of course, even though the analyst may not be asking: “Hey, so what about your sustainability?” the analysts and asset managers on your  calls may be or are asking about the individual elements that make up sustainability, and some of these ESG KPI’s are more important than others.  It’s important to recognize that these are Sustainability issues that they are asking you about!

As We Move Ahead…

All of this terminology discussion is our industry’s challenge, and somewhat of an educational problem in that we need to better inform others about the intricacies and the complexities that make up “Corporate Sustainability” so that there is deeper understanding of the full breadth and depth and importance of the ESG performance areas — and of the full impacts on a company’s reputation, valuation and more.

Of course, there are variations in which of these ESG issues is important (or material!), depending on industry and sector, size and geography.

We think that as we move along, “ESG” will continue to be a more preferred term for many analysts looking holistically at a public issuer. ESG will likely to continue to catch on because this approach will more clearly reflect the “completeness and complexity” of the various issue buckets that make up the corporate sustainability journey – ESG represents what it means and says what it is!

The Early Evolvement of SRI – and the Lasting Legacy

Looking back, the emergence of the Socially Responsible Investing approach (SRI #1), starting with screening out the shares of companies from portfolios (tobacco, gaming, etc.) may have a lasting legacy for some in the investment community.  More and more investors are now using the term, Sustainable & Responsible Investing (SRI #2), and even Sustainable & Responsible & Impact Investing (SRI #3 also!). These are gaining currency in the mainstream analyst and asset management communities.

And so, this is not necessarily a new discussion about titles and terminologies – it has been going on for quite some time.  In April 2009, when one of us (Hank) was editing the National Investor Relations Institute monthly magazine — IR Update — he offered up a commentary: ” Stay Tuned: More Initials for the IRO — These Could Spell Long-Term Success… Or Market Failure for Corporate Issuers ”

It was about ESG – SRI – CSR – even TARP (remember that?) — in that almost a decade-ago column, we noted that a 2008 survey of asset owners and managers, two terms were emerging as the preferred references:  ESG and Sustainability best summed up their approach.  We think this still rings true today.

It’s still an interesting read:  http://www.hankboerner.com/library/NIRI%20IR%20Update/2009/Boerner2009Apr.pdf

What are you thinking about this?  Do weigh in — please share your thoughts in the comments area below — weigh in on the dialogue!

What are your preferred terms in the daily conversation about…….

 

 

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