Watching the Watchers – What Investors & ESG Raters Are Doing in the Virus Crisis

Posted on April 22, 2020 by Hank Boerner, Chairman & Chief Strategist

By Hank Boerner – Chair & Chief Strategist – G&A Institute

As we have numerous times in this space commented about the dramatic shift from a shareholder primacy focus (for public companies and investors) to today’s stakeholder primacy operating environment, the views of key stakeholders – investors, and their service providers – are critical during the virus crisis.

Today we’re sharing the actions and perspectives of the investor-stakeholders…as the investor coalition in our first item notes…

“…the long-term viability of the companies in which we invest is inextricably tied to the welfare of their stakeholders, including employees, suppliers, customers and communities…”

Investor Coalition Focuses on Corporate Response to the Crisis

The Interfaith Center on Corporate Responsibility, a coalition of 300 institutional investors long focused on corporate responsibility and sustainability, joined forces with the Office of New York City Comptroller Scott M. Stringer and Domini Impact Investments LLC to develop an “Investment Statement on Coronavirus Response” — to urge the business community to take what steps they can and offered five (5) steps for corporate managements to consider.

These include:

Providing paid leave – emergency leave for all employees, including temps, part-timers, and subcontracted workers.
Prioritizing health and safety – limiting exposure to COVID-19, rotating shifts, enhancing protective measures, closing locations, setting up remote work, additional training where appropriate.
Maintaining employment – retain workers as much as possible; a well-trained and committed workforce will help companies resume operations quickly; also, companies should watch for potential discriminatory impact during and after the crisis.
Maintaining supplier/customer relationships – As much as is possible, companies should maintain timely or prompt payments to suppliers and work with customers facing financial challenges to help stabilize the economy, protect communities and small businesses, and ensure a stable supply chain will be in place when operations return to normal.
Practice financial prudence – the investors state they expect the highest level of ethical financial management and responsibility in the period of (acknowledged) financial stress. As “responsible investors” (the signatories) the expectation is that companies will suspend share buybacks, and limit executive and senior management compensation for the duration of the crisis.

Beyond these, the investors urged companies to consider such measures as childcare assistance, hazard pay, assistance in obtaining government aid for suppliers, paying employee health insurance for laid off/furloughed workers, and deploying resources to meet societal needs related to the pandemic.

Over the past few years, the investor coalition points out, corporations have shown leadership by using their power as a force for tremendous good. This kind of leadership if critically needed now. And, business reputation and social license to operate is at stake.

As we prepare this about 200 long-term institutional investors with AUM of US$5 trillion had signed on to the effort, including: the AFL-CIO funds, American Federation of Teachers, Aviva Investors, Boston Common Asset Management, the Chicago City Treasurer, Communications Workers of America, Connecticut State Treasurer Shawn T. Wooden, Delaware State Treasurer, Illinois State Treasurer Michael Frerichs, International Brotherhood of Teamsters, Investor Environmental Health Network, Office of Rhode Island General Treasurer Seth Magaziner, Oregon State Treasurer, Robeco, SEIU, UAW Retiree Medical Benefits Trust, Treasurer of the State of Maryland, Vermont State Treasurer, and a large roster of faith-based institutions and religious denomination funds.

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Walking-the-Talk of Corporate Responsibility

Refinitiv provides investors with ESG ratings and perspectives on corporate ESG performance and builds ESG / sustainability considerations into products and services for investor clients. The company announced what it is doing to maintain its forward ESG momentum during the crisis. And the changes will over time affect the public companies that are rated and ESG news distributed worldwide by Refinitiv.

On Earth Day 2020, the folks at Refinitiv – this is one of the world’s largest providers of financial information – announced the beefing up of their own operations…walking the talk of what they provide to investor clients in terms of ESG Data and solutions for evaluating public companies’ ESG performance.

Refinitiv is putting in place for itself more stringent, science-based emissions targets, climate change reporting standards to meet the TCFD’s recommendations, and is joining the RE100 initiative to source 100% of its electricity from renewables.

Refinitiv had made three core pledges on the environment, social impact and sustainable solutions to support the UN SDGs. Part of this was a goal of achieving carbon neutrality before the end of 2020. The company is joining the Business Ambition For 1.5C commitment; aligning its own corporate reporting with the Task Force for Climate-Related Disclosures (the TCFD); and by this coming summer should be 100% in terms of how they source energy from renewables.

Refinitiv recently launched “The Future of Sustainable Data Alliance” to accelerate the mobilization of capital into sustainable finance, and will work to sustainability “at the core of product offerings”. Refinitiv serves more than 40,000 institutions in 190 countries, providing ESG data for 15+ years.

We can expect that these moves will result in the intensifying of the evaluation of corporate sustainability efforts by this major financial information provider. As the Refinitiv CEO David Craig comments:

“The pandemic is clearly providing humanity with a re-set moment: a stark reminder about our fragility as a species and a sharp lesson about what happens when we mess with nature. It is also a moment when the old rules about the role of the state no longer apply. We can therefore attack the twin challenges of COVID-19 and climate change simultaneously, not sequentially. After all, when again will we be at a moment when governments are injecting such unprecedented sums into the economy just as the world needs up to $7 trillion a year of renewable investments to hit 2030 development and climate targets.”

Luke Manning, Global Head of Sustainability and Risk Enterprise at Refinitiv, adds:

“Our commitment is going further than before and aiming for more ambitious emissions reductions that – if repeated by businesses across the world – should limit atmospheric warming to 1.5C above pre-industrial levels. If we want to truly progress the climate agenda we need to help everyone understand that tackling it is in all our personal and financial self-interest. It’s not just about the impact we are having on the environment, but the impact the environment is having on us.”

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Morningstar Acquires Full Ownership in Sustainalytics

Morningstar, a leading firm in providing investment research to individual and institutional investors in North America, Europe, Asia and Australia-Pacific region, began measuring the performance of ESG-focused mutual funds and ETFs three years ago. As part of the initiative, Morningstar acquired a 40% interest in the ESG ratings organization, Sustainalytics.

Now, that interest will be 100% as Morningstar solidifies its competitive advantage in measuring the performance of ESG investable products. Says CEO Kamal Kapoor:

“Modern investors in public and private markets are demanding ESG data, research, ratings, and solutions in order to make informed, meaningful investing decisions. From climate change to supply-chain practices, the nature of the investment process is evolving and shining a spotlight on demand for stakeholder capitalism. Whether assessing the durability of a company’s economic moat or the stability of its credit rating, this is the future of long-term investing.

“By coming together, Morningstar and Sustainalytics will fast track our ability to put independent, sustainable investing analytics at every level – from a single security through to a portfolio view – in the hands of all investors. Morningstar helped democratize investing, and we will do even more to extend Sustainalytics’ mission of contributing to a more just and sustainable global economy.”

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As companies large and small, public and private, step up to help society during the virus crisis, they burnish their reputation and social license to operate.And help society cope with the impact of the crisis on individuals, families, communities and institutions.

We’re bringing you the news of those corporate actions. And, we’re watching the investment community for their reactions, and their intention to encourage public companies to stay the course of their sustainability journey during the virus crisis. Stay Tuned to this blog.

A Deeper Shade of Green: The Social Layer of Green FSAs

Posted on April 2, 2019 by Hank Boerner, Chairman & Chief Strategist

By Ruth Rennie

Developing Green Firm Specific Advantages (GFSAs) allows firms to build business capacities and assets that enhance both economic and environmental performance.

However developing GFSAs focused solely on environmental management capacity will be inadequate to deliver sustainability and long term financial performance.

An additional set of GFSAs that build capacity to manage the social dimension of the people, planet, profit equation are required. These relate to the internalisation of the social contract, operational approaches that develop social equity, and communications approaches focused on inclusive constituency building.

Introduction

Sustainability frameworks build on the fundamental concept of the “triple bottom line” (TBL) balancing the needs of profit, planet and people. The TBL concept aims to broaden the focus of business performance from profit and loss to tracking and managing a company’s economic (not just financial), social, and environmental impact.

This enables companies to understand the full costs of doing business and calculate real value added.

Today risks associated with climate change, resource scarcity, increasingly stringent government regulation and consumer pressure for transparent and accountable business practice have shifted the focus of sustainability from a simple demonstration of corporate social responsibility to a core driver of commercial viability. Yet business leaders still seldom pay the same attention to people and planet targets as they do to achieving profitability (source: Elkington 2018).

The definition of “green” firm specific advantages (FSAs) first developed in the 1990s acknowledges that firms are likely to invest in better environmental performance only if they will also lead to higher economic returns.

Green FSAs (GFSAs) are business capacities and assets that allow firms to enhance both economic and environmental performance by enabling them to respond to and leverage evolving environmental challenges to achieve sustainable growth and competitive advantage. Developing GFSAs has a range of benefits for firms including cost and operational efficiencies, improved innovation and technological capabilities, enhanced product differentiation and market opportunities, and reputational enhancement (Singh et al 2014).

However, the definition of “green” FSAs related only to environmental management capabilities, creates an unbalanced framework that ignores critical capacities and assets that firms need to manage the social dimensions of sustainability that are increasingly critical to ensure both environmental and financial performance.

The need for wider set of Green FSAs

Though much of the sustainability industry of consultants and framework developers continue to equate “sustainability” and “green” approaches with environmentally-friendly and carbon neutral, the new generation of “green” frameworks explicitly link these issues with social equity and inclusion.

The United Nations calls for “Green Economies” which are “low carbon, resource efficient and socially inclusive” (UN Environment). The current “Green New Deal” policy resolution in the USA emphasises the role of environmental crises and economic transformation in exacerbating “systemic injustices” by disproportionately affecting already disadvantaged “frontline and vulnerable communities.” (Green New Deal Policy Resolution, 2019).

There is ample evidence that businesses are increasingly confronted with risks related to social equity and inclusion that threaten both their commercial and sustainability performance. In a recent survey 80 percent of businesses said they expected their company to be affected by changes to “the social contract” (defined as the general agreement on the rights and responsibilities of members of society[1]) over the next 10 years.

These include workforce risks related to payment of a living wage, technology replacing jobs, and erosion of worker benefits through efficiency measures such as outsourcing.

They also include risks from tensions arising from increasing social inequalities, and rising expectations of the role of business in solving social issues, creating a situation where “Social license to operate is at a higher standard than regulatory license to operate” (BRS 2017).

It is therefore not surprising that companies are now giving the highest priority in their sustainability efforts to social issues related to ethics, diversity, human rights and women’s empowerment, alongside climate change. (BSR 2018)

These trends highlight the limitations of cultivating GFSAs that address only a firm’s environmental management capacity to deliver long-term business sustainability or financial performance. Firms also need to develop “new green” FSAs to strengthen their ability to engage a wide range of stakeholders around a mutually beneficial social contract.

As with the GFSAs defined by Singh et al, the social set of GFSAs also need to be embedded into the firm’s planning and organisational practices, operational practices and communications. This effectively creates an additional layer of GFSAs related to “social management” (for want of a better term) as shown in the diagram below. These relate to the internalisation of the social contract, operational approaches that develop social equity, and communications approaches focused on inclusive constituency building.

[1] The full definition of “social contract” used in the survey was «the unwritten and tacit agreement that exists among members of society (individuals and organizations) that guides behavior and establishes rights and responsibilities of members of society.” (BSR 2017)

Fig 1: Green FSAs : Environmental and Social Management Dimensions

Social Contract Internalization Green FSAs

In the broadest terms Social Contract Internalization GFSAs relate to a firm’s capabilities to incorporate relevant social trends and expectations into strategic planning and develop strategies to mitigate risks related to the impact of their business operations, products and services on different social groups and wider patterns of inequality. Developing this perspective allows firms to internalise the social costs of products, technologies and business practices, and balance environmental management and operational efficiencies with social equity considerations.

Social contract internalisation GFSAs therefore enable firms to develop socially sustainable workforce capacity and supply chain relationships. This includes adopting approaches to measure, report on and address the gender pay gap by which men are still paid more than women for equal work in nearly every country in the world (Rubery, 2019).

It also includes adopting proactive strategies to manage the full range of costs to workers, supply chain actors and communities associated with practices such as the dematerialization of products, sourcing of eco-friendly inputs, achieving resource efficiencies, outsourcing and technological innovation.

For example by assessing the social impact of a shift from producing or using non-renewable to renewable resources such as biofuels on producer communities smallholder agriculture, livelihoods and food security (UNRISD 2012). It also includes developing human resource management strategies that ensure workplace health and safety and freedom from discrimination and harassment, and proactive strategies to address inequalities in access to employment or livelihood opportunities.

Beyond this, firms can develop the capacity for product innovation and expansion to new market segments to address inequalities in access to sustainable products and services between different social groups.

Social Contract Internalization Green FSAs Example – Green Jobs

The International Labour Organisation (ILO) defines “Green Jobs” as those that both provide employment in the production of green products and services or in environmentally friendly processes AND meet the criteria of decent work by ensuring productive work, a fair income, security and rights at work, social protection, social dialogue and gender equality (ILO 1 & 2).

Yet the social dimension is still often absent from “green” jobs.

A recent study of around 300,000 organisations in Portugal found that the green job sector employs workers with lower qualifications and has poorer provision and lower coverage of Occupational Health and Safety Services resulting in a higher incidence and severity of accidents at work (Moreira et.al, 2018).

Internalization of Social Contract Green FSAs would therefore help firms to mitigate risks and reduce costs of workplace accidents, and demonstrate commitment to reducing the vulnerabilities of low income workers.

Social Equity Development Green FSAs

Social equity development GFSAs recognize that the unequal distribution of risks and rewards within commercial value chains ultimately pose a threat to the long-term sustainability and financial viability of current business models. This is most apparent in the global commodity supply chains where price fluctuations and buying practices such as spot trading create high risk for producers and suppliers that threaten the whole supply chain.

Social equity development green FSAs enable firms to develop business practices and operational processes to share risk and balance the social equity of key actors in the supply chain such as developing long term supplier agreements and investing in producer capacity.

Building social equity in supply chains enables firms to ensure business continuity and implement effective environmental management with producers as long term partners. It also enables firms to develop speciality products based on quality, transparency and local knowledge, enhance brand value develop product portfolios, and satisfy growing consumer demand for authenticity and transparency (Brown 2018, Samper 2018).

Social Equity Development Green FSAs Example – Mars Sustainable in a Generation Plan drive a new approach to commodity sourcing.

Alongside actions to address GHG emissions, water stress, land use, and deforestation the Sustainable in a Generation Plan commits to meaningfully improve the working lives of one million people in its value chain to enable them to thrive.

To do this the company has adopted a new approach to commodity sourcing from known origins and in many cases known farms, with price and sustainability impacts evaluated side by side and generally from longer term partnership arrangements with fewer suppliers.”

In addition Mars is focusing on increasing income, respecting human rights and unlocking opportunities for women. The focus on cultivating long term buyer relationships and investing in the productivity and livelihoods of smallholder suppliers allows Mars to mitigate the risks that poverty discourages the next generation of farmers from participation in essential commodity supply chains. (Sustainable Brands 2018)

Inclusive Constituency Building Green FSAs

The concept of inclusive constituency building goes beyond reputation management, operational partnership development and targeted engagement with local stakeholders already identified in the GFSA framework. Rather it recognises the increasing consumer demand for businesses to demonstrate strong social purpose and to participate in a company’s broader vision. (Brown 2018, BBMG 2017).

A recent global survey shows at least half of consumers believe brands can do more to solve social ills than government and that it is easier for people to get brands to address social problems than to get government to take action. Moreover 57% report buying or boycotting brands based on the brand’s position on a social or political issue (Edelman 2018).

Inclusive constituency-building GFSAs enable firms to develop purpose driven narratives to engage consumers, investors, supply chain actors, local communities and wider stakeholders such as governments, regulators and NGOs in an ongoing relationship based on transparent communication and accountability to build a broad coalition of support for their activities products and services.

This allows firms to develop stronger brand value and engage proactively with employees, customers and peers as brand ambassadors. It also increases firms’ ability for early sensing of societal concerns and foster an organisation-wide culture of listening and engaging with stakeholders that creates goodwill, can transform conflict into productive collaborations and garners “benefit of the doubt” support in regulatory compliance and public approvals processes.

Inclusive constituency building GFSAs also build firms capacity to engage in constructive dialogue to drive product innovation, enhance creativity and strengthen employee motivation through the inclusion of wider perspectives (Sharma and Vrendenberg 1998).

Inclusive Constituency Building Green FSAs Example – Amazon

Amazon is one of the most financially successful companies in the world, and has made environmental sustainability commitments to increase its use of renewable energy and make all amazon shipments net zero carbon, with a target of 50% by 2030. Yet the company’s financial and environmental management strategies are undermined by its failure to develop an inclusive constituency for its brand.

Amazon recently pulled out of a deal to set up a new headquarters in New York City, fearing damage to its reputation from a barrage of objections from politicians, unions, public housing residents, local community leaders and government institutions.

These objections echoed Amazon’s failure to address poor labor practices and anti-unionisation policies, or to contribute to alleviating social inequality issues to which it contributes, by threatening to halt growth in its home city of Seattle if the city approved a tax on large employers to fund homeless services and low-income housing (Sainato, 2018).

The failure of the deal has been attributed to Amazon’s failure to develop a robust strategy to build support amongst key stakeholders groups and miscalculation on how much it needed to engage with those audiences to make the development of the New York HQs a success (Goodman and Weise, 2019).

Conclusion

To adequately ensure sustainability including environmental management and financial performance, Firms need to develop an additional set of Green FSAs focused on the social dimension of the people, planet profit equation.

Social contract internalisation GFSAs that incorporate a social equity and inclusion perspective into strategic planning enable firms to develop socially sustainable workforce capacity and supply chain relationships and strengthen capacity for product innovation and market positioning.

Social equity development GFSAs that build capacity to rebalance risk and build inclusiveness in supply chains enable firms to ensure business continuity and implement effective environmental management strategies based on long term partnerships and to develop product differentiation.

Inclusive constituency building GFSAs that build capacity to engage stakeholders in a broad coalition of support for a firm’s activities products and services allow firms to develop stronger brand value, sense and respond to societal concerns and drive product innovation, creativity and employee motivation through constructive engagement with wider stakeholder perspectives.

REFERENCES

BBMG Globescan (2017), Brand Purpose in Divided Times, Four strategies for Brand leadership. http://bbmg.com/wp-content/uploads/2017/10/BBMG_GlobeScan_BrandPurposeReport_2017.pdf

Britton-Purdy, Jedediah (2019) “The Green New Deal Is What Realistic Environmental Policy Looks Like”, The New York Times Feb. 14, 2019, https://www.nytimes.com/2019/02/14/opinion/green-new-deal-ocasio-cortez-.html

Brown, Nick (2018), “A Radical New Social Contract Concept from James Hoffmann”, Daily Coffee News, October 15, 2018, https://dailycoffeenews.com/2018/10/15/a-radical-new-social-contract-concept-from-james-hoffmann/

BSR, Globescan (2017), The State of Sustainable Business 2017, Results of the 9th Annual Survey of Sustainable, Business Leaders, July 2017, https://www.bsr.org/reports/2017_BSR_Sustainable-Business-Survey.pdf

BSR, Globescan (2018), The State of Sustainable Business 2018, Results of the 10th Annual Survey of Sustainable, Business Leaders, 2018, https://www.bsr.org/files/event-resources/BSR_Globescan_State_of_Sustainable_Business_2018.pdf

Edelman (2017, 2018), Beyond No Brand’s Land, Edelman Earned Brand Study, https://www.edelman.com/earned-brand, / https://www.edelman.com/research/earned-brand-2017

Elkington, John (2018), “25 Years Ago I Coined the Phrase “Triple Bottom Line.” Here’s Why It’s Time to Rethink It”, Harvard Business Review, June 25, 2018. https://hbr.org/2018/06/25-years-ago-i-coined-the-phrase-triple-bottom-line-heres-why-im-giving-up-on-it

Goodman, J. David and Weise, Karen, (2019) “Why the Amazon Deal Collapsed: A Tech Giant Stumbles in N.Y.’s Raucous Political Arena”, The New York Times, Feb. 15, 2019, https://www.nytimes.com/2019/02/15/nyregion/amazon-hq2-nyc.html

Green New Deal Policy Resolution, G:\M\16\OCASNY\OCASNY_004.XML February 5, 2019 (3:27 p.m.) https://assets.documentcloud.org/documents/5729033/Green-New-Deal-FINAL.pdf

ILO 1 – What are Green Jobs? https://www.ilo.org/global/topics/green-jobs/news/WCMS_220248/lang–en/index.htm

ILO 2 – Decent Work, https://www.ilo.org/global/topics/decent-work/lang–en/index.htm

Kantor, Jodi and Streitfeld, David (2015), Inside Amazon: Wrestling Big Ideas in a Bruising Workplace, The New York Times, Aug. 15, 2015, https://www.nytimes.com/2015/08/16/technology/inside-amazon-wrestling-big-ideas-in-a-bruising-workplace.html

Moreira, Sandra, Vasconcelos, Lia, Silva Santos, Carlos, (2018)“Occupational health indicators: Exploring the social and decent work dimensions of green jobs in Portugal” Work, vol. 61, no. 2, 2018 pp. 189-209, https://content.iospress.com/articles/work/wor182792

Rubery, Jill BBC (2019), “Is equal pay actually possible?, BBC News 22 February 2019 https://www.bbc.com/news/business-47212342

Sainato, Michael (2018) Exploited Amazon workers need a union. When will they get one?, The Guardian, Sun 8 Jul 2018, https://www.theguardian.com/commentisfree/2018/jul/08/amazon-jeff-bezos-unionize-working-conditions

Samper, Luis F. (2018), “A New World Coffee Order” Daily Coffee News, October 17, 2018, https://dailycoffeenews.com/2018/10/17/a-new-world-coffee-order/

Sharma, Sanjay and Vredenburg, Harrie (1998), “Proactive Corporate Environmental Strategy and the Development of Competitively Valuable Organizational Capabilities” Strategic Management Journal, 19: 729–753 (1998) http://www.jstor.org/pss/3094125

Singh Nitish, Yung‐Hwal Park, Carri R. Tolmie, Boris Bartikowski (2014), “Green Firm‐Specific Advantages for Enhancing Environmental and Economic Performance”, Global Business and Organizational Excellence, November/December 2014 pp6-17 https://doi.org/10.1002/joe.21580

Sustainable Brands (2018), Screw Incremental Improvements: Mars Is Changing How It Does Business, September 19, 2018, https://sustainablebrands.com/read/walking-the-talk-1/screw-incremental-improvements-mars-is-changing-how-it-does-business / See also – Henderson, James (2017) Mars CEO Grant F. Reid has said business needs to lead “transformational change” in order to tackle the most urgent threats facing the planet and its people, including a radical overhaul of supply chains”. Sep 08, 2017, https://www.supplychaindigital.com/scm/mars-ceo-transformational-business-change-needed-including-radical-rethink-supply-chains

UN Environment “About the Green Economy”? https://www.unenvironment.org/explore-topics/green-economy/about-green-economy https://www.unenvironment.org/regions/asia-and-pacific/regional-initiatives/supporting-resource-efficiency/green-economy

UNRISD (2012), Social Dimensions of Green Economy Research and Policy Brief 12, May 2012, https://www.files.ethz.ch/isn/143941/RPB%2012e.pdf

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A message from G&A Institute

This is the “final paper” authored by Ruth Rennie as she completed the on-line, self-study “Certification in Corporate Responsibility and Sustainability Strategies” hosted by Governance & Accountability Institute and developed by Professor Nitish Singh, Ph.D., Associate Professor of International Business at the Boeing Institute of International Business at Saint Louis University, and founder and consultant at IntegTree LLC; and, Instructor Brendan M. Keating, Adjunct Professor at Wilmington University and VP of IntegTree.

The professionals completing the course work receive certificates from the Swain Center for Executive & Professional Education at the University of North Carolina Wilmington and from G&A Institute.

The certification program provides a broad overview of key corporate responsibility challenges and strategies that will enable organizations to succeed in the 21st Century Green Economy.

Ruth Rennie is a Sustainability and Social Impact Consultant educated at Trinity College, Dublin, Ireland (M.Phil. – Master of Philosophy, History; at Universite Paris 7 (Paris, France), Diplome d’Etudes Approfondies (DEA); and, Victoria University, New Zealand, Dip TESL (Diploma in Teaching English as a Second Language). Profile: https://www.linkedin.com/in/ruth-rennie/

Ruth’s email: rennie.ruth@gmail.com

More information on the CSR course is available at:

http://learning.ga-institute.com/courses/course-v1:GovernanceandAccountabilityInstitute+CCRSS+2016/about