This blog is the first in a series looking at how a company’s business strategy is affected by its stakeholders. I am starting with the top of the money tree; investors. More companies are voluntarily producing ESG information, and more investors are analysing it, if not actively demanding it. ESG information is being gathered from sustainability indexes, voluntary schemes and annual reports. Investors are assessing this information to determine the potential risk and reward of their investments. The majority of companies are disclosing this information because they want to retain investors and attract new ones, and, to a lesser extent, because of mandatory reporting obligations for companies.
The first blog in this series will focus on whether investors are actually gathering this information, and how? I will delve further into the reasons why in the second blog of the series. In the final blog, I will discuss what investors are doing to manage their ESG risk and value in their portfolios.
The big push for ESG data
Investment trends are changing.
Firstly you have your ESG data on publicly listed companies. The Dow Jones Sustainability Index and FTSE4Good index provide benchmark analysis of qualifying companies’ ESG data. Companies disclose against certain ESG criteria, which is then analysed by the indices, and compared against other qualifying companies. No doubt, disclosure is a taxing process, but is the time taken to report on these aspects outweighed by the investment attracted? It would appear so, as these indices are increasing in use and level of scrutiny, shown by the Bloomberg sustainability index increasing from 2,415 unique users in 2009 to 7,779 users in 2012. Who would want to miss out on the numerous investors who use this data?
So public companies are coming under scrutiny, but what about other companies? Institutional investors, who typically target low risk investments, are signing up to voluntary schemes such as the Principles for Responsible Investment (PRI) and the Carbon Disclosure Project (CDP). The six PRI focus on integrating ESG risk into decision-making. Investors using CDP, ask questions to their investment companies regarding their greenhouse gas emissions, water usage and strategies for managing climate change, water and deforestation risks.
Many companies are viewing this as an opportunity to up their game. The Global Reporting Initiative, a framework that pushes for transparency specifically on ESG matters considered important to an organisation’s stakeholders (including investors!), is followed by 80% of the Global Fortune 250. The new Integrated Reporting Council draft Framework, outlines how companies should disclose, in their annual report, their business strategy for generating short and long-term value and the impacts that has on various resources or ‘capitals’.
And for the late movers?
Legal risk. Governments have recognised the importance of this ESG information and are starting to force those who are yet to see the opportunity. Companies incorporated in the UK, except small companies, have to disclose material risks about their business in their business review. There are already mandatory requirements for disclosures on environmental, employee, social and community matters, using Key Performance Indicators, according to the size of your organization. From October 1st 2013, there will also be human rights, diversity and greenhouse gas emissions to tackle for listed companies. There is a proposal for a Directive in the EU on similar aspects and increasing legislation in the US. Is there more of a legal risk in non-disclosure of ESG information than there is in disclosure? This could be an essay topic the mounting legislation above could tip the balance.
Is this actually important?
Investors are using this information because of the risks associated with brand reputation, compensation payouts and fines, increasing legislation, the rise in prices of natural resources, and damage to capital assets. There is also increasing evidence to support that organisations who disclose on ESG risks start managing them. In turn, managing these risks is adding value to companies. More on this to come; stay tuned.
 EU proposal for a Directive: http://ec.europa.eu/internal_market/accounting/non-financial_reporting/index_en.htm EU proposal COM(2013) 207 final
 US Conflict Mineral Law. California Transparency in the Supply Chain Act.
 The participation rate for the 2012 Dow Jones Corporate Sustainability Assessment for was 8.4% higher than in 2011
 722 institutional investors representing an excess of US$87 trillion in assets, were seeking carbon data from their portfolio in 2013 https://www.cdproject.net/en-US/WhatWeDo/Pages/investors.aspx
 http://www.theiirc.org/consultationdraft2013/ The pilot programme included 90 businesses across the globe from multinational corporations to public sector bodies and over 30 investors organisations.
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