Comment by Andrew Wilson for December / January CCB 115
It could be argued that the news in this section of Briefing should be seen as the most important for all practitioners. For it is here that we bring together the stories that deal with the attitudes, opinions and actions of the financial community. It is the financial analysts that effectively “put a price” on corporate responsibility and reward (or punish) companies for their relative performance in this area. Unfortunately, as is so often the case, there is mixed news to report.
On the positive side, the study by Trucost and RLP Capital shows that funds which incorporate environmental, social and governance (ESG) factors have recently been outperforming traditional mainstream funds. This confirms the common sense view that companies which manage their social and environmental impacts are generally better managed overall, and so provide enhanced financial returns as a result. Providing conclusive evidence of this causal relationship however, has always been tricky.
The difficulties are compounded when one moves from considering a broad asset class to examine the performance of an individual business. In December, Danone announced that it is putting on hold an initiative to launch corporate bonds that would base part of its return on ESG targets. In Danone’s view, and that of their financial advisors, the problem is that sustainability performance indicators are not yet robust enough to be tied to a financial outcome.
So it seems that for the moment we will have to proceed in good faith and hope the financial community will soon catch up with good practice. While others search for the Holy Grail that demonstrates the definitive link between corporate responsibility and long-term profitability, practitioners across the globe will be doing their best to improve the social and environmental performance of the organisations they work for, safe in the knowledge that they are contributing to the sustainable success of the business.
Andrew Wilson is a Director at Corporate Citizenship.
A new report by research firm EIRIS highlights the increasing risks that the issue of biodiversity poses for business and investors. ‘COP Out? Biodiversity loss and the risk to investors’ indicates that significant, unmanaged risks in the supply chain mean the uninterrupted flow of resources is in jeopardy. EIRIS analysed the biodiversity policies of around 1,800 publicly-listed companies within the FTSE All-World Development Index and found that 58% of them operate in sectors whose business activities have a considerable biodiversity impact. The report suggests that investors understand, be aware of, encourage, engage and collaborate on the issue to promote better business performance in this area. Several corporate leaders on biodiversity are named including UK companies Severn Trent Water, Unilever and United Utilities.
A new study by Trucost and RLP Capital shows that mutual funds incorporating environmental, social and governance (ESG) criteria outperformed traditional funds over both one and three year periods. The research compared the financial performance, carbon footprint and risk characteristics of the eight largest traditional US equity mutual funds, by asset size, with those of the eight largest responsible ESG funds. As well as outperforming, the research found that ESG funds had smaller carbon footprints than traditional funds, making them less exposed to the rising cost of carbon. The study claims that taking into account both ESG and financial performance has resulted in better risk-adjusted performance than that demonstrated by traditional funds.
Danone considers sustainability-linked coupons for corporate bonds
Danone has investigated the possibility for the issuance of corporate bonds that base part of their return on ESG (environment, social and governance) targets. Pierre-André Terisse, chief financial officer at Danone, said it had started looking about a year ago at ways in which it could adjust part of the coupon for its bonds based on sustainability promises, with an increased coupon if ESG targets were not met, and vice versa. The company initiated the project with investors to look at the audit potential for ESG criteria, however the project has been put on hold as key performance indicators (KPIs) are not yet robust enough. Despite this, the goal remains to link economic and bond performance with a set of ESG KPIs that reflect the various interests of stakeholders.
Impact investments report highlights opportunity for social and financial benefits
Impact Investments, a new report by JP Morgan and the Rockefeller Foundation, assesses the returns from more than 1,000 impact investments, deeming them an “emerging asset class”. Impact investments are defined as investments intended to create positive social or environmental impact beyond financial return. The report focuses on a segment of the impact investment market: the five global sectors of housing, water, health, education and financial services that serve populations earning less than $3,000 annually. The research estimates an investment opportunity within this segment of between $400 billion and $1 trillion and profit opportunity of between $183 billion and $667 billion over the next ten years.
A group of BP shareholders plan to file a special resolution at BP’s next AGM in April demanding a review of the company’s risk management following the Deepwater Horizon oil spill in the Gulf of Mexico. Shareholders include the US SRI group Christian Brothers Investment Services (CBIS), investor coalition Ceres, €25 billion Finnish pension insurer Ilmarinen and UK campaign group FairPensions. The proposed resolution calls for a review into the “principal operational, economic, reputational, environmental and social risks” facing BP and the steps being taken to address them. A supporting statement suggests the disaster has not only damaged BP’s reputation but jeopardised its “social licence to operate”.
UK asset managers slow to embrace social and environmental stewardship
Stewardship in the Spotlight, a new report by FairPensions, has highlighted a tendency for UK asset managers to neglect social and environmental issues when reporting under the Stewardship Code. The revised Code, launched in July, seeks to improve the quality of corporate governance and promote dialogue between boards and institutional investors. While the report shows an increase in policies addressing the integration of environmental, social and governance (ESG) issues by asset managers, many do not disclose engagement activities nor discuss social and environmental issues and the quality, scope and transparency of compliance statements is variable. The report consequently recommends that the Stewardship Code be further revised so as to require disclosure regarding social and environmental issues by institutional investors.
COMMENTS