the financial community warms to CSR policiesMay 2001
A flurry of recent initiatives from the UK investment community suggests that mainstream investors are taking more notice of companies’ social and environmental records.
In March, FTSE, the leading equity index manager, announced the coming launch of a family of tradable and benchmark indexes embracing companies that meet social responsibility criteria. The objective of FTSE4Good is to create indexes that reflect good practice in corporate responsibility globally.
In April, the Association of British Insurers declared its intention to adopt guidelines on socially responsible investment for its 398 members, who control a quarter of the UK stockmarket.
Also last month, Morley Fund Management, which manages $143billion of assets, announced that from next year it will vote against the annual accounts of FTSE 100 companies unless they include an environmental report.
Shareholder activism is on the rise. At BP’s annual general meeting on 19 April, a shareholder resolution calling on the company to report on its business strategy in response to climate change won 7.5 per cent of the vote, representing 55 per cent of shares in issue.
These events follow last year’s Turnbull guidelines which extended risk management to include environmental and reputational risks, and the UK pensions disclosure regulation now in force.
All this activity raises interesting questions. How will these developments affect companies? How should they respond? Crucially, how can companies with established CSR policies benefit from the increased interest among investors?
The first, and most obvious effect is already being felt: companies face more demands from investors for information on their social and environmental performance. Fifty-nine per cent of occupational pension funds now incorporate SRI into their investment strategies, a recent UK Social Investment Forum survey found. In practice this means they are mandating the investment companies who manage their holdings to ask companies more questions about their social and environmental performance.
This helps to explain why more questionnaires have been dropping onto managers’ desks recently. One FTSE 100 company told EP that in an average month it received four or more questionnaires of this sort, some running to 30 pages.
The demand for more information is also fuelled by the desire of analysts to identify possible links between a company’s financial performance and its environmental and social performance. To do this, they need a lot of data.
The publication of corporate environmental and social information has long been an important risk management discipline. It is now more sensitive than ever before. A few years ago, only non-governmental organizations wanted this sort of data. Now ministers are naming and shaming companies that fail to produce environmental reports and international bodies, including the Organization for Economic Co-operation and Development, are pressing for greater transparency on a wide range of issues.
However, the fundamental problem is not so much information flow, as information quality. Analysts find it hard to identify best-in-class companies without comparable data within a given industry sector. The market consultation paper published last month by FTSE4Good states that its draft criteria ‘demonstrate a bias towards best practice management as opposed to performance. This is primarily because ... there is insufficient comparable data to define specific, measurable benchmarks in some areas.’
Toby Belsom, an analyst with Morley, says companies with established CSR policies should respond to investor interest in three ways. First, they should work with the financial and business community to improve the quality and comparability of the data collected. Both FTSE and Morley, for example, wish to consult widely with companies.
Second, they should explain how CSR policies help to minimize their liabilities.
Third, they should highlight, where appropriate, the commercial benefits of the policies, beyond risk minimisation. ‘Managers are best placed to know the operational risks their company faces, and also to understand how CSR policies can build the value of their business’, argues Belsom.
‘At the moment, the focus is on risk management and liability, and that is obviously important, but investors are going to become increasingly aware that being more socially responsible by, for example, building good relations with stakeholders, can bring commercial benefits’, he says.
Above all, if companies are to justify producing triple bottom line reports, they will need to ensure that the environmental and social data collected is used to add value to the business.
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