the EC green paper: some responses on SRIFebruary 2002
As things stand at present, few investors and companies are working together to develop common ways of assessing corporate ethical performance. As a result, many companies are churning out information on their social and environmental performance that is often of limited use to investors, even though one of the key audiences is the investment community.
‘Some companies in the water sector’, the Association of British Insurers (ABI) notes in its green paper response, ‘produce elaborate reports on their environmental policies, but it is not clear that they have considered how this fits into their overall management of risk’. While this in the first instance shows the failure of managers to integrate environmental risk with general risk considerations, it also highlights the mismatch between investor needs and company delivery which is one of the overriding themes of the responses relating to SRI.
Ethical Performance identified 17 of the 80-odd responses posted on the European Commission’s web site by 15 January as discussing SRI, and reviewed a further five received directly from readers.
Strictly speaking, the green paper is not about socially responsible investment. It is about CSR, and has only six paragraphs that specifically address SRI. But investors are demanding more detailed data on CSR practices. The demand is partly driven by the growth of ethical funds, which in the UK last year accounted for 3.3 per cent of all retail investments, and partly by the growth in interest among non-SRI investment managers.
This explains, in the words of the BT submission, ‘the need for greater convergence between the information made publicly available by companies and the information requested by investors and analysts.’ Several respondents say it would be helpful if the EC were to fund work that pooled the expertise of companies and investors. However, the SRI market is so diverse that at this stage it is hard to envisage common standards and, in the UK at least, SRI investors are resisting them.
In the meantime, then, the focus is on improving both the quantity and quality of SRI information. Most of this data comes from the companies themselves, so there is increasing pressure on companies to become more transparent. This issue is urgent: if companies fail to provide credible information, investors will not be able adequately to assess this emerging area of interest.
One surprise is the unanimity among companies, investors and pressure groups on the best way forward: most favour ‘enabling’ regulations promoting greater disclosure along the lines of the UK pensions disclosure regulation. This requires the institutional investor, not the company, to state its position on SRI.
Several respondents argue that disclosure regulations should apply to all types of investing institutions, and not just pension funds. Others have more modest goals, suggesting that such regulations should be extended only to mutual funds domiciled in the European Union.
For its part, Henderson Global Investors says ‘it would be helpful for the European Commission to review these emerging regulatory disclosure requirements and to assess the possibility of EU-level standardization’.
The ABI, whose 430 members collectively manage funds equivalent to some £1.1trillion ($1.58tn), believes it is more appropriate not to regulate, but for investors to ‘seek disclosure’ from companies on how far they have complied with, among other things, International Labour Organization codes of conduct. ‘Those that have chosen not to should be asked to explain the reasons for their non-compliance. This principle of disclosure and obligation ... is a powerful means of encouraging company boards to think carefully about the issues’.
To judge from the responses, it is not only companies that face demands for greater transparency. Investment management companies need more transparent SRI methods. Pressure group Friends of the Earth says managers should be required to ‘provide evidence’ of their SRI policies and reporting mechanisms. This would help solve the problem of investment managers putting in place a policy and then not implementing it.
The EC itself should also ‘practise what it preaches’, says the London-based SRI specialist Claros Consulting, by requiring its own public sector pension funds to declare their SRI policies.
The need for the EC to fund projects which in the words of General Motors Europe ‘strengthen the perception of the benefits that shareholders can gain from businesses’ proactive attitudes to CSR’, is a recurring theme. Yet there is little discussion of the risks increased corporate disclosure may entail.
This is probably because the work is at an early stage – just how early may be seen from a revealing aside in the ABI submission. ‘There is a great danger to companies as well as shareholders’, it says, ‘if the main risk under consideration by boards is that of being found out’.
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