This article was first published in the June 2012 UK edition of Accounting and Business magazine
The June 2012 Earth Summit in Rio de Janeiro will be even more of a focus for the world’s attention than the first UN Conference on Sustainable Development held in the same city 20 years ago. For one thing, there are about 1.6 billion more people in the world today. For another, the environmental agenda has moved even further towards the centre-stage of politics, society and the corporate world.
Moreover, the environmental argument being put forward by mainstream stakeholders now is less about forcing big business to comply with rules, regulations and targets. It is much more to do with making the case that taking a responsible approach to sustainability is, in fact, in the long-term interests of companies and their shareholders.
A group known as the Corporate Sustainability Reporting Coalition (CSRC) has called on countries attending the so-called Rio+20 event to develop a UN convention. This would require the signatories to compel company boards to think about the sustainability issues that affect them and to report on them in their annual report and accounts.
Institutional fund management group Aviva Investors, the global asset management business of Aviva plc, led the formation of the CSRC, whose membership includes ACCA. Steve Waygood, chief responsible investment officer at Aviva Investors, says: ‘What we want is the board’s thinking. What we don’t want is the boards to simply delegate to their compliance teams that they need to report information that might be absolutely meaningless to their business.’
Made up of more than 40 financial institutions, non-governmental organisations, professional bodies and investors, CSRC is looking for an integrated report that brings together the financial and material non-financial information that investors need to get a more holistic picture of a company’s performance.
One of the draft’s clauses in Rio+20 final agreement reads: ‘We recognise the need for a global commitment on corporate sustainability reporting which promotes and encourages large private and public companies to take sustainability issues into account… and to integrate sustainability information within their reporting cycles.’ Waygood says that, although a step forward, this wording does not give a strong enough commitment to be truly effective.
But overall, what effect does all this have on how corporates treat sustainability reporting?
Rob Lake is director of strategic developments at the UN-backed Principles for Responsible Investment (PRI), a body led predominantly by pension funds and their fund managers. He says: ‘Significantly better information from companies about their sustainability performance and sustainability risk exposure is absolutely crucial to what PRI investors are trying to do.’ PRI’s role, Lake explains, is ‘to find new and more effective ways to bring together and support groups of investors who want to take energetic action to exercise influence over companies’.
The Johannesburg Stock Exchange (JSE) launched a Socially Responsible Investment (SRI) index in 2004. The criteria encompass a range of environmental, social, economic and governance indicators. While recognising that banks are different from mining companies or retailers, the criteria are not themselves specific tonnage targets, for example. Rather, they demand reporting on issues such as commitment to use targets, identification of significant impacts, and outlines of processes, responsibilities and action plans.
Corli le Roux, head of the SRI and sustainability at the JSE, notes that take-up from the investor community has to date been slow. ‘There was little understanding of how sustainability could be incorporated into investment decision-making,’ she says. She adds that PRI has helped.
However, le Roux points out: ‘The index has been mostly driven from the issuers’ perspective.’ Between 85% and 90% by market capitalisation of the top 100 JSE-listed companies meet the criteria. While the criteria are continuing to evolve, this figure suggests that companies still have some way to go – and research suggests that JSE companies, for the most part, have yet to take real action by reducing their greenhouse gas emissions, for example.
While sustainability has long-term implications, not every investor plays the long game. Savvas Savouri, chief economist at London and Dubai-based hedge fund Toscafund, says: ‘You can have those indices until they’re coming out your ears. They will always underperform because you’re putting a constraint on things. If you restrict your [investment] choice set, it will be inferior to a more general choice set.’
Lake says it’s not about pulling out of investments that don’t at present comply, but ‘trying to stimulate a much more productive dialogue between companies and long-term investors so companies understand that they have long-term allies in long-term investors’.
In fact, the evidence is that companies that do well from a sustainability perspective also do well financially. Generation Investment Management, co-founded by former US vice president Al Gore, recently published a paper, Sustainable Capitalism which suggests that environmentally conscientious companies can reduce cost of debt and face lower capital constraints.
In the private equity sphere, a recent paper by Doughty Hanson & Co and conservation group WWF points to other research that suggests businesses that are committed to environmental, social and governance issues earn higher market valuations. The paper, Private Equity and Responsible Investment: An Opportunity for Value Creation, addresses the chicken-and-the-egg syndrome: ‘Companies lament that investors do not value their sustainability efforts, while investors complain that companies do not report sustainability initiatives in terms that they can value.’
There is still a long way to go. But now, thanks to the CSRC, governments are being called on to do something about the issue. At Rio+20, it wouldn’t be surprising if there were a carnival atmosphere. It would be entirely appropriate: for the louder you beat the drum, the more difficult it is to be out of step.
Chief responsible investment officer, Aviva Investors
‘We want boards to think about which parts of the available guidance matter to their firm and could affect future cashflows and the sustainability of their institution. It includes issues like the raw materials on which their company depends and the wastes that are created in the way that their product or service is distributed. Where companies are excessively short term in managing these issues, then that can harm company value and, therefore, the value of the pension portfolios we run. This is why we consider it’s important for companies to have support to think long term from investors and regulators. One appropriate way of doing that is for regulators and investors to ask companies to disclose their long-term strategy, or explain why they have not.’
Corli le Roux
Head of the SRI and sustainability, Johannesburg Stock Exchange
‘We launched the Socially Responsible Investment index to crystallise the debate around sustainability and sustainable development, to recognise what companies were doing in this space, and to enable engagement and responsible investment by investors. Over the years that has crystallised into wanting to positively influence issuers and investors in the way that they do business. We have had a significant amount of influence over the issuers and how extensively they take account of sustainability considerations in their operations. We are also seeing that influence being brought to bear on investors, as more of them start thinking about how to incorporate the imperatives of sustainability into their investment decision-making.’
Head of sustainability, ACCA
‘The investor and finance community should be key actors in the future of corporate reporting. Both investors and the world’s stock exchanges need to engage in, and embrace, the changes ahead in corporate transparency in order to utilise new and material information, in both investment decisions and listing requirements. Investors have an opportunity to shape the development and frequency of integrated reporting, improve general corporate accountability and progress analysis methods to account for deeper ESG [environmental, social, governance] issues.
They need to start changing the time horizons on which their decisions and analyses are taken, and both request and use additional material
ESG company data.’
Andrew Sawers, journalist