Key Issue: Sustainability Reporting
ProxyDemocracy concludes our series on social and environmental issues appearing on proxy ballots with this article on sustainability reporting. The coverage was provided by the Sustainable Investments Institute, the Washington-based research center. Heidi Welsh, SI2’s co-founder and executive director, wrote the final report.
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The 38 sustainability reporting proposals filed in 2010 account for one of the biggest slices of the activist pie this year, but two-thirds of the resolutions have been withdrawn after agreements, leaving just 16 pending.
Companies have grown more comfortable with the concept of sustainability reporting given investor pressures for more disclosure. Accords with proponents have been driven by the high votes these proposals receive, as well as recent regulatory developments.
Stakeholders: Calls for comprehensive sustainability reporting on environmental and social issues come from a wide range of corporate stakeholders. Pension funds, religious groups, foundations and social investment funds favor detailed disclosure to ensure companies are effectively managing their social and environmental risks and opportunities.
Their demands are supported by a growing body of academic literature that also has helped convince mainstream investment analysts, who are seeking data they can incorporate into both qualitative and quantitative investment risk and opportunity models. The proponents also believe that robust disclosure is closely tied to effective corporate management of critical public policy issues that affect constituencies beyond the investment world. These, too, hold implications for the terms under which firms operate.
Efforts to enlist companies in the search for a more sustainable global economy got their start with environmental initiatives begun 40 years ago by multilateral organizations. As the United Nations has gradually drawn private sector actors into its efforts, it has helped to expand the definition of corporate sustainability to encompass social factors such as respect for human rights, although the latter present a complex challenge for sustainability assessment.
Key voluntary schemes: Keen interest by so many players has produced a dizzying array of voluntary standards and codes of conduct, which have yet to coalesce into a single international protocol. Several voluntary initiatives stand out, including the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP).
Nearly all the 2010 shareholder resolutions ask companies to use GRI and to participate in CDP’s annual survey; both organizations boast an impressive array of supporters and each provides companies with a well-developed reporting framework. Members of the U.N. Principles for Responsible Investment, which boasts adherents with some $20 trillion in assets under management, support cooperation with both GRI and CDP. PRI members work to promote more disclosure and are continuing to press companies to sign on to yet another set of principles, the U.N. Global Compact.
Policy questions: The sustainability resolutions present investors with two key questions: 1) whether sufficient evidence exists to support a clear link between good performance on environmental, social and governance (ESG) factors and positive financial return, and 2) whether investors have a fiduciary obligation to take ESG factors into consideration in their investment management approaches.
Meta-studies from Mercer Investment Consulting suggest there is scant evidence of a negative ESG-performance correlation, while a study just released by MIT Sloan Management Review underscores the potential for significant profitability and competitive advantages that can be realized by aggressive sustainability management. Further, the landmark 2005 legal opinion from international law firm Freshfields Bruckhaus Deringer that said ESG “is arguably required in all jurisdictions” was updated in 2009, with a new analysis that concluded investment managers may be sued by their clients if they do not take ESG issues into account, further upping the legal risk ante.
Regulatory developments: The regulatory landscape, still roiled by the financial crisis and its aftermath, saw important developments related to sustainability in the last year. In the United States, the Securities and Exchange Commission issued new interpretive guidance for companies on Jan. 27, saying that firms now must report the material effects of climate change in their regular securities filings.
The SEC also signaled its clear interest in examining additional ESG disclosure mandates, and gave favorable mention to the GRI guidelines. The new SEC Investor Advisory Committee is considering a wide range of options that give investors a much greater voice in securities regulation and leaving the door open for more scrutiny of corporate activity.
The U.S. developments are occurring as ferment continues in Europe, where several months of discussion focused on how corporate ESG disclosure might be made “better and more widespread” have just concluded.
International Initiatives and Codes
- Carbon Disclosure Project (http://www.cdproject.net/)
- Equator Principles (http://www.equator-principles.com/)
- Global Reporting Initiative (http://www.globalreporting.org/)
- International Finance Corp.’s Performance Standards (http://www.ifc.org/ifcext/sustainability.nsf/Content/EnvSocStandards)
- Principles for Responsible Investment (http://www.unpri.org/)
- UN Environmental Program Finance Initiative (http://www.unepfi.org/)
- UN Global Compact (http://www.unglobalcompact.org/)
Recent Papers of Note
- The Business of Sustainability, The Boston Consulting Group and MIT Sloan Management Review, October 2009. (http://www.mitsmr-ezine.com/busofsustainability/2009#pg)
- Future Proof? Embedding Environmental, Social and Governance Issues in Investment Markets, Who Cares Wins, January 2009. (http://www.ifc.org/ifcext/sustainability.nsf/AttachmentsByTitle/p_SI_WCW08_report_WEB.pdf/$FILE/p_SI_WCW08_report_WEB.pdf)
- Shedding Light on Responsible Investment: Approaches, Returns and Impacts, Mercer Investment Consulting, November 2009. (http://www.mercer.com/summary.htm?idContent=1363935&siteLanguage=100)
Key Regulatory References
- Commission Guidance Regarding Disclosure Related to Climate Change, U.S. Securities and Exchange Commission, Jan. 27, 2010.(http://www.sec.gov/rules/interp/2010/33-9106.pdf)
- European Commission on Enterprise and Industry: Sustainable and Responsible Business consultation 2009-2010. (http://ec.europa.eu/enterprise/policies/sustainable-business/index_en.htm)
Entry filed under: ProxyDemocracy, research. Tags: disclosure, environment, governance, MIT, proxy voting, research, Securities and Exchange Commission, shareholder proposals, sustainability, Sustainable Investments Institute, United Nations.