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May 28, 2008

Large UK Companies Put Their Best Foot Forward
    by Anne Moore Odell

New study of the FTSE 100 finds most companies, but not all, are improving their performance on environmental, social and governance issues. -- Responsible investors do make a difference reports the UK-based research firm EIRIS in their newest study that tracks FSTE 100 companies over the past five years. "FTSE100 Snapshot: Trends in ESG performance" discovers that most of the UK's largest companies have made significant progress on environmental, social and governance (ESG) matters, especially environmental policy development.

Responsible investors, especially large institutional investors and pension funds, have helped drive FSTE 100 companies to increase their corporate responsibility. With the growing global awareness of climate change, investors are one of the key factors in companies improving their response to environmental issues reports EIRIS.

"In the UK, you have a lot of institutional investors who are putting pressure on companies to respond to climate change and this affects environmental policies," said Stephen Hine, head of responsible investment development at EIRIS.

"Investors are joining together on climate change, joining, for example, the Carbon Disclosure Project, based in London and IIGCC-Institutional Investors Group on Climate Change. You also have pension plans that are adopting responsible investment, looking at ESG issues. Many of these large plans invest in FSTE 100 companies, and the companies are under pressure to respond," added Hine.

EIRIS reports the number of companies at the very top of the environmental policy scale is growing rapidly. In 2003, 4% of FSTE 100 companies were assessed with an exceptional environmental policy. This percent jumped to 16% of FSTE 100 companies in 2007. EIRIS examined corporate environmental policies, looking at their objectives and targets, the level of board responsibilities, and policies covering energy use, emissions, and waste.

Stephanie Maier, head of research at EIRIS and author of the study, told, "I think that we are seeing more companies seeing the competitive advantage to being leaders in corporate responsibility. There are a number of investors, institutions, and companies looking to see to who is best in class, and these largest companies are spending more time and money on their CR departments."

Improvement has also been seen on human rights, and supply chain management. EIRIS rated corporate human right policies, investigating companies to see if they have clearly stated policies on human rights at a board or senior manager level. The snapshot also looked at companies' commitment to incorporate human rights policies into contracts with major partners or suppliers.

However, EIRIS's snapshot also notes that there is a minority of UK's largest 100 companies that are lagging behind their large-cap peers on ESG issues. Five percent of companies still have an inadequate rating of their environmental policies while 33% of all companies still have inadequate or weak reporting.

"There are some companies that haven't gotten off the starting blocks yet," said Maier. "It is a concern that even a minority of these companies haven't moved, as we are looking at the largest companies in the UK."

The areas that have seen the least improvement over all are board diversity, environmental disclosure, and equal opportunities.

In 2007, the UK revised the "Companies Act" and now requires companies to report "to the extent necessary" on non-financial factors that could impact their bottom line, including on their environmental policies. "This is reinforcing that the government thinks that corporate reporting is important, " said Hine.

Although the UK has passed legislation regulating the reporting of non-financial information and workplace equality, some companies are still lagging behind their peers.

The motivation to increase corporate responsibility is also coming from the companies themselves, the report finds, with companies realizing that being a leader on ESG issues can provide a competitive advantage.

Hine told, "There is a growing number of ESG funds, special funds, and mainstream funds that make it a habit to engage with companies, and companies are getting used to being asked these questions as a matter of course. Analysts are asking questions about the financial impact of ESG issues."

Looking at growing ESG trends, Hines pointed to increased investor involvement over human rights and supply chain issues. Water is another important area for socially conscious investors to look at, as climate change configures water patterns and more conflicts arise over the availability of water

"The other question raised by investors is, what role should companies have in helping alleviant poverty overseas, given worldwide disparities?" added Hine.

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