November 12, 2008
Report Finds That Most Corporations Fail to Address Risks That Threaten Long-Term Profitability
by Robert Kropp
EIRIS report on responsible business practices finds insufficient ESG risk management and
inadequate disclosure and advocates PRI involvement for responsible investors.
The portrait of risk management and disclosure practices by the companies on the FTSE All World Developed
Index, as found in the recent report entitled "The state
of responsible business 2008: Implications for PRI Signatories", is less than flattering. So
why does Bob Gordon, author of the report and Head of the US Team for The EIRIS Foundation, a UK-based provider of independent research
into the social, environmental and ethical performance of companies, seem optimistic?
"Look at the high levels of risk that
investors were subjected to in 2008," Gordon told SocialFunds.com, referring to the current global
fiscal crisis. "It's clear now that if corporations had done a better job of managing risks and
providing adequate disclosure, then investors could have used that information, not only in their
investment decisions but in engaging as owners with the companies in which they invest."
As an indication of growing collaboration among investors, Gordon referred to a letter sent to
9,000 companies by more than 50 PRI signatories that hold $4.4 trillion in assets, requesting
clarification of their positions on mitigating risks and providing disclosure. He believes that the
letter stands as evidence that the tide may be turning in favor of active engagement by investors
in the companies they own.
"Get involved with PRI!" Gordon implored investors, referring
to the UN's Principles for Responsible Investment
(PRI), a framework for investor management of environmental, social and corporate governance
(ESG) issues that can affect the performance of investment portfolios.
The PRI, whose
signatories manage assets exceeding $15 trillion, advocates for the inclusion of environmental,
social, and governance (ESG) risks into investment decisions; activist engagement with companies to
ensure that ESG issues become part of corporate policy; and collaboration among investors to
enhance effectiveness in achieving its goals.
The EIRIS report, which addresses all
investors but particularly those who have signed onto the PRI, "explores the key environmental,
social and governance (ESG) risks and opportunities identified by the UN Global Compact of human
rights, labour standards in the supply chain, environment and anti-corruption." It found that "the
majority of companies are exposed to significant risks on these issues." Furthermore, "80% of
companies in the FTSE All World Developed Index face significant unmanaged ESG risks."
report categorizes companies according to risk in the areas of human rights, labor standards in the
supply chain, environment, climate change, and bribery and corruption. With the exception of
management of environmental risks, in which over 50% of high-impact companies demonstrated a good
management response, high-risk companies have largely failed to mitigate risks in any area.
Less than 20% of high-risk companies have mitigated the risk of labor rights abuses in their
supply chains. Without the external pressure by shareholders on apparel companies, whose advanced
response merited a best practice designation by EIRIS, the percentage of companies demonstrating a
good response would likely have been considerably lower.
In the other areas surveyed in
the report, no more than 10% of high-risk companies demonstrated a good response to risk
On the subject of disclosure, the report found that "disclosure levels are
generally not good enough for investors to be clear about the risks they face, or what companies
are doing to manage their risks."
Only in the areas of environment and climate change did
disclosure levels among high-risk companies surpass 2.5%. The report finds a correlation between
the higher level of climate change disclosure among high impact companies and membership in such
reporting initiatives as the Carbon Disclosure
The EIRIS report provides four recommendations to assist investors in
their consideration of ESG issues: integrate ESG risk into investment strategy; actively engage
with companies to improve their performances; insist upon better corporate disclosure, in part by
promoting reporting initiatives as the Global Reporting Initiative (GRI) and the Carbon
Disclosure Project; and support the PRI.
SocialFunds.com asked James Gifford, Executive
Director of the PRI, how institutional investors would benefit from becoming PRI signatories.
"ESG coverage has a long way to go," said Gifford. "But the key point is shareholder engagement
in order to encourage companies to disclose systematically. Over the next few years we expect ESG
coverage to improve dramatically, and we plan to encourage a significant increase in signatories
from currently underrepresented emerging markets."
In an effort to systematize ESG
information and encourage collaboration among PRI signatories and other institutional investors,
EIRIS appended information about its PRI toolkit to the report. The three products developed by
EIRIS seek to provide systematic information to investors based on the first three of the six
Principles for Responsible Investment.
Gordon of EIRIS said of the toolkit, "The
aggregation of so much information will help investors integrate the principles of PRI into their
investment decisions. We believe the toolkit contains the first products directly linked to PRI."
Gordon is not alone in believing that the current fiscal crisis presents opportunity for
responsible investment. The rapid decline of stock prices should lead asset managers and individual
investors to question the value of the strategies that led directly to the crisis. The quest for
short-term gains led many investors to ignore risks both financial and related ESG issues.
In contrast to a focus on short-term gains, sustainable investment strategies emphasize
long-term returns for shareholders.
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