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’.
