Investors looking for companies with good environmental, social and governance track records will find the job easier after European politicians ruled that thousands of firms must reveal their performance as corporate citizens.
Trillions of dollars of pension fund, insurer and mutual fund money is already invested in companies that are screened for a range of ethical criteria because of evidence that such firms tend to be more profitable in the long term.
Until now, the release of information has been patchy. The new legislation, though watered down from initial proposals, will compel around 6,000 mostly listed firms across the European Union to provide details on how they tackle issues such as bribery and human rights.
“We’re very, very pleased with the outcome; we think it will make a big difference,” said Steve Waygood, chief responsible investment officer at Aviva Investors, the fund management arm of the UK insurance group, which has 241 billion pounds ($404.7 billion) in assets under management.
“This really is an eleventh-hour agreement … we were very concerned that nothing would have been agreed at all and that this would have been knocked back three or four years and that a great deal of work would have been wasted,” he added.
The legislation, which still needs to be approved by EU member states, will require companies to disclose information on environmental, social, employee, human rights, corruption and bribery matters in their management reports.
What this looks like in practice has yet to be hammered out and could vary. The rules do not prescribe the information to be given.
Matthew Doyle, director of Hermes Equity Ownership Services, said the rules would “start important new developments in corporate reporting” and enable investors to access “materially important” information that would help them to better evaluate the sustainability of companies’ operations.
A January report by fund manager Hermes found that well governed companies had outperformed returns on the poorly governed by an average of over 30 basis points over the past five years.
Total global ESG (environmental, social and governance) assets under management amounted to at least $13.6 trillion at the end of 2011, with Europe accounting for 49 per cent, according to The Global Sustainable Investment Alliance (GSIA), a group of membership-based investing organisations.
“We believe that in many cases, as a business, doing the right thing over the long term pays shareholders because of things like regulation, fines, your brand and so on,” said Aviva’s Waygood.
Seen as historic turning point
The legislation builds on the work of pressure groups, academics, investors and politicians over the past decade.
Some 1,200 asset owners, investment managers and service providers managing nearly $35 trillion around the globe have signed up to the United Nations-backed Principles for Responsible Investment (PRI) Initiative, which launched in 2006 to support sustainable investing.
Some countries such as France already require certain information from companies, but the legislation goes much further and will make comparisons easier between a company in Poland and one in Spain, for example.
“It’s an historic piece of legislation”, said Francois Passant, executive director at advocacy and sustainability think-tank Eurosif, which represents asset owners and managers with more than 1 trillion euros in assets under management.
“ESG matters tend to materialise over the long term. So, if you’re a pension fund with long-term liabilities, it’s really vital you take into account non-financial risks,” he added.
The draft had proposed applying the rules to 17,000 listed and unlisted companies, but it was scaled back following complaints from businesses.
The requirements also were softened. Companies must ‘comply or explain’, which means they can avoid giving data if they have a good excuse. They also may be allowed to delay the release of some information.
“Sure, there are weaknesses. It’s a compromise. But it’s the turning point for non-financial reporting,” Eurosif’s Passant said. “If explanations are not reasonable, you can be challenged by shareholders.”
Even after compromises were made, the BDI trade association for German businesses still said the legislation is unnecessary, because more and more firms are already producing reports on corporate social responsibility (CSR) without being forced into it.
“In recent years, the number of companies in Germany who publish annual sustainability or CSR reports on a purely voluntary basis has steadily increased,” said Holger Losch, a member of the BDI’s executive board.
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