Responsible investments going mainstream

pri james gifford 2012 sgx
PRI's James Gifford predicts all the world's major funds will be based on responsible investing principles within 10 years. Image: Eco-Business

Investors and fund managers are demanding better information from companies on key environmental, social and governance issues which are set to become major factors in investment decisions within the next decade.

Many stock exchanges across the globe are responding by requiring listed companies to disclose such information.

Executive director James Gifford of the United Nations-backed Principals for Responsible Investment (PRI) said at a conference last Tuesday that the world’s fund managers are increasingly factoring in such environmental, social and governance issues, known in the industry as ESG, when making decisions.

So far, socially responsible investing, also called SRI, in which investors systematically combine both ESG and financial information about a company in their decisions, has been a niche sector practiced by a minority of investors such as large pension plans and other institutional investors.

But paying attention to ESG factors such as water scarcity, worker welfare, corruption, pollution and unstable supply chains adds value for all investors because it reduces risks to future profits, Mr Gifford told 175 industry professionals at the ESG Asia conference.

The event, held at the Singapore Stock Exchange, was jointly organised by media firm and Asia-based independent research firm Responsible Research.

Companies which prove they are managing such risks make better investments in the long-term, and can provide “insurance-like” protection in times of crisis, he added.

The investing community is increasingly aware of the benefits of ESG investing, he noted, pointing to PRI’s nearly 1,000 company signatories, who collectively manage about US$30 trillion, as evidence.

However, to analyse risks from ESG factors, investors and fund managers need companies to provide better information.

“Disclosure is the first step in managing risk,” said Mr Gifford.

Stock exchanges are starting to require that their listed companies include ESG factors in the information that they disclose to investors.

At the conference, Responsible Research launched a new study which found that three quarters of the exchanges agreed they had a responsibility to encourage corporate social responsibility (CSR) among listed companies.

The study, which surveyed 27 of the world’s largest stock exchanges, gauged the progress made by the UN Sustainable Stock Exchange (SSE) initiative that was established in 2009 to mainstream ESG investment.

To achieve that, the bourses have been seeking ways of improving access to information on ESG factors by pressuring their listed companies to include corporate social responsibility issues in the annual reporting process.

Over half of the exchanges, including Singapore and Hong Kong, already provide encouragement to their listed companies in the form of guidelines or workshops.

Some, such as Bursa Malaysia, require their large companies to provide sustainability reports or explain why they do not.  In 2010, the Johannesburg Stock Exchange in South Africa became the first stock exchange to require its listed companies to integrate sustainability reporting into annual financial reports – or issue a statement with their reason for not doing so.

Sustainability reports provide details on social and environmental impacts of a company and can be published separately or integrated into a firm’s annual financial report.

In its recommendations for the upcoming Earth Summit in Brazil, known as Rio+20, the UN has suggested that every country adopt the ‘comply or explain’ approach used in Malaysia and Johannesburg.

Over 75 per cent of the exchanges surveyed said they supported a global comply or explain policy because it would ensure consistency from country to country, and because exchanges cannot implement the disclosure rules needed without “a nudge” from policymakers, noted the report.

Exchanges say their hands are tied on reporting requirements: Only 10 per cent of those surveyed said they had complete control over listing requirements, and a third said such decisions were made entirely by government regulators.

But the report also noted that regulations are only part of the problem. Exchanges said they lacked financial incentive to promote ESG investing.

While 86 per cent of bourses surveyed said they had established or were planning to establish sustainability indices such as the United States-based Dow Jones Sustainability Index or the FTSE4Good in the United Kingdom, they noted that such indices provided no revenue for the exchange.

Most exchanges these days are for-profit enterprises that rely on a high volume of trades for revenue. The result is a preference for quantity over quality, said experts.

Emerging markets are an exception, however, as exchanges located in such markets tend to see ESG credentials as a way to boost reputations for transparency and good management, noted the report.

Responsible Research executive director Lucy Carmody, who edited the report, added that some bourses said they would have more incentive to promote ESG initiatives if investors clearly showed that ESG issues were integral to their decision-making process.

The report will serve as the basis for discussion at a June 18 event for stock exchanges and regulators that will precede the Rio+20 summit, where the UN’s SSE members will urge all nations to establish a convention on corporate sustainability reporting.

Are Asian firms ready?

Executive director of the Singapore Stock Exchange (SGX) Magnus Böcker, who also spoke at the conference, said that while there was no doubt that investors were recognising the importance of ESG issues, Asian businesses were still lagging behind and in the early stages of adopting sustainability reporting.

Non-profit Singapore Compact for CSR, which last year published a study of Singapore-listed firms, found that out of the 562 companies listed in Singapore in 2010, only 79 filed sustainability reports.

Sustainability reporting is voluntary for SGX-listed companies at the moment, but last year, the exchange published CSR reporting guidelines for its members for the first time and said it might make such reporting mandatory in the future.

Mr Bocker said stock exchanges have an important role in developing the region’s economies through setting benchmarks for disclosure and maintaining confidence that investors are protected against uncertainty.

He added that SGX was not afraid to take action and would continue to improve its regulatory role to protect investors.

“SGX will never be successful unless we pursue higher standards to make us one of most trusted exchanges in the world,” he said.

Thomas Thomas, executive director for Singapore Compact for CSR, told Eco-Business separately that even without compulsory requirements, Singaporean companies were making progress on sustainability reporting.

Over half of Singapore’s large listed firms, defined as companies valued at over S$1 billion, are producing reports – and that number is rising, he said.

With SGX and international agencies sending clear messages that they want sustainability reporting done, it will start to become part of the “value system” here, he said. Now that large companies have started reporting, the rest will follow because they will want to show they are responsible, he added.

Mr Thomas’s organisation has run corporate training workshops for sustainability reporting two to four times each year since 2008. Singapore Compact is now introducing additional workshops to help companies through the process due to growing demand for such training.

There is definitely more interest now because of the discussions and trends around reporting, noted Mr Thomas. “But it’s not the report itself that is important,” he stressed. “It’s the process: You must be practising corporate social responsibility to report on it.”

Larger companies generally have a good understanding of the process and the need to include both the positive and negative aspects of CSR performance. Occasionally however, he sees companies that are too focused on the report itself and neglect to first establish goals and evaluation methods for CSR issues such as greenhouse gas emissions, water efficiency or staff welfare.

“If they try to make the report too much of a public relations tool, they’ll lose credibility,” he said, adding that companies need to provide a clear message to their stakeholders on what their mission is and how they are getting there.

Mr Thomas said that the rate of sustainability reporting, which grew 25 per cent in Singapore from 2010 to 2011, is likely to accelerate and reach a tipping point within the next decade.

Over the past few years, many unlisted companies have started to report because they see benefits such as marketing value, enhanced reputation and tracking their CSR performance, he noted.

His advice to those new to the process is to jump right in: “The most difficult part of the reporting process is getting started. Once that’s going, the rest of the process is much easier.”

Companies in Southeast Asia are making forays into sustainability reporting, albeit by taking small steps.

Singapore telecommunications and media company Starhub last week announced its first integrated sustainability report written to Global Reporting Initiative (GRI) standards.

The non-profit GRI provides industry-specific guidelines for CSR reporting that are written by a network of sustainability and industry experts. GRI continually upgrades its reporting standards, the most widely used globally, to push companies to higher levels of reporting.

Jeannie Ong, head of corporate communications for Starhub, said in a statement that the firm integrated its latest sustainability report into its 2011 annual report to provide greater transparency to investors and other stakeholders.

The report follows GRI guidelines and measures its environmental impacts using several different international standards, including the Greenhouse Gas Protocol for measuring greenhouse gas emissions and the Water Footprint Network for measuring impacts on water supply.

Ms Ong said following the standards and integrating the annual report and sustainability report into one publication had been a challenging but necessary experience.

“We believe the adoption of internationally recognised and recommended standards is the way forward,” she added.

The company found identifying and collecting data from the many different points of energy consumption particularly difficult, a Starhub representative told Eco-Business.

Starhub used 42 indicators specified by GRI for the telecommunications industry, although the information was not independently verified as recommended by GRI. However, a sustainability advisory firm helped with the report and verified a sample of the data, said the report.

Malaysia’s YTL Corporation, a conglomerate of construction, utility and property companies with operations in Malaysia, Singapore, Indonesia, China, France, the United Kingdom and the United Arab Emirates, started reporting on its corporate social responsibility activities in 2006 - before Bursa Malaysia began requiring sustainability reporting.

The firm has won multiple sustainability reporting awards from Malaysia’s Association of Chartered Certified Accountants, yet it still has ambitious plans for making them better.

YTL director of investments Ruth Yeoh told Eco-Business in a recent interview that YTL wants to take a leadership role in sustainability and has a goal of improving its reporting process with each year. For 2012, the company plans to publish its first report based on GRI standards.

This will require the company to include more quantitative targets and data in its reports, and to seek independent verification of the data.

Initially, YTL will reduce the range of business activities covered in the report, as many of them were previously included only in anecdotal form, noted Ms Yeoh. However, those boundaries will gradually be extended to eventually cover all of the firm’s business units, she added.

The rationale for YTL’s on-going reporting efforts is to combine transparency and responsibility, and to demonstrate to investors, staff and others the company’s long-term commitment in making sustainability a priority even while it is rapidly growing, she said.

“It also shows that management is capable and not afraid of disclosing the good and bad,” she added.

Ms Yeoh noted that one of the biggest challenges in pushing for sustainable development is that not everybody is going to get it right the first time. It is still very early days, and companies trying to establish models that are sustainable and cost-effective are still very much in the experimental stage, she said.

“It is not always easy for us to convince external stakeholders and individuals in the industry that sustainability or the environment should be top of the agenda in business strategy,” she added.

However, she maintains that for Asia, which has its own set of environmental problems from pollution to energy crises, it is important to keep searching for solutions.

“How well Asian countries will manage these issues will be the key in this century and beyond,” said Ms Yeoh.

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