Dear Fellow Supporters of Integrated Reporting,

This month’s newsletter contains articles and studies on:
  • Corporate governance (annual letters from Larry Fink of BlackRock and Ron O’Hanley of State Street Global Advisors and a piece by Marty Lipton)
  • ESG and financial performance (a report by Bank of America Merrill Lynch, an academic study, and the 10th edition of the PRI’s RI Quarterly)
  • Trends in the investment industry (a UBS white paper, an article from The Economist, and a report by PricewaterhouseCoopers)
  • Sustainable companies (the latest rank from Corporate Knights of the 100 most sustainable companies and an interview with John Elkington)
  • Sustainability reporting (a report written by GRI and SustainAbility)
  • And finally, a piece I wrote on U.S. corporate pension plans for my column on
Corporate Governance
On January 24, 2017 Laurence D. Fink, Chairman and CEO of BlackRock, published his “Annual Letter to CEOs.” In it he remarks that:

"Environmental, social, and governance (ESG) factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects. We look to see that a company is attuned to the key factors that contribute to long-term growth: sustainability of the business model and its operations, attention to external and environmental factors that could impact the company, and recognition of the company’s role as a member of the communities in which it operates. A global company needs to be local in every single one of its markets."
On January 26, 2017 Ronald P. O’ Hanley, President and Chief Executive Officer of State Street Global Advisors (SSGA) published his “Letter and ESG Guidelines” sent to board members. He too notes the importance of ESG issues:
"Ahead of the upcoming proxy season, I want to provide our latest perspectives on how we believe boards can effectively work with management to incorporate a sustainability lens into long-term company strategy. We define sustainability as encompassing a broad range of environmental, social and governance (ESG) issues that include, for example, effective independent board leadership and board composition, diversity and talent development, safety issues, and climate change. Over the long term, these issues can have a material impact on a company’s ability to generate returns. As one of the largest index managers in the world, our size, global scale and long-term ownership provide a unique, top-down point across industries on the ESG risks and opportunities confronting companies and their shareholders."
Included in the letter is “SSGA’s Framework for Evaluating Sustainability Approaches” based on three criteria:
  1. Has the company identified material environmental and social sustainability issues relevant to its business?
  2. Has the company assessed and, where necessary, incorporated the implications of relevant environmental and sustainability issues into the company’s long-term strategy?
  3. Has the company adequately communicated its approach to sustainability issues and its influence on strategy?
Companies are then classified as follows
  1. Tier One companies have satisfied all three
  2. Tier Two companies have satisfied one or two
  3. Tier Three companies have not considered sustainability issues at all 
In 2016, they deeply evaluated 177 companies in their global portfolio and found that 7% were Tier One, 72% were Tier Two, and 21% were Tier Three.
The New Paradigm” (A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth), by Martin Lipton of Wachtell Lipton Rosen & Katz is a call for corporate executives, board members, and investors to shift their attention from short-term financial results to long-term value creation. The opening paragraph of the paper states:
"The 'New Paradigm' is an emerging corporate governance framework that derives from the recognition by corporations, their CEOs and boards of directors, and by leading institutional investors and asset managers (“investors”), that short-termism and attacks by short-term financial activists significantly impede long-term economic prosperity. The economic impact of a short-term myopic approach to managing and investing in businesses has become abundantly clear and has been generating rising levels of concern across a broad spectrum of stakeholders, including corporations, investors, policymakers and academics. The proposition that short-term financial activists and reactive corporate behavior spur sustainable improvements in corporate performance, and thereby systemically increase rather than undermine long-term economic prosperity and social welfare, has been overwhelmingly disproved by the real world experience of corporate decision-makers as well as a growing body of academic research. This emerging consensus has reached a tipping point, and decisive action is imperative. The New Paradigm is premised on the idea that corporations and institutional investors can forge a meaningful and successful private-sector solution, which may preempt a new wave of legislation and regulation such as adumbrated in the recent policy statement by Prime Minister Theresa May in the U.K."
ESG and Financial Performance
ESG: good companies can make good stocks,” a Bank of America Merrill Lynch “Equity Strategy Focus Point,” by Savita Subramanian, Dan Suzuki, Alex Makedon, Jill Carey Hall, Marc Pouey, and Jimmy Bonilla begins by noting that:
"It’s not just for tree-huggers - incorporating environmental, social and corporate governance (ESG) considerations into one’s framework is critical. First, these metrics have been strong indicators of future volatility, earnings risk, price declines and bankruptcies. Second, trends in the US investment landscape suggests that trillions of dollars could be allocated to ESG-oriented equity investments, to stocks that are attractive on these attributes, over the next few decades– inflows equivalent to the size of the S&P 500 today! In this first in a series of notes, we present our findings based on the Thomson Reuters ESG dataset, and conclude that ESG may be too costly to ignore."
And from the Introduction:
"Values-based investing resonates at a human level — allocating capital to responsible companies with good governance feels like the right thing to do. But whether it enhances performance is less clear. Negative perceptions around the efficacy of ESG approaches may date back to the mid-70s where early attempts, branded as Socially Responsible Investing or SRI, primarily used negative screening—excluding “sin” stocks/industries from portfolios. The unintended consequence was a loss of diversification and fund concentration, which inhibited outperformance.
Academic research is split on whether ESG is a meaningful source of returns: a 2007 study1 concluded that applying socially responsible criteria led to abnormally high returns, while another2 found no difference between risk or return profiles of ESG portfolios and conventional funds. But interestingly, among fund managers who incorporate ESG factors, 80% cited better returns as one of the top reasons for incorporating ESG factors into their process according to a recent survey (US SIF 2016 Survey).
Here we examine ESG from the perspective of an equity investor, and conclude that ESG attributes may be too costly for investors to ignore. Our conclusions:
• ESG factors have been reasonable signaling tools for future performance, and companies with attractive ESG ratings have shown a tendency to re-rate as asset flows into these types of strategies have increased.
• ESG factors have been effective signaling tools for future stock price volatility and future drawdown risk.
• ESG factors have been effective signaling tools for future earnings volatility, future S&P quality rank upgrades/downgrades and future returns on total equity.
• Select ESG factors have had efficacy in signaling future bankruptcy risk.
• Most importantly, ESG-type investment strategies may be a self-fulfilling story. Our estimates suggest that ESG-type investment vehicles could double their asset base in the next one to two years, and could see exponential growth in the next one to two decades. Part I: good companies."
Does it Pay to Be Really Good? Addressing the Shape of the Relationship Between Social and Financial Performance,” by Michael L. Barnett (University of Oxford Said Business School) and Robert M. Salomon (New York University Stern School of Business) examines the relationship between corporate social performance and financial returns. Here is the abstract:
"Building on Barnett’s (2007) theoretical argument that a firm’s ability to profit from social responsibility depends upon its stakeholder influence capacity (SIC), we bring together contrasting literatures on the relationship between corporate social performance (CSP) and corporate financial performance (CFP_ to hypothesize that the CSP-CFP relationship is U-shaped. Our results support that hypothesis. We find that firms with low CSP have higher CFP than firms with moderate CSP, but firms with high CSP have the highest CFP. This supports the theoretical argument that SIC underlies the ability to transform social responsibility into profit. "
Towards the end of their paper they note:
"Our findings add richness to Brammer and Millington’s (2008: 1339) conjecture that the benefits of CSP, or lack thereof, come only in the extreme.

Those that give at an unexpectedly high rate differentiate themselves in the eyes of stakeholders and reap the benefits of this differentiation…Firms that give at an unexpectedly low rate conserve the financial resources they might have otherwise donated to charity.
Indeed, we find a tipping point at which the total benefits of CSP outweigh the mounting costs (around a net KLD score of 12 for ROA and 9 for net income). But going beyond the Brammer and Millington’s (2008) findings, our study suggests that firms do not gain all the benefits only after exceeding this tipping point and none prior. Rather, our study suggests that there is variation in benefits across the range of CSP, such that as SIC accrues, it provides benefits that come to meet and then exceed the costs of being socially responsible. Much the same as the CSP-CFP relationship is neither purely positive or purely negative, a firm is neither purely good nor bad."      
The 10th edition of PRI’s Academic Research series, “RI Quarterly: The Next Frontier for Responsible Investment,” cites four studies:

•    “ESG factors and risk-adjusted performance: a new quantitative model” by N. C. Ashwin Kumar¹, Camille Smith¹, Leïla Badis¹, Nan Wang¹, Paz Ambrosy¹ and Rodrigo Tavares², ¹IE Business School, Madrid, Spain; ²Granito & Partners (Published in Journal of Sustainable Finance & Investment, 2016, Vol. 6, no. 4, 292–300)
•    “The materiality of ESG factors for equity investment decisions: academic evidence” is a report which “presents the results of a study performed by the European Centre for Corporate Engagement (ECCE) at Maastricht University in cooperation with NN Investment Partners (NN IP) to gain new insights into the usefulness of environmental, social and governance (ESG) data for investment professionals.”
•    “ESG and Corporate Financial Performance: Mapping the global landscape” sponsored by Deutsche Wealth & Asset  Management and written by Gunnar Friede (Senior Fund Manager), Michael Lewis (Head of Sustainable Finance Research), Prof. Dr. Alexander Bassen (Professor of Capital Markets and Management at the University of Hamburg), and Prof. Dr. Timo Busch (Professor of Sustainability and Management at the University of Hamburg)
•    “From the Stockholder to the Stakeholder” sponsored by Arabesque Asset Management and written by Gordon L. Clark (Oxford University, Smith School of Enterprise and the Environment), Andreas Feiner (Arabesque Asset Management), and Michael Viehs (Oxford University, Smith School of Enterprise and the Environment and European Centre for Corporate Engagement)

In the introduction to this volume of RI Quarterly, Katherine Ng, Head of Academic Research for Principles for Responsible Investment, states that:
"Any publication that comes out at the start of the year cries out for either a review of the past year or some crystal ball action. In our latest edition of RI Quarterly, after a hiatus, we touch on both. We have reviewed the past 12 months—and what a year 2016 turned out to be with, with its unusually high degree of political nail-biting. We also look at several key issues that could be considered on the frontier for responsible investment but will become part of investors decision making."
Trends in the Investment Industry
Mobilizing private wealth for public good” is a UBS White Paper for the World Economic Forum Annual Meeting 2017. Here is the Foreword by Axel E. Weber, Chairman of the Board of Directors, and Sergio P. Emotti, Group Chief Executive Officer.
"The world cannot go on growing as it has been. While global imbalances like uneven growth, wealth inequality, and environmental degradation have generally raised living standards, unsustainable growth now puts future living standards at risk, and can imperil the welfare of the generations to come.
The Sustainable Development Goals (SDGs) present a critical opportunity to promote sustainable growth for all. Private capital can and must invest to achieve them, and yet a number of obstacles prevents it from doing so to the necessary extent.
UBS promises to work together with its clients to grow and protect their wealth over generations. Sustainability is a cornerstone of our business.
We invite you in this white paper to examine why private capital fails to reach SDG-related projects. We encourage policymakers to follow our recommendations to engage private capital investment in the SDGs. And we urge potential partners to work alongside our new and existing initiatives to build sustainable investment solutions to meet these vital goals.
Divided, the best efforts to change our world to become more sustainable will fail. Together, we can create a better, balanced, and more sustainable future."
The Economist “’Impact investing’ inches from niche to mainstream” begins by noting:
"When investors gathered in Amsterdam in late 2016 for perhaps the largest annual conference on “impact investing”, the mood was upbeat. The concept of investing in assets that offer measurable social or environmental benefits as well as financial returns has come a long way from its modest roots in the early 2000s.
Panelists at the conference included, among others, representatives of two of the world’s largest pension funds, TIAA of America and PGGM of the Netherlands, and of the asset-management arm of AXA, a French insurance behemoth. A niche product is inching into the mainstream."
It concludes:
"Cynics may still dismiss impact investing as faddish window-dressing. Of Zurich’s $250bn-plus in assets under management, only $7bn-worth are classified as impact investments. At Goldman’s asset-management arm, impact and ESG-integrated investments combined only make up $6.7bn out of a total $1.35trn in assets under management.
That is to ignore the scale and progress that large institutional investors have brought to impact investing. Although $7bn is a tiny slice of Goldman’s portfolio, it is huge compared with the investments of even well-established impact specialists, such as LeapFrog, whose commitments total around $1bn. And the entry of hard-nosed financial giants sends an important message about impact investing: that they see it as profitable for themselves and their clients. It is not enough to make investors feel good about themselves; they also want to make money."
 “Asset Management 2020: A Brave New World,” by PricewaterhouseCoopers, “sets out how the operating landscape for asset managers will change by 2020 and explains how asset managers can prepare for the challenges ahead and turn them into competitive advantages.” From the Introduction:
"Amid unprecedented economic turmoil and regulatory change, most asset managers have afforded themselves little time to bring the future into focus. But the industry stands on the precipice of a number of fundamental shifts that will shape the future of the AM industry.
To help asset managers plan for the future, PwC has considered the likely changes in the AM industry landscape over the coming years and identified key gamechangers that will impact the competitive environment. This paper first presents how the operating landscape for asset managers will change by 2020 and beyond. In the second part of this paper, we discuss how asset managers may prepare for the challenges these changes present and turn them into competitive advantages."
Sustainable Companies
In “100 World’s Most Sustainable CompaniesCorporate Knights has published its 2017 Global 100 results. Here are the top 10:
“John Elkington is one of the leading sustainability thinkers Ethical Corporation interviewed for an in depth examination of how the CSR agenda must change in the wake of the Brexit vote and Donald Trump.” Jere are a few selected paragraphs from the interview “Business has to be central to delivering the change we need”:

Elkington outlined the "breakthrough business models" that will be needed to meet the SDGs in a paper he wrote last year for the Business and Sustainable Development Commission, a year-old initiative that wants to inspire companies to use the SDGs as a framework for growth. Its flagship report Better Business, Better World, arguing that sustainable business models could open economic opportunities worth at least $12 trillion and up to 380 million jobs by 2030, is published this week, though he won’t be in Davos for the launch event….

Elkington has been trying to bridge this gap on numerous fronts: he heads up the Global Reporting Initiative's year-old technology consortium, which is looking at how big data can be used to unlock sustainability information from individual CSR reports and make it freely available to help businesses and policymakers solve big global sustainability issues. The consortium, which involves HP, IBM, SAP and machine-learning analytics start-up Quid, was put on hold for three months while the GRI was without a CEO, but with Timothy Mohin due to take up the reins this month, Elkington has been assured it will get back on track…

And alongside his work with the Business and Sustainable Development Commission, Volans has been working with the UN Global Compact's LEAD group of 50 major companies from around the world, which describes itself as “uniquely positioned to inspire widespread uptake of sustainability solutions among businesses around the world”.

This year, in a gratifying sign that his "breakthrough business models" agenda is getting global traction, the LEAD members will have their annual meeting in New York this year branded a Breakthrough Summit."
Sustainability Reporting
Future Trends In Sustainability Reporting,” Insights from the GRI Corporate Leadership Group on Reporting 2025 January 2017 in collaboration with SustainAbility. Here is the Foreword from Eric Hespenheide, Interim Chief Executive and member of the Board of Directors of Global Reporting Initiative:
"Sustainability reporting is an essential first step in the process by which organizations take action to create a truly sustainable global economy; this belief has always underpinned GRI’s mission.
But reporting is not static – it evolves, through developments like emerging global challenges, new technologies and changing stakeholder interests – and companies need to take this into consideration.
As the global standard setter for sustainability reporting, GRI needs to be aware of these developments in reporting. GRI’s global multistakeholder network is in the best position to provide cutting-edge information on where reporting is heading.
We launched a project to harness this information and analyze emerging trends in reporting: Reporting 2025 supported international dialogue on the topics likely to be on companies’ agendas in the coming decade. Through interviews with some of the world’s leading sustainability reporting experts and practitioners, we created a future vision of reporting that would form the basis of further exploration.
The Corporate Leadership Group (CLG) on Reporting 2025 took this project to the next level. The forward-looking international leadership forum of companies discussed the image put forth in the interviews, considering the topics that might feature in the future. They also pinned down the key topics expected to influence business decisions in the next decade to transition to a sustainable economy, and identified the disclosures that would be needed to make this happen.
The CLG Reporting 2025, comprising 13 companies from a variety of sectors and regions, was a dynamic group motivated to uncover and understand emerging trends and improve disclosures. The group engaged during meetings throughout the year, including with leading experts and stakeholder representatives, and shared their own experiences of reporting.
GRI is rooted in innovation. As sustainability reporting pioneers from the start, we believe reporting and transparency can accelerate the transition to a sustainable economy, and we are always looking ahead for opportunities to facilitate this. The discussion about future reporting trends is therefore vital to ensure that sustainability reporting has the most positive impact possible on sustainable development.
With this CLG – and future editions – we are ensuring that the discussion continues. The GRI Sustainability Reporting Standards can help every company in the world report their sustainability performance, therefore contributing profoundly to greater transparency. The continuation of the discussion about reporting trends will inspire companies to use the GRI Standards to identify, measure and report their most material impacts, helping us move to a sustainable future together."
U.S. Corporate Pension Plans
The Risk And Opportunity For America’s Corporate Pension Plans,” is a piece I wrote for my column on In the opening paragraph, I note that:
"There is a curious anomaly in the corporate world in the United States that is putting the beneficiaries of U.S. corporate pension funds at risk. Stated very simply, while more and more companies are proclaiming their commitment to “sustainability,” their pension funds are virtually ignoring the topic."

I conclude with a quote from Gavin Power, Deputy Director of the UN Global Compact:
I will leave the final words on this to Gavin Power, Deputy Director of the UN Global Compact, who said, “Over the past two decades, we have seen a dramatic transformation in how companies integrate sustainability into their policies and practices. We believe corporate pension plans remain an untapped area. Considering sustainable development issues in pension fund investment decisions is a natural extension of a company’s holistic commitment to sustainability. It is also in the interest of beneficiaries—both through returns and in creating a better world for their retirement years.”
Kind regards,


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Saïd Business School · Park End Street · Oxford, Greater London OX1 1HP · United Kingdom