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Dear Fellow Supporters of Integrated Reporting,
 
The topics in this e-mail are Climate Change, Sustainable Investing, Green Bonds, Private Equity, Generation S, Inclusive Capitalism, Fiduciary Duty, JUST Capital, the Multi-Capital Scorecard, and News from Arabesque.
 
Climate Change
 
Global 3500 Greenhouse Gas Performance 2010-2015: Key Trends & Opportunities for Leadership,” by John Moorhead and Tim Nixon, is the latest report on the greenhouse gas emissions of the world’s 3,500 largest publicly traded companies. From the introduction:
 
"This report is not meant to name and shame. Rather, it is meant as a starting point for further inquiry. What might appear as poor performance in the data could be the result of a recent acquisition that adds to a company’s emissions, or the beginning of a carbon intensive business model’s shift towards lower carbon intensity and paradigm changing innovation. We encourage readers to dig deeper behind these headlines, particularly as, in previous reports, around half of the GHG data used for this report are self-reported, with the remainder estimated by Thomson Reuters using patented methodologies. We invite more companies and their stakeholders to provide new updates and increased transparency in this critical area so as to increase the availability of this vitally important set of data."
 
Contained in this report is State of the Climate: Just the numbers, compiled by Chief Meteorologist Paul Huttner from Minnesota Public Radio from the leading sources of scientific data on climate.  It shows:
  • 16 of 17 warmest years on record globally have occurred since 2000
  • 1 in 27 million odds that string of hottest years globally since 2000 occurred naturally
  • 1.48C – global average temperature change from early industrial levels most likely for the whole of 2016.
  • 2016 - 99% chance 2016 will be the 3rd consecutive "warmest year on record” globally (Gavin Schmidt, NASA)
  • 2015 – warmest year on record globally since 1880
  • 2014 – previous warmest year on record globally since 1880
  • 400 ppm – global average atmospheric CO2 levels remain above
  • 400 ppm (first recorded in March 2015) most likely for the whole of 2016
  • 22 to 44 cm IPCC projected sea level rise by 2100
  • 1 trillion tons – cumulative ice loss in Greenland between 2011 and 2014. That's 12% per decade – rate of Arctic Sea ice decline
Sustainable Investing
 
The FTSE4Good 15-year anniversary report: Past, present and future of sustainable investment is comprised of six sections:
 
Section 1: The new normal  Section 2: Sustainable investment data  Section 3: FTSE Russell pioneering role in ESG  Section 4: The state of global ESG disclosure  Section 5: Measuring and mapping ESG performance  Section 6: Past, present and future of Sustainability Investing
 
From Section 1:
 
“When the FTSE4Good Index Series launched in 2001 it was regarded by many as a fad, and one of the UK’s mainstream newspapers even called it the “silly index.” Environmental and social issues were regarded as niche “ethical” concepts that were irrelevant, distracting, or even return-compromising by almost all investment professionals. Fifteen years later the landscape has changed beyond recognition, with financial institutions around the world—including pension funds, insurance companies, asset managers and banks—now incorporating sustainable investment approaches into their investment philosophy and processes. For many years there was a growth in commitments and policies, but little change in investment practices and actual asset allocation.
 
The trend toward sustainable investment approaches was first seen through the growth in the number of institutions and geographies making commitments and joining initiatives, such as the UN-backed Principles for Responsible Investment (PRI). However, the step change, which has been evident in the last two or three years, has been in the actions being taken: re-allocating assets and using sustainability parameters in an integrated manner deep within the investment process.”

 
The Morgan Stanley Institute for Sustainable Investing and Bloomberg LLC collaborated on a report “Sustainable Signals: The Asset Manager Perspective.” It is a survey of 402 U.S.-based asset managers conducted by Edelman, supplemented by 17 interviews done by the Initiative for Responsible Investment at the Harvard Kennedy School. From the Executive Summary:
 
“Sustainable investing has entered the mainstream, with two-thirds of asset managers surveyed now aiming to achieve competitive market-rate financial returns alongside positive social and/or environmental impact and with nearly nine in 10 familiar with the practice. This surge in activity has been spurred by rising investor demand and media coverage, resulting in a proliferation of new products from specialist and mainstream asset management firms.
 
Sustainable Investing Trends at a Glance Among 402 individuals surveyed at U.S. asset management firms: Yet: 89% are familiar with sustainable investing, 55% say the field lacks credible data to inform decision-making, 65% practice sustainable investing, 64% believe its adoption will continue to grow, 51% are confident they can explain the non-financial impact of sustainable investing to clients, 62% say proof of financial performance by sustainable investing products would increase firm’s commitment.”

 
The PRI and MSCI, in collaboration with UNEP: Inquiry; Design of a Sustainable Financial System, have published the Global Guide to Responsible Regulation. From the Executive Summary:
 
"This report is the first global study to analyse the impact of responsible investment-related public policy initiatives. It focuses on the perceptions of the investor community to draw conclusions about the impact of regulation on investment practice. Through quantitative analysis and interviews with investors, stock exchanges, policymakers and regulators, we found that:
  • Responsible investment policy is widespread and the pace is increasing
  • There’s some evidence that it’s driving better ESG performance by companies
  • Policy effectiveness is hampered by weak implementation and weak signals
  • Despite the increase in sustainable finance regulation, most governments aren’t connecting sustainability and capital markets policy—but there are signs that this is beginning to change"
Setting the Sustainability Agenda,” by Fiona Reynolds of the PRI discusses sustainable investing in the context of the election of Donald Trump as the next President of the United States. In reflecting on the reasons for this outcome, she notes that:
 
“People are looking for something different, for markets and a system that works for them, not against them, which is why the PRI is undertaking work, in collaboration with our signatories, on creating a more sustainable financial system.
This work aligns closely with the PRI’s mission, which calls for it to promote a sustainable global financial system that supports long-term value creation and benefits the environment and society as a whole. It also aligns to the Sustainable Development Goals (SDGs) announced last year, notably, SDG1, whereby a healthy financial system can help curb income inequality.”
In “What Does Trump Mean for ESG Data and Investment Strategies?” Hendrik Bartel argues that “ESG is not about a “movement”—it’s about a new set of tools no investor can ignore. Even if the president-elect and his appointees and many in the Republican Congress may ignore it, it is up to investors to actively integrate new datasets into their decision-making process.”
 
After discussing standards for ESG disclosure (such as those developed by the Sustainability Accounting Standards Board), the likely position the SEC will take on this in the next administration, and the economic forces supporting serious efforts to cope with climate change, he concludes:
 
"Citizens of the U.S., Great Britain, and the world vote once in a generation to turn the political world on its head, but they vote every day with their investments for the newly developing market standards that are slowly and surely reshaping our world.
 
At my core, as an entrepreneur, I’m an optimist—but in the case of ESG investing, there’s no optimism needed.  There’s no turning back from ESG as an investment fundamental, and a force for change in our world."
Impact of Environmental Factors on Credit Risk of Commercial Banks” by the Industrial and Commercial Bank of China (ICBC) is the first paper by a Chinese financial institution on the impact of internalizing environmental costs onto a firm’s balance sheet and the consequent risks this creates for commercial banks. From the abstract:
 
"A relevant theoretical framework, transmission mechanisms and analytical methodologies are established to assess the impact of tightening environmental protection standards and climate change policies, joint and several liabilities that banks are exposed to via their customers’’ activities and changes in the bank’s reputational standing in the eyes of shareholders and depositors. Two industries, namely thermal power and cement production, are selected for stress testing against a range of high, medium and low stress scenarios and the impact on their financial performance and credit ratings is assessed as a result. Actionable responses to this analysis are put forward. This bank-led approach to research in this focused field (i.e. assessing the impact of environmental factors on credit risk of commercial banks) is pioneering in China."
Green Bonds
 
Why green bonds will matter,” by Tim Nixon, begins by noting that green bonds having been growing by double-digit rates since their inception in 2008 with the World Bank. Yet green bonds still only represent less than 1% of global bond issuance, raising the question of whether all the excitement about them is justified. “What is exciting about green bonds is what they could become, in particular as the stakes and temperatures rise with climate change.”
 
The article goes on to discuss “green bonds with teeth, where performance is more specific and tied to continued financing.  What may be next on the horizon is a kind of green bond that is targeted at a specific sector of the economy and designed to achieve a specific environmental outcome in that sector.  One of the most promising opportunities for this concept is in the area of climate change.”
Private Equity
 
Bridging the gap: Aligning the Responsible Investment interests of Limited Partners and General Partners,” by PricewaterhouseCoopers is a report based on interviews with private equity investors which “reveals growing interest in responsible investment, and finds a need to not only bridge the gap in understanding between investors and managers, but to also demonstrate the value.” From the Foreword by Malcolm Preston:
 
“This report describes the results of our engagement with Limited Partners (LPs) to explore their perspective. It’s quite clear that responsible investment currently plays a significant role in their investment decisions with
 
  •  71% of the LPs interviewed saying they would decline to participate in a General Partner’s (GPs) fundraising, or would turn down a coinvestment, on ESG grounds
  •  18% of LPs interviewed having withdrawn from an investment or withheld capital on ESG grounds
 
 And that it will continue to do so in the foreseeable future, with 97% expecting responsible investment to increase in importance over the next two years. For GPs then, it is critical to get this right, to satisfy the growing expectations of the LPs
 
It is a relatively new area, though, that’s still finding its way. It’s clear that discomfort remains between LPs and GPs on how to achieve their responsible investment objectives, and that their expectations and approaches are yet to align. It’s a gap that feels destined to be bridged – with 88% of LPs interviewed believing there is added value in responsible investment, there is a sense of continued optimism around it and willingness to pursue it."
 
The report also states that 97% of LPs believe responsible investment will increase in importance over the next two years
.
Generation S
 
Generation S Will Make The Future,” by Georg Kell in The Huffington Post begins on a sober note:
 
“Our world is changing. Over twelve months have passed since the signing of the Paris agreement on climate change. In that time, average temperatures have risen to 1.2C above that which they were before the industrial revolution, putting 2016 on course to be the hottest year since records began. Amid this warming landscape, a wave of populism and nationalism has gradually spread around the globe, increasing concern amongst many that basic values of humanity and environmental stewardship will fall victim to demagoguery.”

But it concludes on an optimistic one:
 
“Yes, the world changed in 2016, and there are cracks. But look around you, and you may start to notice that there are in fact more than a few people who are part of a new group. Against the odds, they can make the future. And whilst they are not yet a majority, through their actions, they can become the biggest drivers of change.
           
They are the light. The question is, are you in?”
Inclusive Capitalism
 
The “21st Century Challenge: Forging A New Social Compact” Global Forum sponsored by Fortune and Time was held in Rome on December 2-3, 2016.
 
In an age of disruption and turmoil, Pope Francis calls on the “noble vocation” of business to help create a more inclusive and humane economy. Even as free markets have lifted billions out of poverty—with business “stimulating and developing the immense resources of human intelligence”—too many have been left behind. This Forum offered an historic opportunity for Fortune 500 and Time 100 leaders to engage with the Pope to forge a new social compact for the 21st century.
 
Here is a link to the address “Pope Francis: We Must Listen to the Voices of the Poor” in both English and Italian.
Fiduciary Duty

Frank Bold has produced a two-minute video “The Purpose of the Corporation” which traces the history of corporate purpose from its modern origins to the present day. The video discusses how corporate purpose became focused on short-term shareholder maximization and argues that it is time to get back to its origins where purpose was defined in broader terms.
Here is some further background “Behind the Purpose of the Corporation Infographic” which notes:
  • In the 1970s Britain, £10 out of every £100 of profit was paid in dividends to shareholders. Today companies pay £70 out of every £100.
  • Many CEOs earn today more than 200 times the wage of the average worker, and CEO rewards salaries are now tied to profits and share prices, ignoring other forms of value.
  • Public listed companies consumed 51% of net income in stock buybacks (buying back your own shares), 35% for dividends, leaving just 14% for all other purposes.
From the perspective of fiduciary duty on the investor side. In a hugely important development for the pensions industry, two leading independent UK barristers, including pensions expert Keith Bryant QC, have confirmed that pension fund trustees who fail to consider climate risk could be exposing themselves to legal challenge. The opinion concludes that where climate risks carry material financial implications for fund performance, trustees must take those risks into account in investment decisions. Its authors state that this is “beyond reasonable argument” and that failing to do this “would not be a proper exercise of [trustees’] powers.” You can read the opinion here.
 
For a summary of the opinion and what it means for pension fund trustees and pension fund members, please see ClientEarth’s briefing here.
 JUST Capital
 
The inaugural JUST 100 ranking  from JUST Capital is live on Forbes, featuring the top-ranked companies in each industry. Click here to see the rankings, articles by JUST Capital CEO Martin Whittaker on its mission and methodology, and features on the winning companies.
 
Here is some background on JUST Capital from their website:
 
"JUST Capital is a nonprofit that provides information and rankings on how large corporations perform on issues that matter most to the public. We give individuals a voice on what really matters to them, and evaluate how companies perform on those issues. Our November 2016 ranking identifies America's Most JUST Companies, singling out the top performing publicly traded company in each industry, for a total of 32 winners. In addition, in partnership with Forbes, we publish the JUST 100, showcasing 100 of the top performers across the different industries.   Both of these, our overall platform and the research underpinning it empower consumers, workers, business leaders, investors - all of us - to make more informed decisions about where to buy, work and invest."

 
The Multi-Capital Scorecard
 
The MultiCapital Scorecard: Rethinking Organizational Performance by Martin P. Thomas and Mark W. McElroy has just been published. The MultiCapital Scorecard methodology they’ve developed is completely open-source, explained in the books, is free for the taking for end-user application.  Here is a brief description of the book:

"In this book, sustainability and performance experts Martin Thomas and Mark McElroy introduce the world’s most advanced 3BL performance accounting methodology: The MultiCapital Scorecard. It is the first context-based integrated measurement, management, and reporting system. And, it can help corporations, public institutions, and other organizations answer the question they should be asking themselves for every aspect of their operations: “How much is enough for us to be sustainable?” The answers set internal performance standards against which operations and their impacts can be measured. Nothing less will do!
 
The MultiCapital Scorecard describes this open-source methodology, which consists of a structured, quantitative measurement and reporting system that complies with international standards for 3BL integrated measurement and reporting. Moreover, the MultiCapital Scorecard is designed to help organizations assess their own 3BL performance in their own contexts with context-based metrics of their own choosing. An eminently practical management aid for integrated thinking, it can be tailored to any organization’s needs."
 
For more information please see their website: The MultiCapital Scorecard and also a recent article of theirs: "Does Sustainable Performance Mean Abandoning Capitalism?"

 
News on Arabesque
 
The ‘sushi of finance’ in Asia” is based on an interview of Omar Selim conducted by Jessica Cheam, the editor of Eco-Business. The article discusses the founding of Arabesque Partners, Omar’s own background, Arabesque’s “ESG Quant” approach and performance, the opportunities for the firm in Asia, and the promising future of equity investing in a zero interest rate fixed income environment. The article concludes:
 
Selim also plans to make the fund widely available to retail investors via fund distributors, as he firmly believes that “sustainability should not be a luxury for the rich”.
And he might look the classic banker, but he says: “I’m good at finance, not passionate for it.”
“With Arabesque, I’m trying to combine my passion for nature with my expertise in finance,” he explains. It is this curious combination that inspired the name “Arabesque”, which describes art, the geometry of patterns and the importance of symmetry in nature.
He hopes that the firm can be a trailblazer for the finance world, and a catalyst in making sustainability mainstream.
“In the near future, ESG will become the standard. Instead of opting in for ESG, you’ll have to opt out. We hope to help everyone catch on.”
I wish all of you the best for a happy and healthy 2017!

Kind regards,

Bob






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