Subject: Climate Custodian, Thomson Reuters, CFA Institute, the Journal of Sustainable Finance & Investment, SustainAbility, and the GAO
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Dear Fellow Supporters of Integrated Reporting,

This e-mail introduces the idea of a “Climate Custodian,” contains a related piece reflecting on COP21 published by Thomson Reuters, shows support from the CFA Institute for integrated reporting, and informs you about a recently published paper in the Journal of Sustainable Finance & Investment regarding the relationship between ESG and financial performance based on a meta-analysis of 2000 empirical studies, SustainAbility’s annual trends report, and the United States Government Accountability Office’s review of SEC actions on climate-related disclosures.

The Climate Custodians
Tim Youmans and I have just published a little piece in the MIT Sloan Management Review titled “The Climate Custodians.” We make the link with our prior SMR post on The Statement of Significant Audiences and Materiality by showing that the global custody banks' primary regulator requires directors of these banks to consider eight specific audiences, and further requires that these banks' directors rank the interests of shareholders below the interest of the corporation itself and below depositors' interests. In this new piece we argue that custody banks are well-positioned to play the role of “climate custodian.” In particular, we argue that the three largest ones—BNY Mellon, JPMorgan Chase, and State Street—which collectively have $75.5 trillion in custody assets, or two-thirds of tradeable global assets, are particularly well-positioned to do so. Custody banks provide settlement, safekeeping, and reporting of customers’ marketable securities and cash, enabling liquid securities markets.  Thus, they have the information they need to focus attention on the impact of global climate change on the global securities markets.
Thomson Reuters
In “EXECUTIVE PERSPECTIVE: Are You Playing Climate Change Defense or Offense after Paris COP21” Mark McDivitt and Tim Nixon reflect on the implications for the investment community of COP21. They note that “Within the global investor community, this will not be just limited to ‘playing defense’ with negative screening and divestiture away from carbon intensive assets, but it will also be about ‘playing offense’ where asset owners, asset managers, endowments, insurance companies and hedge funds will utilize this new growth sector, ‘ESG (Environmental, Social & Governance) Finance,’ to drive above market returns.” After describing the various ways of playing defense and offense—and like in any sport, both are necessary, they conclude “The global investor community is taking action by applying a right balance of pressure, both defense and offense, on the 195 member-state countries to honor their INDC commitments.
For global financial players of all stripes, it’s time to answer the question, are you playing defense, offense or nothing at all?”
Integrated Reporting and Long-Termism
By now many of you have read or heard about a letter Larry Fink, CEO of BlackRock, the world’s largest investor with $4.5 trillion in assets under management, sent to the CEOs of the S&P 500 and a number of large European companies. In his letter Mr. Fink urges CEOs to resist “the powerful forces of short-termism afflicting corporate behavior” and asks for CEOs to “lay out for shareholders each year a strategic framework for long-term value creation} and says that ”CEOs should explicitly affirm that their boards have reviewed those plans.”
Referring to this letter, Sandra Peters (Head, Global Financial Reporting Policy) and James Allen (Head, Capital Markets Policy—Americas Region) of the CFA Institute, wrote their own February 10, 2016 letter to the Financial Times in which they note that “Efforts by the International Integrated Reporting Council to develop a framework for reporting value creation seem very much in line with what Mr. Fink is suggesting. We have encouraged accounting standard-setters and policymakers globally to think more broadly about reporting on strategic objectives as well as about environmental, social and governance (ESG) factors.”   The IIRC itself has also commented Mr. Fink’s letter.
Journal of Sustainable Finance & Investment

Here is the abstract from the recently published paper “ESG and financial performance: aggregated evidence from more than 2000 empirical studies” by Gunnar Friede, Timo Busch & Alexander Bassen.
The search for a relation between environmental, social, and governance (ESG) criteria and corporate financial performance (CFP) can be traced back to the beginning of the 1970s. Scholars and investors have published more than 2000 empirical studies and several review studies on this relation since then. The largest previous review study analyzes just a fraction of existing primary studies, making findings difficult to generalize. Thus, knowledge on the financial effects of ESG criteria remains fragmented. To overcome this shortcoming, this study extracts all provided primary and secondary data of previous academic review studies. Through doing this, the study combines the findings of about 2200 individual studies. Hence, this study is by far the most exhaustive overview of academic research on this topic and allows for generalizable statements. The results show that the business case for ESG investing is empirically very well founded. Roughly 90% of studies find a nonnegative ESG–CFP relation. More importantly, the large majority of studies reports positive findings. We highlight that the positive ESG impact on CFP appears stable over time. Promising results are obtained when differentiating for portfolio and non-portfolio studies, regions, and young asset classes for ESG investing such as emerging markets, corporate bonds, and green real estate.
SustainAbility Trends Outlook
Global Trends & Opportunities: 2016 and Beyond”  is SustainAbiility’s annual trends outlook. It is is based on their ongoing issue tracking and interviews with two dozen global sustainability experts on their expectations for 2016 and beyond. The report identifies key issues and opportunities that will define the field, as well as signals for companies and others to watch.
GAO Report

Last month the United States Government Accountability Office issued a report titled “Supply Chain Risks: SEC’s Plans to Determine if Additional Action is Needed on Climate-Related Disclosure Have Evolved.” The report notes that “Some stakeholder groups interested in climate-related disclosure issues have requested that SEC take additional actions to increase climate-related information disclosed in companies’ filings…According to SEC staff, however, the agency has no plans for specifically determine if additional actions related to disclosure of climate-related risks are necessary or appropriate in the public interest or for the protection of investors, but these SEC staff explained that other potential and ongoing efforts by the agency could address climate change disclosure.” Finally, at the end of the report it is noted that “We provided a draft of this report for review and comment to SEC. in oral comments provided on December 9, 2015, SEC staff in the Division of Corporation Finance generally agreed with our findings and provided technical comments, which we incorporated into the report, as appropriate.”

Kind regards,


Robert G. Eccles | Professor of Management Practice | Harvard Business School
Phone: 617.495.8585

 Movement: Meaning, Momentum, Motives, and Materiality