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Dear Fellow Supporters of Integrated Reporting,

The topics of the February 2017 newsletter are:
  • The Role of the Corporation in Society
  • News from B Lab
  • ESG Data and Reporting
  • Sustainable Investing
  • News on Arabesque
The Role of the Corporation in Society
"For all of the uncertainty and anxiety in headlines today, the world is a much better place than it has ever been. In emerging markets, billions of people have moved out of extreme poverty. In the developed world, we enjoy better medicines, connectivity, and mobility than most of us could have imagined even 20 years ago. The promise of global progress has become a reality for many — but not for all."
 
They note that CEOs must balance two objectives: the prosperity of the company and the prosperity of society, and suggest a new leadership agenda based on seven pragmatic ideas.
  1. SHAPE THE NEXT WAVE OF GLOBALIZATION.
  2. SUPPORT ENTREPRENEURIAL BUSINESS GROWTH.
  3. LEVERAGE TECHNOLOGY FROM FRONT TO BACK.
  4. INVEST IN HUMAN CAPITAL .
  5. BROADEN ACCESS TO BASIC GOODS.
  6. REBALANCE AND ALIGN REWARDS.
  7. REVITALIZE SOCIETY THOUGH A SOCIAL BUSINESSMINDSET.
They conclude:
 
"The case for renewing the narrative of progress and global businesses’ role within it needs to start with the end in mind. It does not require a degree in modern history to imagine the ends that await us if we accept deep political polarization in our societies as the new normal. In private discussions with us, many business leaders have shared this sentiment, irrespective of their political views. Many are willing to take pragmatic steps toward more actively shaping society, to not only sustaining economic progress but also helping to bring about broad-based prosperity. Now is the time to act."
"Achieving the ambitious global Sustainable Development Goals (SDGs) – which include ending poverty, improving global health, ensuring universal education, and mitigating climate change by 2030 – will cost a lot of money. The total will be far more than governments can make available, and the gap cannot be closed by official development assistance, now at $132 billion per year. The private sector, as well as updated financial markets, will be essential."
 
They note the important role of data on ESG performance for allocating this money properly and conclude:
 
"New ESG reporting frameworks can help to attract billions of dollars from institutional investors to support the effort to achieve the SDGs. But that is only one example of how the public and private sectors can work together to identify opportunities to advance the SDGs. If we take advantage of these possibilities, public-private cooperation can enable millions of people to lift themselves out of poverty and help to build a more peaceful, prosperous, and secure world."
"The Forum will feature ten CEOs presenting their long-term strategic plans to an audience of institutional investors. This event has the potential to be much more than a dialogue between CEOs and analysts. It is an opportunity to launch a bold collective response to the problem of short-term termism and establish a role for integrated reporting in developing and communicating a long-term strategy."
 
He goes on to note that:
 
"In conjunction with the Forum, the Strategic Investor Initiative has prepared a toolkit that CEOs can use in developing and presenting their publicly disclosed long-term strategic plans to investors. The toolkit content is evolving and currently includes contributions from Bain & Company, BlackRock, BrownFlynn/Sustainserv, FCLT Global, McKinsey & Company, State Street Global Advisors, Strategic Investor Initiative, and Vanguard. The summary of an exercise to map the Content Elements of the Integrated Reporting Framework to the 10 elements of a long-term strategy (referenced in “Rising to the challenge of short-termism) was shared with the Strategic Investor Initiative. The map provides practical guidance for how to structure content in a way that can facilitate investor conversations about a company’s long-term objectives. Perhaps more importantly, CEO’s and directors can use the map to discuss and then formulate their organization’s long-term strategy."
 "In addition to presenting operational and financial outlooks ranging three to five years or more, these long-term plans incorporated material environmental, social, and governance (ESG) issues, introduced new long-term performance metrics, and highlighted the role of each company’s values or purpose as the foundation for long-term prosperity.

Key takeaways from the sessions included:
  • Environmental and social factors vary from industry to industry, but are indisputably financially material: employee and public safety is material for PG&E, the energy utility; data privacy is a material factor for technology companies such as IBM; and ensuring access to quality healthcare for all is a material factor for healthcare companies such as Humana.
  • The concept of transparency for investors is evolving with event participants calling for quarterly investor communications to become building blocks of longer-term plans and disclosure rather than the central focus.
  • The over-emphasis on quarterly reporting is widely considered to be a driving force in the dearth of financially relevant factors in the majority of quarterly-focused investor communications.
  • Forum participants voiced their views on the fundamental importance of CEOs conveying their long-term performance outlook to describe how they serve key stakeholders including customers, employees, and communities, as well as shareholders."
News from B Lab
 
"That we must be the change we seek in the world,
That all business ought to be conducted as if people and place mattered,
That, through their products, practices, and profits, businesses should aspire to do no harm and benefit all,
To do so requires that we act with the understanding that we are each dependent upon another and thus responsible for each other and future generations."
 
They then note that “In the current environment of rising insecurity, fear, hate speech, and violence, and in the absence of trust in our economic system, all business leaders have an unprecedented responsibility and opportunity to build a more inclusive society.” From this they then call on all business leaders to do two things:
 
"First, in this chaotic moment, to stand up and to speak out, together and unequivocally, when we see injustice, hate, and the violence they produce. Second, to take concrete action in our own businesses to create an inclusive economy that is equitable and creates opportunity for all for the long term."
 
  • Also from B Lab is an announcement that “ Laureate Education, a Certified B Corp, became the first benefit corporation to complete an initial public offering. This is a momentous shift in the history of the public markets.”
 
"The IPO of a benefit corporation means that mainstream investors have finally gotten the message: traditional corporate governance, which favors shareholders over everyone else, is not tenable in our increasingly interdependent economy. Governance that recognizes the interests of all stakeholders works better in the long run and generates more value for everyone. That’s why investors are recognizing that businesses must treat customers, employees and communities as partners, rather than as instruments to be managed for maximum short-term financial gain.

Bottom line? The Laureate IPO means that companies don’t have to value shareholder profits over everything else to attract investment. The capital devoted to public equity markets—$70 trillion around the globe—is available to benefit corporations."
 
The announcement also includes an analysis of this IPO, “Liquid Investment; Lasting Value” by Frederick Alexander, Head of Legal Policy. Quoting from his piece:
 
"The benefit option is now available in 30 states (including Delaware, where Laureate and most public companies choose to incorporate). This choice entails one simple, but profound change in corporate governance: a benefit corporation must balance the interests of all its stakeholders in operating its business — it cannot maximize wealth for shareholders, while ignoring the costs imposed on others. Laureate thus has rejected the market paradigm of “shareholder primacy,” and asked the public to invest in an entity specifically designed to treat customers, employees and communities as the shareholders’ partners, rather than as tools to be exploited for maximum financial gain. Doug Becker, the Chairman of Laureate, declares their creed as 'here for good.'”
 
ESG Data and Reporting
 
  Abstract
"Using survey data from a sample of senior investment professionals from mainstream (i.e. not SRI funds) investment organizations we provide insights into why and how investors use reported environmental, social and governance (ESG) information. The primary reason survey respondents consider ESG information in investment decisions is because they consider it financially material to investment performance. ESG information is perceived to provide information primarily about risk rather than a company’s competitive positioning. There is no one size fits all, with the financial materiality of different ESG issues varying across sectors. Lack of comparability due to the lack of reporting standards is the primary impediment to the use of ESG information. Most frequently, the information is used to screen companies with the most often used method being negative screening. However, negative screening is perceived as the least investment beneficial while full integration into stock valuation and positive screening considered more beneficial. Respondents expect negative screening to be used less in the future, while positive screening and active ownership to be used more."
"Three years after publication of the International Integrated Reporting Framework for companies to adopt a forward-looking, broader approach to their corporate reporting aligned to long-term value creation, the global coalition supporting the transition is launching a worldwide call for feedback on its implementation.
 
The International Integrated Reporting Council (IIRC) is announcing a two-month comment period aimed at businesses, investors, regulators, policy makers and other key stakeholders. Focus groups will be held in over ten countries around the world and public feedback is invited via a dedicated webpage."
"London Stock Exchange Group has today issued guidance, through its Global Sustainable Investment Centre, setting out recommendations for good practice in Environmental, Social and Governance (ESG) reporting. The global guide responds to demand from investors for a more consistent approach to ESG reporting, which is now a core part of the investment decision process. This guide is available on-line to both issuers and investors globally. It has also been sent to more than 2,700 companies that have securities listed on LSEG’s UK and Italian markets with a combined market capitalisation of more than £5 trillion."
  • Detailed recommendations showing how issuers should integrate ESG factors into investor reporting and communication
  • Investors demanding more consistent reporting of ESG data
  • ESG considerations increasingly part of investment decision - has moved from niche to mainstream
  • Guidance builds on Financial Stability Board’s Task Force on Climate-Related Financial Disclosures and UN Sustainable Development Goals
  • LSEG plays central role in the investment chain and capital raising ecosystem
Sustainable Investing
 
"People often talk about barriers to ESG integration. Hiding places might be a better metaphor. If you ask an investment fiduciary to do something new, some (though not all) will seek out a number of things to hide behind as to why they can’t. The most popular hiding places have tended to be: fiduciary duties, investment consultants and lawyers. We're interested in eliminating hiding places.
           
Through our work on fiduciary duty, building on the work of countless initiatives on that subject, we’ve reduced the size and effectiveness of that hiding place. We see evidence that investment consultants are increasingly advising clients on ESG risks and analysis, though of course, laggard practices remain common.
 
So let’s talk about perhaps the most enduring hiding place: the lawyers (for full disclosure, I’m a recovering corporate finance lawyer)."
 
While he admits that the common perception around fiduciary duty of fund trustees not supporting ESG integration is based on a substantial reality, he argues that it doesn’t have to be this way and offers four practical suggestions for dealing with outdated practices:
  1. Precision in our use of language: if you hear a colleague using CSR, ESG integration and SRI interchangeably in conversation, or worse, in written documents, call them on it – ask them what they mean. They might be using one of the terms accurately, but perhaps not all of them. Let’s not commit ourselves the errors we’d like others to avoid.   
  2. Challenge outdated guidance: where we see lawyers providing outdated legal guidance that mischaracterizes sustainability concepts or fails to reflect the sophistication of contemporary investment approaches, call them on it. Ask for it to be withdrawn or revisited.
  3. Seek affirmative guidance: where a legal issue may be, for some market participants, perceived to be a legal barrier to an aspect of sustainability practice (eg - acting in concert in some markets which can chill collaborative shareholder engagements), ask for clarificatory guidance from the lawyers (and, if necessary, the regulators).
  4. Question your advisers: don’t be deferential in the face of your lawyers. The clients    that were the toughest, but ultimately the best, to work for were the ones that asked “why”?
"The California State Teachers’ Retirement System (CalSTRS), the Florida State Board of Administration and Washington State Investment Board are the lead asset-owner signatories for the Investor Stewardship Group (ISG). This collective of some of the largest US-based asset owners and managers has articulated a set of fundamental stewardship responsibilities for institutional investors.
 
Among the asset-manager signatories are BlackRock, Vanguard and State Street Global Advisors – three of the largest funds managers in the world.
 
In addition to the stewardship fundamentals, the group has released a corporate governance framework that articulates six principles it considers fundamental for US-listed companies. They reflect the common beliefs embedded in each member’s proxy voting and engagement guidelines, and are designed to establish a foundational set of investor expectations about governance practices in US publicly traded companies.
           
The frameworks are long overdue. The US – the largest sharemarket in the world – operates without any stewardship code or agreed-upon corporate governance principles."
"Most asset managers know that ESG data are emerging mainstream finance metrics. More than half of global assets today, $59 trillion, are controlled by asset managers or owners who consider ESG factors. The results are there too: thousands of studies since 1970 show a positive relationship between ESG criteria and corporate financial performance.
 
But individuals and asset owners are demanding ESG at higher rates than financial advisors are offering it, some studies show. That gap makes ESG savvy a significant advantage for a money manager.

The article then lists 10 reasons who investors are leading their advisors on ESG."
"This is all well and good, but many sustainable investing devotees, young and old, have a blind spot that needs fixing. Blame it on the so-called “experts” in the industry.
 
They make a big deal of avoiding fossil fuel companies and polluters. The environment isn’t the only thing that needs minding. We also need a sustainable democracy. Without that, it doesn’t matter how clean the environment is. Life could get ugly.
 
And make no mistake, sustainable democracy is at risk. No, this isn’t another Donald Trump rant. Democracy was precarious before he came into office."
 
He concludes:
 
"Even if investing in sustainable democracy didn’t help you outperform the market, does this really matter?
 
After all, if socially responsible investing is about putting money into the stocks of companies that share your values, then maybe it’s OK to give up some gains in the process. People give up money and time whenever they donate to charities or volunteer. There is a cost to those activities. But it’s offset by the benefit of knowing you might be improving the world. Why should investing be any different?
 
A lot of millennials seem to agree with this. Over half of them in the Morgan Stanley study I cited above said they get it that sustainable investing may involve some trade-off in financial gain — yet they are some of the biggest fans of this style of investing."
News from Arabesque
  • In “Big Oil and Climate Change—A Way Forward” our Vice Chairman Georg Kell notes the critical oil that Big Oil plays in combatting climate change. He states that “The Norwegian Oil company, Statoil, has just put forward a new “Climate Roadmap” which outlines how the company plans to face the certainty of a low carbon future, to which I provided early stage input. The roadmap has two complementary approaches. “First, it outlines how the company will sustain its role as an industry leader in carbon efficiency when it comes to emissions from its own operations…The second approach is based on a significant expansion on new energy solutions, primarily large scale offshore windfarms and floating platform technology."
He concludes:
 
"Statoil’s strong positioning on climate change also sends a welcome signal at a time when Washington is trying to set back the clock. A regulatory bump in the road can slow down the transition. But it cannot reverse it. Other countries are not betting on the past and countless local activities are moving ahead irrespective of federal politicking. In such a context, corporations and investors play an especially important role. How they assess climate related risks and opportunities, and how this will inform their investment decisions, is now more important than ever. There are of course any number of companies and investors who benefit from higher emissions. But there is also a growing number of companies and investors who understand that the transition towards a low carbon energy future is not only inevitable, but that it also offers new opportunities for growth. Roadmaps such as Statoil’s will help shift the balance in the right direction, if others follow."
A Few Things from Me
 
First is an interview “Climate Disclosure, Harmonization, and Challenges in the Reporting World” that I did with Lois Guthrie, the founding director of the Climate Disclosure Standards Board.

Second, is a MAD interview I did when I was in Dubai in January.
 
The teaser is “A Tesla in Finance/Interview with Robert Eccles” and the full video is “sustainability in Finance.”
Kind regards,

Bob






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