Dear Fellow Supporters of Integrated Reporting,
The topics in this e-mail are Sustainable Investing, Trends’ Reports, Fiduciary Duty, Integrated Reporting, Conceptual Frameworks, the Strategic Investor Initiative, Global Reporting Initiative, News on Arabesque, and a Personal Update.
Sustainable Investing
A study by Cambridge Associates, “The Value of ESG Data: Early Evidence for Emerging Market Equities,” authored by Chris Varco, found that: “Our examination of incorporation of environmental, social, and governance factors into the stock selection process for two major MSCI indexes finds evidence that ESG factors added value in emerging markets equities but not developed markets equities.
  • Examination of the first three years data for the new MSCI Emerging Markets ESG Index provides early but consistent evidence that ESG–based stock selection can add value after accounting for the impact of other factors such as style, country, and sector exposure. Analysis of available ESG data for the preceding six and half years broadly indicates the same.
  • For the nearly six-year period that could be examined for developed markets, MSCI World ESG slightly underperformed MSCI World, much of which was attributable to poor selection of US stocks.
  • Given these findings, investors evaluating managers would do well to focus on understanding if and how the manager incorporates ESG factors, for what reason and how consistently, and whether ESG-based stock selection has added value to their funds.
The study, “Sustainable investing and bond returns,” by Barclays' Quantitative Portfolio Strategy Research team (Albert Desclee, Lev Dynkin, Jay Hyman, and Simon Polbennikov) of the relationship between ESG investing and performance in the US corporate bond markets found that:
  • Introducing ESG factors into the investment process resulted in a small but steady performance benefit. No evidence of a negative impact was found. 
  • Over the historical period of the study, the performance advantage of portfolios with an ESG tilt was not caused by high-ESG bonds becoming more expensive than their low-ESG peers, driven up by excess demand. Thus, they found no evidence to suggest that including high-ESG bonds would cause future underperformance as the prices of these bonds revert back to the prices of their peers. 
  • Of the three scores – E, S and G – the governance score had the strongest impact on performance. Bonds with a high G score also suffered credit downgrades less often than those with a low G score.
State Street’s Center for Applied Research, in collaboration with the CFA Institute, did a study to answer the question of how to leverage motivation of investment professionals to improve the financial performance of their clients. In their paper “Discovering Phi: Motivation as the Hidden Variable of Performance,” by Suzanne Duncan, Mirtha Kastrapeli, Mimmi Kheddache-Jendeby, and Phil Palanza, they explain that the answer is purpose, habits, and incentives or what they call phi, “an intangible factor that has not previously been quantified.” The study is based on in-depth interviews with 200 global industry leaders and a survey of 7,000 respondents (investors, investment providers, government officials, and regulators) across 20 countries. They found that:
“The phi motivation is distinctly different from the short-term outperformance motivation of asset-gathering focus of our industry. The results of our analysis were exceptional: A one point increase in phi is associated with 28% greater odds of excellent organizational performance, 55% greater odds of excellent client satisfaction and 57% greater odds of excellent employee engagement.”

The 21st Century Investor: Ceres Blueprint for Sustainable Investing,” by Peter Ellsworth and Kirsten Snow Spalding of Ceres is an update of their original study first published in 2013.
“This Blueprint is written for the 21st Century investor— institutional asset owners and their investment managers—who need to understand and manage the growing risks posed by climate change, resource scarcity, population growth, human and labor rights, energy demand and access to water—risks that will challenge businesses and affect investment returns in the years and decades to come.
These risks can and do influence financial performance and investment returns, yet they are often not considered when investment decisions are based primarily on traditional financial analysis.
This Blueprint is designed to help concerned trustees or board members advance a process for better oversight and decision-making that enhances sustainable risk-adjusted returns. It outlines the critical decisions that trustees must make regarding board policies and implementation, and specific steps in the investment process that will benefit from trustee involvement.”

A Practical Guide To ESG Investing For Equity Markets,” by Justin Sloggett is a publication of the Principles for Responsible Investment (PRI) which describes a range of techniques for integrating ESG factors into investment strategies. It also provides case study examples. These techniques can be used in:
  • Fundamental strategies (also known as traditional strategies)
  • Quantitative strategies (also knows as systematic strategies)
  • Smart beta strategies (also known as strategic beta, alternative beta, and factor investing)
  • Passive (also known as indexing) and enhanced passive strategies (also known as enhanced index)
The report also explores ESG integration in sell-side research, assessing external managers, and impact on the investment process.
"Business of Tomorrow Podcast on Investor Relations & the SDGs: Problem or Opportunity?” is a UN Global Compact podcast interview by Sarah Murray of Erika Karp (Founder and CEO of Cornerstone Capital Group), Susanne Stormer (VP of Corporate Sustainability and Chief Sustainability Officer at Novo Nordisk), and yours truly. We explore and debate the relevance and impact of the 17 Sustainable Development Goals (SDGs) on companies and investors.
Tipping Points 2016: Summary of 50 Asset Owners’ and Managers’ Approaches to Investing in Global Systems,” by William Burckart, Steve Lydenberg, and Jessica Ziegler of The Investment Integration Project (TIIP) notes that “Over the past several decades, many in the financial community have evolved a variety of approaches that recognize the importance of considerations that transcend the traditional daily challenges of portfolio management. These approaches seek to manage, to the extent possible, risks and rewards at environmental, society and financial systems levels.” In their study, they found a number of investment activities achieve this:
  • Incorporation of ESG issues as fundamental to the investment process through investment beliefs statements
  • Engagement with corporations to better understand their portfolio companies and to increase the positive impacts of these companies on the environment and society
  • The creation of targeted funds to allocate assets to financially viable projects that direct address contemporary problems
  • In their selection of external managers they are requiring them to consider their own impacts at these systems levels
In “Can the SDGs provide a platform to build on the existing social impact sukuk?The Responsible Finance & Investment Foundation reports on the “Malaysia-U.S. Chamber of Commerce Capital Market Conference” held in Washington, D.C. on November 10. One of the topics was the relationship between the Sustainable Development Goals and Islamic Finance.
“There is a philosophical alignment between many of the Sustainable Development Goals and Islamic finance, according to Prof. Robert Eccles, Chairman of Arabesque Partners, who delivered the opening keynote address at the Malaysia - U.S. Chamber of Commerce Capital Market Conference last week in Washington, DC. In his presentation, he highlighted the similarity in seven of the nine goals (zero hunger, good health, gender equality, clean water & sanitation, affordable clean energy, infrastructure, and peace/justice & strong institutions) prioritized by the Islamic Development Bank and those ranked as moderate or high-priority goals for asset managers making investment decisions according to a ShareAction survey.

Trends’ Reports
Eurosif’s “European SRI Study: 2016” notes that:
“This 2016 European SRI Study bears out the sustained growth in SRI across different approaches. The data collected for this Study, at the end of 2015, allowed us to cover institutional and retail assets from 13 different European markets. The methodology was modified for some minor aspects, as a few simplifications were brought to the SRI questionnaire; but the taxonomy remains unchanged from 2012.
Some of the main growth trends highlighted in this edition have built up consistently over the past years. However, it is worth noting a number of interesting shifts. Exclusions remains the dominant strategy at over €10 trillion, covering 48% of the total of European professionally managed assets.”
Data on assets under management and growth rates are provided by type of strategy (1. Sustainability themed investments; 2. Best-in-Class investment selection; 3. Exclusion of holdings from investment universe; 4. Norms-based screening; 5. Integration of ESG factors in financial analysis; 6. Engagement and voting on sustainability matters; and 7. Impact investing) and by country.
You can also see previous studies on this page.
I had the privilege of writing one of the Forewords for this study. The other was written by Executive Director Flavia Micilotta and ad-interim President Will Oulton.

In US SIF’s “Report On US Sustainable, Responsible and Impact Investing Trends 2016” CEO Lisa Woll introduces the report by noting:
“The demand for sustainable and impact investing is growing—investors now consider environmental, social and governance (ESG) factors across the $8.72 trillion of professionally managed assets, a 33 percent increase since 2014.
Money managers and institutional investors are scrutinizing an array of concerns—including climate change, weapons production, human rights and corporate political spending and lobbying—across a broader span of assets than in 2014. A diverse group of investors is seeking to achieve positive impacts through such strategies as corporate engagement or investing with an emphasis of community, sustainability or the advancement of women.
Client demand is one of the major drivers for money managers that introduce products that take ESG factors into account. Indeed, evidence of the growing interest in sustainable investing is the recent launch of services that issue ratings for thousands of mutual funds and exchanged traded funds on the ESG profiles of their portfolio companies.”
The Executive Summary to “Superfund Responsible Investment: Benchmark Report 2016” by the  Responsible Investment Association of Australasia (RIAA) notes that:
"Responsible Investment (RI) has moved firmly from the margins to the mainstream across Australia and New Zealand, with over half of all professionally managed assets in Australia now operating under responsible investment strategies."
"In the last five years, there have been substantial advances in how superfunds are implementing responsible investment strategies, and requiring its implementation by their asset managers. Many Australian superfunds now have in place sophisticated responsible investment strategies that often employ multiple tools across active ownership, screening, ESG integration, impact investment, corporate engagement, voting and sustainability-themed allocations."
"At this point in time, when consumers are showing heightened interest in the way their super is being invested, and when evermore superfunds are deepening and refining their responsible investment strategies, we consider it a critical time in the industry’s development to start articulating and defining in clearer terms the different strategies and manner by which funds are choosing to do responsible investment. As such, RIAA has undertaken this inaugural."
Fiduciary Duty
From the perspective of the fiduciary duty of company board directors, The Institute of Directors Southern Africa (IoDSA) has published “King IV: Report on Corporate Governance for South Africa 2016.” In his Foreword Mervyn E. King, the Chair of the King Committee, explains that “Certain Concepts form the foundation stones of King IV. They are ethical leadership, the organisation in society, corporate citizenship, sustainable development, stakeholder inclusivity, integrated thinking and integrated reporting. These concepts are relevant to three connected paradigm shifts in the corporate world.” These three shifts are:
  • From financial capitalism to inclusive capitalism: “There is now general acceptance that the employment, transformation and provision of financial capital represent only a fraction of an organization’s activities. Instead, inclusive capitalism takes account of the employment, transformation and provision of all sources of capital—the six capitals—in order to reposition capitalism as the engine of shared prosperity. It gives parity to the sources of value creation.
  • From short-term capital markets to long-term, sustainable capital markets: “The shift from short-term to long-term thinking arises from the need to create value in a sustainable manner. In essence, sustainable capitalism refers to an economic system in which value is created in a sustainable manner. The period indicated by long term or longer term would depend on the strategic objectives of the organisation and the risks and opportunities presented by its external environment, including it material stakeholders.
  • From siloed reporting to integrated reporting: “We live in an era of radical transparency, which is prompting a rethink on corporate reporting. This is evidenced by the European Union’s directive on environmental, social and governance (ESG) reporting, the United Kingdom’s strategic report, the context of reports filed with the United States Securities and Exchange Commission, the Operating Financial Review in Australia and the listing requirements of several stock exchanges, including the Johannesburg Bourse.
From the perspective of the fiduciary duty of investors, PRI’s “Fiduciary Duty in the 21st Century: U.S. Roadmap” by Brian Tomlinson, Will Martindale, Elodie Feller, and Melanie Paty is a publication from a three-year project to clarify investors’ obligations and duties in relation to the integration of environmental, social and governance (ESG) factors in investment practices and decision-making. This project is being led by the PRI, the United Nations Environment Program Finance Initiative (UNEP FI), and the Generation Foundation. The first publication was Fiduciary Duty in the 21st Century (September 2015) and the second was Investor Obligations and Duties in 6 Asian Markets (September 2016).
This most recent publication focuses on fiduciary duty in the United States. The report notes the evolving landscape for fiduciary duty in the U.S.: “Our roadmap seeks to engage with the major trends in the US capital markets as we advance the case and methods for ESG integration as a core element in fiduciary investment practice.” It goes on to identify “strategic leverage points in the US investment market for advancing the modern interpretation of fiduciary duty.” In seeking a “balance between regulatory action and investment processes” the report makes recommendations regarding:
  • Overcoming misconceptions and knowledge-gaps on ESG integration
  • Update Reg S-K to ensure high quality disclosure of material ESG information
  • Guidance to trustees and plan sponsors on investment consultant practices
  • Updated guidance regarding fiduciary duty
  • Enhanced framework for shareholder engagement with investee companies
  • Revision of Investment Policy Statements
  • Disclosure of investment practices
  • Diversified governance structures
  • Improved Stock Exchange guidance on ESG disclosure
Integrated Reporting
The International Integrated Reporting Council has recently published “Creating Value: The cyclical power of integrated thinking and report
“This issue of Creating Value looks at the central relationship between Integrated Reporting and its cyclical power and relationship with integrated thinking. We see reporting and thinking as two sides of the same coin – both necessary to enhance connectivity in the organization and enhanced communication on value creation. In combination, the benefits are rich and compelling:
• A shared understanding of strategy and how value is created throughout the organization with fewer silos.
• More cohesive management information and informed decision making, enhancing accountability and performance.
• Boards can actively use a multiple capitals approach to make strategic decisions about resource allocation and value creation over time, communicating the trade-offs between the capitals and the outcomes for business and society. This approach gives greater meaning to decisions, building trust inside the business and with stakeholders.
• A greatly enhanced quality of dialogue between organizations and their providers of financial capital, helping to achieve greater accountability, a longer-term focus and more efficient capital flows to drive investment and productivity.
• World-class corporate reporting focused on material disclosures that assist decision-making, applying the principles of the International Framework.

Conceptual Frameworks
In Pursuit of Inclusive Capitalism: Business and Approaches to Systemic Change” is a study by a team of researchers at the Saïd Business School of Oxford University led by Dean Peter Tufano and the Social impact practice of Deloitte Consulting Practice led by Tony Siesfeld who received a grant from the Ford Foundation (led by Graham MacMillan). Other contributors were Richard Barker, Mary Johnstone-Louis, Colin Mayer, Pradeep Prahhala, Noah Rimland Flower, and Theodore Roosevelt.
“This study is the result of months of research and individual interviews with 40+ heads of non-governmental organisations seeking to promote more inclusive approaches to capitalism. Through a variety of strategies, this nascent and growing field of organisations seek to influence business leaders as well as asset owners, asset managers, and consumers to do business that does right by society. This report sets out the world from these organisations’ point of view, their diagnosis of what the role of business should be in society, of what stands in the way of business playing that role, and what is necessary to achieve change.
From this research, we learn that the organisations in this study (‘the organisations’) typically seek to influence business behaviour by shaping the ideas of thought leaders, educators, and senior executives. We identify a landscape of eight key influence strategies pursued by the organisations we researched (see Figure 1). We designate the three most prominent influence strategies as ‘core’: convening/networking leaders, research/thought leadership and movement building/community organising. In addition, we identify five ‘supporting’ influence strategies: acting as an incubator for the development and dissemination of new standards/organisational forms, providing advisory services, working via business education, via public engagement, or through policy/advocacy.”

 “Business, Human Rights and the Sustainable Development Goals: Forging A Coherent Vision and Strategy” is a paper from Shift, led by President and Co-Founder Caroline Rees, which was commissioned by the Business and Sustainable Development Commission. The Executive Summary begins by noting:
“The United Nations Guiding Principles (UNGP) on Business and Human Rights set the global standard for what companies need to do to address negative impacts on people’s human rights connected with their business. The Guiding Principles look at how companies make their profits, not how they spend them. They are not a sign-up proposition, not an optional extra, but an expectation of all companies everywhere and increasingly viewed as part of soft law.”
It concludes:
“The paper concludes that the Sustainable Development Goals (SDGs) present an opportunity not just to update our vision of the role of business in sustainable development, but to change it fundamentally. There is no more pressing or powerful way for business to accelerate social development than by driving respect for human rights across their value chains. The proposition that all companies not only can contribute at scale to development through these networks of business relationships, but that they have a responsibility to do so, is the quiet revolution that sits at the heart of the UN Guiding Principles on Business and Human Rights. The paper closes with a set of specific recommendations about how to embed this vision at the heart of how business gets done.”

The Social Lexicon: Sorting out the muddle” by Nicola Clegg, Bex Dawes, and Amy Mason in association with Jonathon Porritt and the Forum for the Future notes that “In recent years, much of the literature dedicated to discussing topics within the ‘social sustainability’ space has been more than a little confusing, predominantly due to a myriad of loosely defined terms being used interchangeably. This paper seeks to tease out the origins and the meaning of these words and phrases, and to clarify the relationships between them.” The first paragraphs from the Introduction explain the purpose of the paper:
“In the world of social sustainability, the terms ‘social capital’, ‘social impact’, social value’, ‘social return on investment’ and ‘social license to operate’ are all used regularly and, sometimes, interchangeably. There is often no clarification as to what these terms mean, what context they are being used in, or even how they related to each other. To add to this already confusing lexicon, there have recently been calls for leading businesses around the world to create a ‘new Social Contract’ for sustainability, and other organizations are seeking to add to the list, by adopting phrases such as ‘social dividend’.

Within this summary document, we briefly explore the history of these terms and find examples of how they are being used. We then attempt to determine the definition of each one and to clarify the relationships between them.
In conclusion, we outline some outstanding questions which surround the concept of a ‘new Social Contract’, voice our recommendations (and reservations) for use of the term ‘social dividend’, and finally, we explain how the findings of this research could be further developed by Forum for the Future.”

Strategic Investor Initiative
On September 22, CECP’s Strategic Investor Initiative (SII) held a Special Briefing and Reception at the new Bloomberg offices on Park Avenue in New York. In attendance were thought leaders representing investors, corporations, advisory firms and NGO’s. Those attending were welcomed by CECP’s CEO, Daryl Brewster.
I led a panel discussion on how the SII aspires to encourage and elevate the long-term value creation discussion between CEOs and their largest investors.  Clara Miller, President of the Heron Foundation, characterized the SII as a “moment of radical common sense” that has the potential of “changing the DNA of capital markets.” Graham McMillan of the Ford Foundation talked about how the “SII team can serve as translators” - improving communications between CEOs and investors about long-term value creation. Michelle Edkins of BlackRock discussed how the SII aligns with her view that long-term value is more about corporate “operational excellence and financially material metrics” as opposed to just ESG factors.
SII Director Mark Tulay followed the panel by thanking the SII Advisory Board for their leadership. He announced the inaugural Strategic Investor Forum would be held on February 27, 2017, immediately
following the annual Board of Boards convening of CECP-member CEOs. At this forum, ten CEOs will present their long-term plans to a live audience of long-term investors. Asset owners, asset managers and buy-side analysts are encouraged to attend and can register here.
SII Research Director Tim Youmans wrapped up the event by reviewing the key elements of the Strategic Investment Center , and by pointing out SII research partners in attendance to kick off the reception conversations. A highlight video of the SII Special Briefing can be viewed here.
Global Reporting Initiative
On October 19, Global Reporting Initiative (GRI) “launched the world’s first global standards for sustainability reporting, giving companies a common language for disclosing non-financial information. The GRI Sustainability Reporting Standards will enable companies around the world to be more transparent about their impacts on the economy, the environment and society. They will also help organizations make better decisions and contribute to the United Nations Sustainable Development Goals (SDGs).”
Here is some further information from an e-mail I received about this, which I’m sure many of you received as well:
“The GRI Standards are a set of 36 modular Standards that facilitate corporate reporting on topics such as greenhouse gas emissions, energy and water use, and labor practices. The new format allows GRI to update individual topics based on market and sustainability needs, without requiring revisions to the entire set of GRI Standards. The GRI Standards are centered on materiality – focusing on the topics that represent the most significant impacts of the organization and are most important to organizations’ stakeholders – which supports sustainability reporting that is tailored to each individual company. A company can prepare a sustainability report in accordance with the GRI Standards at Core or Comprehensive level, or disclose individual topics to meet specific reporting needs.
GRI is organizing free launch events around the globe in November: in North America on the 2nd, 16th and 29th, in Africa on the 10th, in Australia on the 15th and 17th, in Asia on the 21st. For more information or to register for a launch event visit the GRI website here.

The GRI Standards are available for free download on the GRI Standards hub on the GRI website, along with detailed mapping documents that show all of the changes from G4 to GRI Standards.
News on Arabesque
Under the direction of Tim Nixon, Thomson Reuters recently launched the initiative Leaders of Sustainable Development “to promote gender equality and women as leaders to achieve a sustainable planet.” On October 28, Tim posted an interview with Arabesque board member Barbara J. Krumsiek on the relationship between sustainable investing and gender equality. In her interview, Barbara states that “I believed then and believe now that focus on diversity and inclusion at all levels of the workforce will advance women’s equality – ultimately, contributing to a healthier community, family, and business climate.”  
Emma Hunt, Co-Head of Hermes Equity Ownership Services, has been appointed to the Advisory Board of Arabesque. Upon her appointment, Emma said: “Good stewardship and positive holistic impact are bedrock principles on which quality long-term investment is built. To this end I am delighted to be joining Arabesque’s Advisory Board and to contributing further to their evolving business.” 

Fellow Arabesque Advisory Board member Professor Tensie Whelan, Director of NYU Stern School of Business’s Center for Sustainable Business, has published with Carly Fink an article in the Harvard Business Review called  “The Comprehensive Business Case for Sustainability.” In the opening paragraphs of their article they note that:
“Today’s executives are dealing with a complex and unprecedented brew of social, environmental, market, and technological trends. These require sophisticated, sustainability-based management. Yet executives are often reluctant to place sustainability core to their company’s business strategy in the mistaken belief that the costs outweigh the benefits. On the contrary, academic research and business experience point to quite the opposite.

Embedded sustainability efforts clearly result in a positive impact on business performance.  Drawing from our own research and our colleagues’ research in this area, we have created a sustainability business case for the 21st century corporate executive. Hoping to alleviate their concerns, this article also provides concrete examples of how sustainability benefits the bottom line.

They conclude:
“The preponderance of evidence shows that sustainability is going mainstream.  Executives can no longer afford to approach sustainability as a ‘nice to have’ or as solid function separated from the ‘real’ business.  Those companies that proactively make sustainability core to business strategy will drive innovation and engender enthusiasm and loyalty from employees, customers, suppliers, communities and investors.”
Personal Update
I have been appointed as a Professor of Management Practice at the Saïd Business School of Oxford University. Among other things I will be working with Professor Richard Barker, Head of the Accounting Department, to start the Oxford Saïd Corporate Accounting and Reporting (OSCAR) Programme. 
On November 16, I attended my first in-person board meeting of the Mistra Center for Sustainable Markets (MISUM) at the Stockholm School of Economics. At this meeting I had the pleasure of meeting Professor Mette Morsing of the Copenhagen Business School has been appointed the new Mistra Chair of Sustainable Markets funded by the Swedish Foundation for Strategic Environmental Research, Mistra. She will be the Scientific Director of MISUM.
I have also done an interview with MISUM regarding the Sustainable Development Goals.
Environmental Disclosure in China” by Tracy Yingcui Cai, Allegra Fonda-Bonardi, Peiyuan Guo, and me is an article published in The Solutions Journal. In Brief:
“Transparency drives sustainability. The world’s general perception is that China is one of the world’s biggest culprits in greenhouse gas emissions and other pollutants, and also one of the least transparent in disclosures about them. China is taking important steps in this direction. In fact, with sufficient support from the corporate, financial, and government sectors, China could lead the world in improving environmental disclosures and contributing to environmental sustainability on a scale commensurate with its global economic impact.”
Here are a few articles based on my last trip to China in the summer:
Is investing in Natural Capital worth it? A Big Data Perspective - SASAC, affiliated news channel (July 13, 2016)  [Article in Chinese and English]
Green Finance Cannot Rely Solely on Charity; Internet Data Can Support Building an Ecological Bank - Securities Daily, China and the De Tao Group [Article in Chinese and English]
My piece Standing Rock Protest: Finding the Long-Term Solution has already been sent in a separate e-mail to call out the importance of this situation. The situation continues to get worse with injuries, some quite serious, to many of the protestors.

Kind regards,


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