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July 27, 2004
Book Review--Raising the Bar: Creating Value with the United Nations Global Compact
    by William Baue

Primarily a guidebook for companies to navigate Global Compact participation, the book also reports on a study suggesting a Global Compact market premium.

For executives and managers of corporations considering joining the Global Compact (a voluntary sustainability initiative) or starting to implement its principles, Raising the Bar: Creating Value with the United Nations Global Compact is necessary reading. The book summarizes the nine principles (a tenth principle addressing corruption slated for addition later this year is also discussed), then "deconstructs" the Compact into ten elements (from vision to processes and innovation to reporting) to ease understanding. Simple symbols direct readers to numerous case studies (a magnifying glass), tools (a wrench), and information sources (an "i").

Socially responsible investment (SRI) practitioners, however, will want to skip to the last chapter, "Performance and Value Creation," written by Claude Fussler of the World Business Council for Sustainable Development (WBCSD), before reading the rest. It discusses a study the Global Compact commissioned from Sustainable Asset Management (SAM) on the market performance of Global Compact signatories. SAM conducts research and ratings for the Dow Jones Sustainability Index (DJSI), gathering information via a questionnaire that is "as comprehensive as the Global Reporting Initiative (GRI) guidelines," according to Mr. Fussler.

Of the 99 Global Compact signatories evaluated in SAM's assessment of 2003 corporate sustainability performance, 76 Global Compact signatories (referred to as the GCS76) made it into the DJSI. Comparing the stock performance of the GCS76 to the Morgan Stanley Capital Index (MSCI) from January 2002 to January 2004 reveals 3.4 percent outperformance by the former, as the GCS76 gained 11.6 percent while the MCSI rose 8.2 percent.

The study also finds that the risk, or the degree of uncertainty of return on equity, was 26.43 percent for the GCS76 compared to 20.99 percent for the MCSI for this two-year period.

"This is an extremely interesting risk profile for an investor," said Colin le Duc, SAM's former head of research operations. "One would usually expect a much higher risk for such a small selection of companies."

"Thus a broad conclusion is that Global Compact Signatories and members of the DJSI create premium shareholder value at acceptable risk levels," added Mr. le Duc. "They definitely do not carry a handicap for shareholders relative to the mainstream market."

These results suggest the possibility of a Global Compact market premium, though "[w]e have yet to understand why," Mr. Fussler admits. He dismisses the notion that Global Compact participation is a "magic wand that boosts stock appeal," pointing out that socially responsible investors may be the only ones specifically considering Global Compact membership in investment decisions. He also points out that examining performance over different time periods (such as the year 2000 bursting of the technology bubble) might not support the Global Compact market premium hypothesis. Readers must also remember that this is one limited study.

Mr. Fussler interrogatively posits a correlation between Global Compact participation and general management excellence: "Are the Global Compact signatories, then, better at strategy than others? We think so; at least we believe that they continue to be better than many others," he writes.

A graph comparing sustainability performance by Global Compact signatories to the total number of companies that made it into the DJSI and the overall sample of companies considered by SAM for DJSI inclusion is revealing. A significantly higher percentage of Global Compact signatories scored performed well across a broad spectrum of sustainability parameters.

"In the long run we believe that strategies and actions consistent with the principles of the Global Compact exercise and enhance a number of intangible assets that drive value," Mr. Fussler writes, though he admits that "causality is hard to prove . . . "

With this in mind, SRI advocates can now flip back to the beginning of the book to assess the value of the Global Compact. The book does a very thorough job of revealing the positive benefits of the Global Compact, though it devotes less attention to potential negative aspects or limitations. For example, the book does not list sexual orientation amongst the discrimination issues addressed by the Global Compact, nor does it discuss the role of free and prior informed consent for communities affected by corporate projects.

Ultimately, however, it may prove beyond the scope of any such book to quiet skeptics on either side of the fence--neither corporatists who doubt the value of sustainability nor social and environmental activists suspicious of corporate motives.


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