November 12, 2008
Report Finds That Most Corporations Fail to Address Risks That Threaten Long-Term Profitability
by Robert Kropp
EIRIS report on responsible business practices finds insufficient ESG risk management and
inadequate disclosure and advocates PRI involvement for responsible investors.
The portrait of risk management and disclosure practices by the companies on the FTSE All World Developed
Index, as found in the recent report entitled "The state
of responsible business 2008: Implications for PRI Signatories", is less than flattering. So
why does Bob Gordon, author of the report and Head of the US Team for The EIRIS Foundation, a UK-based provider of independent research
into the social, environmental and ethical performance of companies, seem optimistic?
"Look at the high levels of risk that investors were subjected to in 2008," Gordon told
SocialFunds.com, referring to the current global fiscal crisis. "It's clear now that if
corporations had done a better job of managing risks and providing adequate disclosure, then
investors could have used that information, not only in their investment decisions but in engaging
as owners with the companies in which they invest."
As an indication of growing
collaboration among investors, Gordon referred to a letter sent to 9,000 companies by more than 50
PRI signatories that hold $4.4 trillion in assets, requesting clarification of their positions on
mitigating risks and providing disclosure. He believes that the letter stands as evidence that the
tide may be turning in favor of active engagement by investors in the companies they own.
"Get involved with PRI!" Gordon implored investors, referring to the UN's Principles for Responsible Investment (PRI), a framework for
investor management of environmental, social and corporate governance (ESG) issues that can affect
the performance of investment portfolios.
The PRI, whose signatories manage assets
exceeding $15 trillion, advocates for the inclusion of environmental, social, and governance (ESG)
risks into investment decisions; activist engagement with companies to ensure that ESG issues
become part of corporate policy; and collaboration among investors to enhance effectiveness in
achieving its goals.
The EIRIS report, which addresses all investors but particularly
those who have signed onto the PRI, "explores the key environmental, social and governance (ESG)
risks and opportunities identified by the UN Global Compact of human rights, labour standards in
the supply chain, environment and anti-corruption." It found that "the majority of companies are
exposed to significant risks on these issues." Furthermore, "80% of companies in the FTSE All World
Developed Index face significant unmanaged ESG risks."
The report categorizes companies
according to risk in the areas of human rights, labor standards in the supply chain, environment,
climate change, and bribery and corruption. With the exception of management of environmental
risks, in which over 50% of high-impact companies demonstrated a good management response,
high-risk companies have largely failed to mitigate risks in any area.
Less than 20% of
high-risk companies have mitigated the risk of labor rights abuses in their supply chains. Without
the external pressure by shareholders on apparel companies, whose advanced response merited a best
practice designation by EIRIS, the percentage of companies demonstrating a good response would
likely have been considerably lower.
In the other areas surveyed in the report, no more
than 10% of high-risk companies demonstrated a good response to risk mitigation.
subject of disclosure, the report found that "disclosure levels are generally not good enough for
investors to be clear about the risks they face, or what companies are doing to manage their
Only in the areas of environment and climate change did disclosure levels among
high-risk companies surpass 2.5%. The report finds a correlation between the higher level of
climate change disclosure among high impact companies and membership in such reporting initiatives
as the Carbon Disclosure Project (CDP).
The EIRIS report provides four recommendations to assist investors in their consideration
of ESG issues: integrate ESG risk into investment strategy; actively engage with companies to
improve their performances; insist upon better corporate disclosure, in part by promoting reporting
initiatives as the Global Reporting
Initiative (GRI) and the Carbon Disclosure Project; and support the PRI.
SocialFunds.com asked James Gifford, Executive Director of the PRI, how institutional investors
would benefit from becoming PRI signatories.
"ESG coverage has a long way to go," said
Gifford. "But the key point is shareholder engagement in order to encourage companies to disclose
systematically. Over the next few years we expect ESG coverage to improve dramatically, and we plan
to encourage a significant increase in signatories from currently underrepresented emerging
In an effort to systematize ESG information and encourage collaboration among
PRI signatories and other institutional investors, EIRIS appended information about its PRI toolkit
to the report. The three products developed by EIRIS seek to provide systematic information to
investors based on the first three of the six Principles for Responsible Investment.
Gordon of EIRIS said of the toolkit, "The aggregation of so much information will help
investors integrate the principles of PRI into their investment decisions. We believe the toolkit
contains the first products directly linked to PRI."
Gordon is not alone in believing that
the current fiscal crisis presents opportunity for responsible investment. The rapid decline of
stock prices should lead asset managers and individual investors to question the value of the
strategies that led directly to the crisis. The quest for short-term gains led many investors to
ignore risks both financial and related ESG issues.
In contrast to a focus on short-term
gains, sustainable investment strategies emphasize long-term returns for shareholders.