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February 04, 2009
Who Cares Wins Initiative Issues Final Report
    by Robert Kropp

Final report in a five-year series documents improvements in integration of ESG issues by corporations and investors, but sees much work yet to be done.


Launched in 2004 as a joint initiative of the financial industry and the UN Global Compact, International Finance Corporation (IFC) and the Swiss government, Who Cares Wins aims to support the financial industry’s efforts to integrate environmental, social and governance (ESG) issues into mainstream investment decision-making and ownership practices.

In January 2009 the initiative published the last in its series of five reports, entitled Fut ure Proof? Embedding environmental, social and governance issues in investment markets. In the report, the initiative summarizes the strategic outcomes and "proposes a number of actions to further ESG integration and, ultimately, to set the investment system on a more sustainable, long-term footing."

Since the publication of the initiative's first report, much has been accomplished to help bring ESG issues into the mainstream. The fact that ESG issues can have a significant financial impact is now commonly accepted, especially since, as the 2009 report asserts, "the recent economic downturn has revealed the devastating effects of miscalculations" in the financial industry's management of risks related to ESG issues. The initiative believes that "urgent and wholehearted action is warranted not in spite of, but precisely because of the market dynamics observed in the past months."

Gavin Power, Deputy Director of the UN Global Compact, said, "When we started this there was very little attention being paid to ESG issues. Risk management is what corporate governance is all about. We saw an opportunity to mobilize the mainstream market by convening organizations to work together on new issues."

Among the successes reported by Who Cares Wins is the establishment of new collaborative initiatives such as the Principles for Responsible Investment (PRI) that facilitate the adoption of best practice by providing a framework for investor consideration of ESG issues.

Power said, "Who Cares Wins initially focused on the investment research community and asset managers. One of the actors we felt should come into play was the pension fund industry, which led to the development of the PRI."

Who Cares Wins counts the Enhanced Analytics Initiative (EAI), an international collaboration between asset owners and asset managers aimed at encouraging investment research that accounts for the impact of extra-financial issues on long-term investment, as another critical success. As a result of EAI's efforts, according to the report, "some of the strongest progress in the asset management community has been in terms of sourcing ESG-inclusive investment research from service providers."

Other areas of improvement noted during the five years of the process include the implementation by leading financial companies of ESG issues in their strategic decision-making. The integration of such corporate governance issues as executive compensation, as well as financially material environmental issues, has also seen improvement.

Yet throughout the final Who Cares Wins report, the authors repeatedly acknowledge that much work remains to be done before ESG issues are fully integrated into mainstream investment decision-making. For one thing, the report notes, "the response of investors to social issues, such as workplace health and safety, human rights and companies’ stewardship of intellectual capital, has lagged" behind consideration of governance and environmental issues.

The core constituency of Who Cares Wins consists of asset managers and investment researchers, both in engagement with their peers as well as with companies, asset owners, and other actors. But while asset managers have increased their sourcing of ESG-inclusive investment research, the managers themselves report that incentives within their organizations often do not reward the long-term goals of ESG integration.

Furthermore, according to the report, "other actors in the investment system have doubts about how that research is used within asset managers, and about the robustness of some of the current range of ESG-inclusive asset management strategies." As a result, "the absolute levels of progress in the broader asset management community are still low." Even PRI signatories find integration of ESG into investment decision-making the greatest challenge to their commitment.

"The report indicates that there's been tremendous advancement, but there's a lot more work to do," said Power. "ESG issues are fundamental to corporate performance. It's important that companies dialogue more with investment professionals about their corporate social responsibility (CSR) mandates."

The report questions the commitment to ESG issues of the financial industry's senior executives, and asserts that further systematic changes in the role of ESG issues in investment cannot occur without leadership in the form of CEO support and institutional commitment throughout a full five-year market cycle.

"The corporations have done a poor job of explaining to the investment management community that ESG issues are material," said Power.

Since 2004, reporting frameworks such as the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP) have helped to improve ESG disclosure and accountability from companies. Yet many investment professionals believe that mandating minimum disclosure standards of corporations should be considered.

The conclusions of the Who Cares Wins initiative provides ten recommendations for refocusing the investment system on the long term and on an assessment of risk that includes the integration of ESG issues into investment decisions. The recommendations include the mobilization of corporate management to provide improved reporting on ESG issues, the integration by asset managers of ESG issues with investment strategies and services, and a requirement by regulators and governments that companies and investors provide greater transparency on ESG performance and integration.

Furthermore, asset owners such as pension funds should make ESG inclusion a specific criterion in new asset management mandates, and investment research providers should expand the quality and scope of ESG inclusive research to include other sectors, regions (including emerging and frontier markets) and asset classes.

"There have been cultural hurdles to overcome," said Power. "There needs to be more consistent standardized reporting on ESG issues. And the short-term emphasis on quarterly results has to be overcome in the face of terrifying long-term concerns such as climate change."

 

 
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