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May 19, 2009
Corporations Show Improvement on ESG Issues, but Have a Long Way to Go
    by Robert Kropp

Research by EIRIS finds that financial institutions score the lowest in managing their ESG risks.

Following the lead established decades ago by sustainability investors, a wave of new adherents are calling for the incorporation of environmental, social, and governance (ESG) into assessments of corporate risks and opportunities. The growing influence of such initiatives as the Principles for Responsible Investment (PRI) and the United Nations Global Compact suggests that the disastrous consequences of an exclusive corporate focus on short-term profitability are leading governments and mainstream investors to insist upon ESG incorporation and disclosure by companies.

So how well are companies performing in response to the growing mandate for the consideration of ESG issues? According to a report issued by Ethical Investment Research Services (EIRIS), a UK-based provider of research into the ESG practices of companies, only a quarter of companies listed in the FTSE All World Developed Index are managing ESG risks adequately.

The report, entitled At risk?—How companies manage ESG issues at board level, analyzed the ESG risk management strategies of listed companies between 2005 and 2008, and focused on four areas of corporate ESG performance.

While 34.7% of companies achieved a score of over 50% on the issue of board responsibility for ESG management, 45.3% of companies displayed no evidence that the issue has been addressed. Of the four areas of ESG performance, board responsibility has shown the least improvement between 2005 and 2008.

A 26% increase in the number of companies scoring at least 25% on the issue of ESG risk management indicates that disclosure by companies of the ESG issues relevant to their businesses is improving.

The strongest area of performance was identification of ESG risk, with 76.2% of companies achieving at least 50% of the possible score in 2008. Only 48.2% achieved at least 50% in 2005.

The weakest response by companies was in the area of disclosing liabilities or opportunities related to ESG risks. However, this was also the area in which the greatest improvement was shown, as 20.5% of companies scored at least 75% in 2008, compared to only 2.6% in 2005.

Of the industry sectors analyzed in the report, the weakest performance was in the financial sector, suggesting that poor disclosure and the failure of financial institutions to recognize the relevance of ESG may be persisting. The technology sector, which had been the worst performer in 2005, showed the most improvement, while the heavily-regulated resources sector was the best performer.

The best regional performance was by Japan, followed by Europe and North America.


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