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.
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