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Socially responsible investment (SRI) portfolios reportedly represent
more than $2 trillion in investment capital. Approximately 200 SRI
mutual funds now screen for environmental, social and economic factors—the
so-called "triple bottom line" of corporate performance. With the
proliferation of stock market indexes that seek to measure both
financial and non-financial value, analysts and investors are paying
more attention to socially responsible profitability.
A recent survey indicates both the increasing influence of non-financial
factors in equity research and valuation, and the frustration of
analysts in trying to interpret those factors. The survey reports
an "impressive number of leading financial services firms—represented
through teams of 'sell-side' brokers and analysts—have confirmed
the material relevance of governance and sustainable development
performance on equity valuation. Companies such as ABN Amro, Deutsche
Bank and Goldman Sachs are calling on investors, asset managers
and financial markets to include these factors in their decision-making."
However, the report goes on to say, "(T)he majority of analysts
noted difficulties in comparative analysis due to the range of reporting
practices." Here are five approaches that may help to overcome this
problem and attract the positive attention of socially responsible
investors.
Approach One: Use an accepted reporting format to increase data
transparency, accessibility and comparability.
A big problem facing companies seeking to attract socially responsible
investors is presenting non-financial information that can be easily
interpreted, analyzed and judged. Herein lies a mutuality of interest:
analysts want simplicity and a way to compare apples to apples;
companies want out from under an avalanche of questionnaires. As
if in response, the Global Reporting Initiative (GRI) has emerged
as the gold standard for sustainability reporting. GRI provides
a reporting format and guidance on internal reporting structures
and data presentation. Companies that use GRI both to drive toward
key business objectives and to report their results will be more
attractive to socially responsible investors.
Analysts and investors are beginning to utilize central repositories
of company-reported sustainability data, including OneReport and
the London Stock Exchange's "Corporate Responsibility Exchange."
Participation in such data consolidation and tracking services will
increase comparability and accessibility, and also decrease the
need to respond to a multitude of analyst surveys and questionnaires.
"Integrated reporting"—the inclusion of non-financial performance
data as part of a company's financial report—will enhance the
impact of triple-bottom-line information. The aforementioned survey
notes that ". brokerage firms recommend that corporate managers
and board directors 'include social, environmental and governance
reporting in their annual reports and financial statements.'" Currently,
the practice of integrated reporting is patchy at best—however,
some leading companies (i.e. PepsiCo, Inc. ) are presenting an integrated
report.
Approach Two: Get listed on a respected corporate social responsibility
(CSR) or sustainability index.
A certain way to get attention from socially responsible investors
is to get listed on the Dow Jones family of Sustainability Indexes
(DJSI) , the FTSE4Good Index , the Ethibel Sustainability Index
(ESI) or the Domini 400 Social Index . Each one is regularly rebalanced
and the listed companies screened to ensure they meet established
sustainability criteria. Inclusion provides data credibility as
well as immediate access to millions of dollars of passively managed
socially responsible capital.
Approach Three: Align your information with SRI investment criteria.
Large, actively managed SRI funds, including Calvert Funds , KLD
and Trillium Asset Management , use internally developed investment
screens and filters as the basis for investment decisions, and often
make this information available. Some companies (i.e. Novo Nordisk
) align internal and external reporting with widely used SRI investment
criteria, and such an approach allows analysts to access and analyze
reported data more easily.
Approach Four: Obtain external assurance and verification.
Independent third-party verification of a company's data collection
processes, and ideally the underlying data, provides greater validity
and power to non-financial data. Although less than a third of surveyed
U.S.-based companies reported to PwC that they had used external
verifiers, that percentage is likely to increase as sustainability
assurance standards such as AcountAbility's AA1000 Assurance Standard
and ISO's pending CSR standard gain acceptance.
Approach Five: Develop and strengthen internal CSR initiatives
including mission, metrics, data tracking and research.
A clear sustainability or CSR vision and mission statement is
important to successfully attract SRI investment. An unambiguous
sense of direction, aligned with specific goals backed up by metrics,
conveys conviction to outside investors and lays the foundation
for establishing strong non-financial data tracking and reporting
processes.
To facilitate and enhance these processes, companies must develop
meaningful metrics. Although companies are sometimes confounded
by sustainability metrics, plenty of guidance is available. Stakeholder
engagement can help in developing relevant and meaningful metrics,
as can consultation with peer companies and trade associations.
The performance-improvement lessons learned from Six Sigma and other
management tools can often be applied to triple-bottom-line goals
and objectives. Once companies develop measurable targets, meaningful
progress becomes more transparent and auditable.
Conclusion
Fund managers and analysts face significant challenges today when
researching and analyzing non-financial performance data. Making
the job of the analysts easier will significantly increase a company's
probability of attracting socially responsible investors and the
wider investment world. We believe that one key to success lies
in a company's ability to increase data comparability, accessibility,
transparency and credibility.
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