Numbers, numbers and more numbers. The investment community has always praised companies that showed off their figures – earnings, losses, revenues, costs, cash flow, budgets. But investors now realize that all these numbers put together are only a very small part of the whole picture. They need more than just financial information to make an investment decision.
As the whole of society grows more and more concerned about the world’s economic inequality, environmental problems and human rights violations, companies are called on to take responsibility for their actions. The buzz phrase on investor and CEO lips alike is corporate social responsibility (CSR), and it has moved to the top of the boardroom agenda. The IR officer’s role is also bound to change because in many directors’ eyes, social commitment is all for naught if it goes unreported. The traditional financial lexicon is no longer enough; IROs need to learn a new vocabulary.
Beyond figures
Veteran teachers of the new grammar abound. Take PricewaterhouseCoopers, which has been building its ValueReporting framework for three years. ‘Forward thinking companies are beginning to see information as delivering competitive advantage,’ says David Phillips, PwC’s ValueReporting leader. ‘Beyond financial performance, companies are communicating information about their marketplace, their strategy and the intangibles and other non-financial data that are lead indicators of the future performance of the business.’
Phillips speaks straight to senior management concerns: In a rocky market, why should they try to focus on fuzzy intangibles? ‘Volatility in stocks is often driven by lack of information and, while this will never go away entirely, if critical management information is missing, this gap will get readily apparent to investors,’ he adds.
PwC’s new ValueReporting Forecast 2002 says the best value creation efforts often go unreported and unappreciated by investors. ‘Almost all of the CEOs interviewed for this research think their companies are undervalued,’ says Phillips. ‘This is because the picture they are showing is incomplete; they are hiding lots of things that could help to increase their shares’ values,’ he insists.
What information are companies failing to disclose? Geoff Lane, head of global sustainability solutions at PwC, says investment house Friends Ivory & Sime, the Association of British Insurers (ABI), and PwC have together been on roadshows to explain to
65 senior executives from 55 companies worldwide what investors are looking for. ‘Most of the time they want to know about the company’s future strategy, its goals, what management is like, employee relations, new product developments and how they are implementing their corporate social responsibility policy.’
Measuring success
The challenge is that while senior executives and company directors understand hard numbers, they have trouble measuring their progress in social, environmental and ethical issues. How can companies ensure they are in compliance with the new standards? For that matter, what are the new standards?
‘There are no international standards that can help companies catalog how they have to behave,’ responds Joe Gleason, managing director of the global corporate practice at Manning Selvage & Lee, a top PR firm. ‘Most of them recognize that they have to be environmentally friendly, for example, but they don’t know how to get there. Companies may write checks to environmental groups and yet be polluters or to the Red Cross and yet harm human rights. They need to be coherent.’
Indeed, CSR is not just throwing money at tree huggers and whale lovers. Anyway, a survey by US strategic communications consultancy Hill & Knowlton of more than 2,500 individuals shows that the public is very cynical about corporate philanthropy, with three quarters saying companies only participate in charitable events to attract good publicity. ‘Companies’ responsibilities are much wider than companies think their responsibilities are,’ affirms Adrian Henriques, an independent social auditor in London.
To help companies to find their CSR route, there are firms such as London’s SERM Rating Agency which quantifies safety, environmental and social risks as a financial rating of sustainability risk. ‘By using these ratings, companies know how they are doing in each area and are aware of what they have to improve to attract investors,’ explains Jonathan Barber, SERM’s managing director.
Show me the way
There are indeed many new signposts to point companies in the right direction. In the UK, the Association of British Insurers has just launched guidelines to improve CSR disclosure by Britain’s companies. ‘We have talked to a wide range of fund managers, corporate executives and NGOs in preparing our guidelines,’ explains Mary Francis, director general at the ABI. ‘The guidelines represent an important opportunity for investors and companies to work together to both protect shareholder value and improve understanding of corporate social responsibility.’
The succinct guidelines don’t venture into specifics, instead summarizing board responsibilities for assessing sustainability. These universal rules apply to companies of any size and in any business, outlining how board members should identify and assess the risks to a company’s short and long-term value from social, environmental and ethical (SEE) matters, as well as the opportunities to enhance value that may arise from an appropriate response. The ABI goes on to advise that the annual report should reflect all the SEE-related assessment a company is carrying out. If there are no such policies, the report should explain why.
Drawing the line
The ABI’s guidelines and the UK’s Myners Report, which demands pension funds report their social and environmental policies – or lack thereof – bring CSR to the investment mainstream. It’s hard to draw the line anymore between the CSR movement and the older practice of socially responsible investment (SRI).
In the US, financial information services and consulting firm SRI World Group has written a framework for institutional investors, especially pension funds, universities, religious organizations and foundations. It details how these investors, representing $7 tn in US assets, can identify risk and capitalize on market opportunities while simultaneously generating social and environmental benefits for their own stakeholders.
Mark Thomsen, news editor at SRI World Group, believes investors can act as company lecturers. They can show management what it is they expect in terms of social, environmental and ethical commitment before they put their money into a company. ‘Socially responsible investors are realizing that engaging with companies through dialogue is more effective in changing behavior than simply not investing in those companies. And many companies have found that the costs of committing to corporate social responsibility are outweighed by benefits such as enhanced reputation and lower risk of litigation,’ says Thomsen.
Two models
Craig Mackenzie, director of governance and socially responsible investment at UK asset manager Friends Ivory & Sime, describes the two models of SRI. ‘The traditional one consists of managing a screened portfolio that excludes controversial companies on the basis of all kinds of ethical measures, like arms or tobacco companies. In the UK,’ he goes on, ‘there are 14 SRI mutual funds or unit trusts with £4 bn in assets, which is an insignificant figure and, therefore, IROs are not so interested in these funds.’
The other SRI model, the engagement approach, doesn’t automatically exclude companies. It encourages companies to adopt better practices. ‘We have done research among clothing retailers who use labor in third world countries. What we do is explain to them the reputation risk and help them introduce policies and conduct codes,’ says Mackenzie.
He believes IROs do not yet have the expertise needed to report social and environmental policies. ‘It’s a big challenge for them. When we first meet with these guys they don’t understand what we are talking about. But after a few meetings, they see that by implementing these policies they can considerably increase their share value.’
Similarly, Morley Fund Management has introduced environmental reporting requirements for FTSE 100 companies. Morley wants UK giants to have robust processes to minimize environmental damage and to widely report them. If such reports are not published, Morley votes against the annual meeting resolution to adopt the report and accounts. ‘We try to encourage firms to adopt an active approach to responsible practices and to communicate their policies effectively,’ says Toby Belsom, an analyst at Morley.
Simon Berkeley, a consultant at Environmental Resources Management, points out that while there are some international environmental standards, it’s more difficult to establish global social models. ‘In either the UK or Azerbaijan, we know when a company is getting the water dirty. Whereas if we talk about gender balance, European companies need to have gender equality policies but those don’t apply at all to the Middle East,’ he comments.
Looking for leaders
Perhaps because it’s easy to identify polluters, oil companies have been the first to take strategic measures to improve their reputation. Indeed, Shell and BP are continually mentioned as examples to follow in environmental reporting. Conversely, telecommunications, media and pharmaceutical companies are considered the worst at environmental reporting.
Mike Harrop, Shell’s IR manager in the UK, says the company has a very transparent environment report which makes his job easy; just about every investor inquiry is already answered in the book. However, he admits, ‘There are investors who have prejudices against oil companies and whatever we say is not going to change their predisposition. Therefore it’s not worth spending time with them.’
Berkeley provides suggestions for less obvious offenders: ‘Communications and media companies should provide equal access to information for all developing countries because information is essential to social and economic development,’ he insists. ‘However, these multinationals are still reluctant to invest in the third world. The same applies to pharmaceutical companies. instead of developing Viagra they could send drugs to poor countries to help with eye cataracts or Aids.’
There is general agreement that companies are gradually strengthening their CSR commitments in response to pressure from investors and society as a whole. Hill & Knowlton’s survey indicates that nearly three quarters of Americans consider social responsibility issues when making investment decisions, and 12 percent would buy green stocks even if they gave a lower return on investment.
The Washington-based Social Investment Forum, which issues reports every two years, found that in October 1999 one out of every eight dollars under management in the US was in a socially responsible portfolio. And the trend is set to increase, believes Carolyn Kay Brancato, director at the Conference Board, a speaking platform for top management. She says the recent decision by Calpers, one of the world’s largest pension funds, to launch SRI portfolios ‘has changed the dynamic of the situation.’ She further adds, ‘Most companies now try to answer every inquiry from social funds. If only other major pension plans did the same as Calpers, the boost to SRI would be much more noticeable.’
The question investor relations officers may be asking themselves is why now? Investors have more than enough on their minds without woolly issues like CSR. Sadly, a major factor behind the current surge of interest in CSR may be the September 11 terrorist attacks on the US. Industry leaders now want investment to focus on the long-term economic and environmental health of the whole world, not just shareholder value. ‘There are companies like MetLife, for instance, that after these events decided to seek SRI in the stock market,’ says Brancato.
Signs of strength
It’s entirely appropriate, then, that the US is the world leader in SRI, though the UK and continental Europe are catching up with benchmarks like FTSE4Good and DJ Stoxx’s new pan-European sustainability indices. Pension funds including the Netherlands’ PGGM and ABP Investments are looking to SRI and may set an example for retirement funds elsewhere.
Still, most senior executives and many investors only understand three things: numbers, numbers and numbers. Board level commitment may only become more than paying lip service when CSR hits the bottom line. Yet history shows that many socially screened equity investments outperformed their benchmarks over five and ten-year periods. In London, the Forum for the Future’s Center for Sustainable Development is researching whether CSR boosts earnings. The same organization is developing sustainable finance recommendations to back-up the UK government’s proposals at the Rio+10 World Summit on Sustainable Development in Johannesburg in September.
Isn’t it already obvious, though? If companies want to ensure their success far into the future, they must help build a world with fresher air and greener landscapes; they must make sure there are enduring and healthy markets for their products and services beyond today’s developed world; and they have to help make people happier, from El Salvador to Zimbabwe.
