How Investors Changed Microsofts Reporting — and Why All Companies Should Care
NBS Thought Leaders offer guidance on sustainable business models for the 21st century. Thought Leaders are leading academics and practitioners: world experts on sustainability issues. Here, Michael Jantzi, CEO of leading sustainability research firm Sustainalytics, describes how investors' expectations for sustainability are affecting firms — and the actions firms need to take.
The responsibilities of corporate directors and managers have evolved significantly during the past decade. While leaders certainly need to act in the best interests of the corporation, those interests can be defined as more long term than short-term profit maximization for shareholders, according to the Supreme Court of Canada, as articulated in the 2008 BCE decision.
The court decision reflects trends worldwide. Some cling to the notion that a board’s sole responsibility is to the owners, but this shareholder versus stakeholder debate is becoming irrelevant as a growing number of investors are demanding higher standards of environmental, social and governance (ESG) performance from companies. Driven by the increasing complexity of the global economy and evolving views of fiduciary responsibility, investors are integrating ESG parameters into their models because it helps them make more informed decisions.
The United Nations-backed Principles for Responsible Investment initiative highlights this trend. It now counts more than 1,100 investment institutions as signatories, representing US $32 trillion of assets under management (AUM).
Whether directors and managers are aware of it, their firms are being evaluated based on ESG performance. The Canada Pension Plan Investment Board (CDN $165.8 billion AUM) has had a responsible investing policy in place since 2005. It states that “responsible behaviour by these companies with respect to [ESG] factors can generally have a positive influence on corporate financial performance.” Similarly, the Caisse de dépôt et placement du Québec ($165.7 billion AUM) believes that taking ESG considerations into account contributes to complete, integrated management of all investment risks.
This approach is entrenched more firmly outside of North America. For example, PGGM, the Dutch-based fund that manages assets worth more than €110 billion, integrates ESG factors into its investment decision-making processes because it constitutes good risk management and “contributes to a better social and/or financial return.”
No company can escape the spotlight
Traditionally, only leaders of publicly-traded companies faced ESG-related questions from shareholders. However, this is changing as investors begin to integrate ESG factors across a range of asset classes. For example, CalPERS, the US $227 billion fund that manages the retirement savings of public sector employees in California, prioritized exploring ESG factors in credit analysis, meaning that any corporation that is tapping the debt markets needs to consider ESG risks and opportunities. RARE, an Australia-based fund manager specializing in global infrastructure investment, believes ESG factors are critical to better understand the long-term prospects for these types of projects.
Companies accessing venture capital need to have ESG issues on their radar screen as well. For example, Kohlberg Kravis Roberts (KKR) has made a public commitment to formally incorporate ESG factors into its investment processes. And in real estate, the practices of PGGM, which integrates ESG factors into its real estate investments and engages with real estate companies on ESG issues, are becoming more common throughout Europe and North America.
Even directors and managers of small and medium enterprises (SMEs), which normally operate far outside the scope of the capital markets, can’t escape the need to pay attention to ESG issues, especially if they are significant suppliers to larger firms. Investors are putting increased pressure on large companies to ensure that ESG risks are managed all the way down their supply chains. For example, the US $120 billion New York City Pension Funds system has asked Dell, Intel and Motorola to adopt internationally recognized standards of workplace safety and human rights in their global supply chains and publish reports on their implementation. Starting in 2013, Microsoft will include a summary of ESG information from its vendors in its annual Citizenship Report and vendors will be encouraged to make their reports public as well.
Knocking on your door
Some companies don’t realize the extent to which their shareholders care about ESG issues, perhaps because much of this analysis happens behind the scenes, making it invisible to the board and management. Increasingly, however, owners want to engage with companies on ESG issues. Sometimes investors up the ante by filing shareholder proposals, which give voice to the entire spectrum of ownership. These filings can reverberate throughout the organization, as at Citibank in May 2012, when 55% of shareholders voted down the CEO’s US $14.9 million pay package.
What does this mean for directors and managers?
The underlying message is that directors and managers of companies — large or small, public or private, regional or global, no matter the industry or sector — need to understand that managing ESG risks and leveraging opportunities are a critical part of business success in the 21st century. Along with implementing ESG policies and programs, companies must work to build trust with an increasingly demanding capital markets audience.
Experience has taught me that transparent communication with stakeholders is critical to building that trust. While it’s dangerous to generalize, investors initially look for directors and managers to demonstrate their understanding of their company's exposure to ESG issues across the range of operations. They must then articulate how the company is managing these risks and, increasingly, explain how the company is integrating ESG into its strategic and business planning to differentiate itself from the competition to leverage market opportunities.
About the author
Michael Jantzi is the CEO of Sustainalytics, which supports investors with the development and implementation of responsible investment strategies. He founded Jantzi Research (which later merged with Sustainalytics) and has been active in the responsible investment field since 1990. Michael is a thought leader on sustainability investment and corporate social responsibility issues and regularly appears in the global media. In June 2010 Michael was awarded the Lifetime Achievement Award by the Social Investment Organization in recognition of his contributions to the Canadian responsible investment market.
Michael mentors social entrepreneurs through his involvement in the Ashoka Support Network. He also sits on the practitioner advisory council for the Research Network for Business Sustainability and is a member of the advisory council for the Schulich School of Business' Centre of Excellence in Responsible Business.
CalPERS. (2012). Towards sustainable investment: Taking responsibility[MF1] . Deutsche Bank. (2012). Sustainable investing: Establishing long-term value and performance. PGGM. (2011). Responsible investment annual report. Principles for Responsible Investment. (2012). Annual report of the PRI initiative.