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September 24, 2010 5:46 PM Age: 11 yrs

TUNE IN – THE WORD FOR IR PROFESSIONALS IS SUSTAINABILITY!

Category: Hank Boerner Articles
Source:  By Hank Boerner - Featured commentator, Accountability Central.com

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Tune in to the Sustainability Movement to see your future unfolding – over the past 10 years the corporate governance movement and the socially-responsible investment (SRI) movements have been converging and today the combined forces of investors and market players involved in the formerly separate spheres are influencing capital flows, access and cost of capital for corporate and sovereign issuers, corporate reputations…and more.

Welcome to the Sustainability Movement. (Or, as some analysts and investors see it, the “ESG Movement – combining Environmental & Energy, Social Issues and Governance factors and monitoring corporate ESG Key Performance Indicators (KPIs). This is the emerging foundation of many are calling the New Normal in the capital markets, post-crisis.

Once the word of advice for young professionals and would-be managers was “plastic!”.

In the 1967 movie, “The Graduate,” the lead character Benjamin Braddock, played by Dustin Hoffman,  is leaving his carefree college days to enter the real world of work and Dad is urging him on to graduate school.  He is advised by a family friend:  “Go into plastics” to have a career and promising future.  The exchange goes like this on screen:  Mr. McGuire to young Braddock:  “I want to say one word to you.  Just one word.  Are you listening?”  “Yes, sir, says Benjamin.  Mr. McGuire advises:  “Plastics.” 

Since the screen debut of that little bit of dialogue almost 50 years ago, variations of that exchange have been repeated many times in business and personal conversations.  Fast forward to the 21st Century and the entrance of the Millennial Generation in investor relations and finance.  What word would you offer to newbies or early-stage IR professionals?  Financial service?  Technology?  Food retailing? Insurance?  My choice:  “Sustainability!”

Consider:  The institutional investor advocates systematically nudging the SEC over several years to require public companies to disclose material information about the risks and opportunities inherent in climate change represent more than $1 trillion in Assets Under Management (AUM).  On January 27, 2010, the Commission issued its Interpretive Release (guidance - effective immediately) to clarify what publicly-traded companies need to disclose to investors related to climate change effects on business operations.

 

Stay Tuned …to the “Names” behind the drive toward more corporate disclosure, transparency and communication on climate change and related issues:  Ceres, Environmental Defense Fund, the Investor Network on Climate Change (INCR) and others.  Members of these and other coalitions include CalPERS (the California Public Employees Retirement System, largest such fund in the US).  Ceres is a powerful coalition of investors, environmental advocates and public interest groups focused on sustainability challenges; Ceres directs the INCR, whose 80 institutional members manage more than $8 trillion in assets.  Overall, the AUM of the Sustainability Movement reaches into the trillions’ of dollars, in the US and globally.

Stay Tuned …to the institutions’ concerns:  Greenhouse Gas Emissions (GhGs, if you are not that familiar with the terminology).  The US Environmental Protection Agency named GhGs for required disclosure and data collection beginning January 1, 2010. (See the Greenhouse Gases Rule if you have questions – a number of clarifications are being issued regularly by EPA.) You will be able to track specific investor names involved and issues by following this year’s proxy votes; investors (working with new encouragement from the SEC under Chair Mary Schapiro) are filing record numbers of proxy resolutions related to climate change and linking these (in some cases) to executive compensation and other traditional corporate governance measures.

 

Stay Tuned …to new ESG and Sustainability frameworks, analytical models, methodologies and the tracking of Key Performance Indicators that institutional investors (asset owners and their managers) are adopting or embracing. 

Note that in recent analyst and portfolio manager surveys the two terms are 50/50 in acceptance and common usage, so tune in to both “Sustainability” and “ESG” (for environmental & energy, social issues and corporate governance) when investors use the terms.  Where corporate governance may have previously been the responsibility of the legal team and corporate secretary, the issues that shareowners and advocates raise – exec comp, board independence, board governance – are being linked to a wide range of “E” and “S” issues. 

The important aspects of corporate business that the IRO, financial analysts, portfolio managers and others deal with every day, and exchange information and views on, are primarily data-driven (the “numbers” and what they mean). Information beyond the numbers have been considered “non-financial,” “extra-financial” or “intangible.”  No more – and this may be one of the hardest concepts for a battle-hardened IRO to bring into focus.  The affects and effects of climate change, supply chain, labor conditions, diversity record product life cycle, product stewardship, water usage and water waste, GhG’s impact on operations, the totality of carbon emissions – all are now very material and tangible (with financial results) for a growing number of investors.

Because the analyst and investor may not ask about ESG / Sustainability issues, advise the experts, doesn’t mean they don’t care about these performance factors.  If they can’t get the information from your company they might move on to another investment opportunity.

Goldman Sachs, while in the news headlines these days for certain behaviors related to other practices, may be overlooked as a major ESG players.  G-S has taken a lead among financial services industry giants in creating the Sustainability debate with its “GS SUSTAIN” framework.  Over recent years this rigorous methodology has brought together the ESG criteria into a broad industry analysis that identifies long-term investment choices in such established sectors as energy, consumer products, banks, and for emerging industries such as alternative energy.  More than 100 public companies are profiled as potential sustainability winners over the long-term (and this presumes those companies not on the list are laggards or potentially losers over time).

“We are close to the tipping point,” Goldman Sachs notes in addressing the impact of climate change, “with increased business awareness, the shift from niche social issues to mainstream concerns, and companies being differentiated by early leadership in adaption [to redesign operations and reposition business models to provide a window of competitive advantage]…”  GS identifies corporate climate change leaders on its GS SUSTAIN focus list (regularly updated).  Is your company among the future winners?  Should it be?

Stay Tuned … to such global reporting frameworks now evolving as the Global Reporting Initiative (GRI), an independent organization whose birth was sponsored by the United Nations.  There are now 1300 organizations signing on the principles of the GRI (corporations, associations, not-for-profits, governments) and while the USA is underrepresented (in percentage terms, with only 130 reporters in the GRI), that will change quickly.  Advocates for more climate change disclosure are pointing to the GRI as a de facto standard that public companies can voluntarily embrace and begin to comply with the SEC’s climate change disclosure guidance.

One of the tests for judging the interest of investors in ESG / Sustainability was thought to be what would happen in a down market – was this a passing fad?  The answer in the Great Recession is a qualified “no” – sustainable investment (what was also called “SRI”) has held up very well in the markets of 2007-2010, and in many instances Sustainability investment beat the mainstream benchmarks such as the S&P 500.

Keep this top-of-mind when you consider the importance of Sustainability to investors:  A prominent SR investor, Steve Viederman, regularly challenges analyst and asset manager audiences with this question:  Would you deliberately invest in an un-sustainable company?  In a company with ir-responsible management?  How will we know if a company is sustainable and responsible, investors may ask..  The answers in the future will come in part from the corporate IROs that recognize the importance of Sustainability and ESG KPI’s to investors and help their companies tell the sustainability story that investors want to hear.  Plastics?  That was good advice in the 1960s – for this century, my advice is to tune in the Sustainability dialogue and as you consider your career and future..thank Sustainability!

 

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Hank Boerner is the former editor of NIRI IR Update, and is the corporate governance commentator and contributing editor of Corporate Finance Review, a Thompson Reuters publication.  Email:  hboerner@accountability-central.com

 

 

 



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