Growing Importance of ESG/CSR to Owners

FT reports that a survey by Aviva Investors found that ninety per cent of equity and fixed-income fund managers polled, with about £4tn of combined assets under management, recognized the importance of ESG to end owners and consultants although a smaller percentage, 79 per cent, said they were likely to embed the strategy in all mainstream funds in the future.

Underlining the growing importance of ESG, 72 per cent of respondents believed there was a link between a company’s ESG performance and total returns, citing operational savings made by managing companies through a long-term investment view and including ESG strategies as ways of improving returns.

In spite of some signs of improving awareness of ESG issues among asset managers, the survey revealed 68 per cent of those polled did not have a board member responsible for ESG and, out of those who did, only 19 per cent tied ESG goals to their remuneration incentives. (Fund managers focus on ESG factors, 12/9/2012)

The best site I’ve found for ESG advice on the specific companies in my own portfolio is GMI RatingsIN MY OPINION | The Rise of Routine Anomalies: Redefining Black Swansby James Kaplan, CEO (12/10/2012) discusses Nassim Taleb popularized theory of black swans and notes that “anomalous events that defy traditional economic theories have become a routine occurrence. Not all of them are cataclysmic. Importantly, most of them are man-made.”

Kaplan’s point is that although most portfolio managers are not making good use of non-traditional measures of investment risk, such as measuring perverse incentives for corporate leaders, GMI Ratings has been doing it for years.

Rewards for poor performance typically result in poor performance. Misleading accounting practices typically result in mispriced risk. It really is that simple… The fact is that HP’s massive write-down was predictable. In fact, GMI Ratings predicted it. We also downgraded BP before Deepwater Horizon, Tepco before Fukushima, AIG before the financial crisis, News Corp before the phone-hacking scandal, Olympus before Michael Woodford blew the whistle, and many other firms before major negative events irretrievably destroyed shareholder wealth.

Many investors did not get out of these stocks in time because they chose to dismiss or discount risk signals for which there is no space on the corporate income statement. Whatever EPS measures, it does not detect lies. Neither does EBITDA or COGS or SG&A or the elegant corporate sustainability reports adorned photos of smiling faces and blue skies. These are cultural constructs, creations of image-makers. But many investors still rely on them without a sufficient dose of healthy skepticism… we should continue to study the hyper-complex causes of highly improbable events, but we should not neglect the obvious red flags of bad governance and bogus accounting.

One of the best sites to catch the news on sustainable investments and corporate social responsibility in general is You can depend on Robert Kropp to keep you posted on the most important developments in the field of ESG, especially the ES portion.

Another great site for corporate responsibility news is A recent post (Will Corporate CSR Positions Grow or Disappear as Responsibility Becomes a Core Function?) discussed a survey of businesses, Corporate Social Responsibility: Who’s Responsible? Finding an Organizational Home for an Increasingly Critical Function. The authors found the top motivation for CSR reporting being enhanced reputation (88 percent). Tied for second was competitive positioning and social consciousness (71 percent). Profitability weighed in at 56 percent. The study recommended the following best practices:

  • A comprehensive reporting process with a direct link to the CEO
  • Embedding CSR responsibilities into every employee’s job descriptions
  • Ongoing research to determine the effect of CSR policies from both internal and external stakeholders when evaluating and measuring efforts
  • Holding the CEO and top management accountable for the implementation and results of the company’s CSR program
  • An understanding of the influence and importance of various groups in the company’s CSR processes
  • CEO and top management support is critical in driving the company’s CSR programs
  • Coupling the company’s standard measurement tools with a regular evaluation of traditional and social media coverage about the company.
  • Communicating about the company’s CSR efforts through social media platforms, including Facebook and Twitter, in addition to posting information regularly on the company website

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