Inform, on form
SRI is still a relatively new concept which is still considered by many to be some way down the list of priorities as companies and their senior executives feel the pressure to focus more and more on the bottom line. The reason it finds itself so far down the list is that as well as appearing more of a “nice to have” than a “must have”, its implementation poses a number of challenges for both for companies and then by extension for investors seeking to understand them better.
The companies that find themselves in the spotlight are often, not surprisingly, the largest companies, a large proportion of which have offices and installations in many countries.
When we are looking at a large company with a large number of employees how can we be sure that all its SRI policies are being implemented in every one of its installations around the world? “This is one of the biggest challenges,” says Julie McDowell, head of SRI research at Standard Life Investments in Edinburgh.
Clearly investors don’t have the resources to spot check company installations. “We ask management how they ensure for themselves that their policies are being adhered to and what kind of training they provide for their staff,” she continues. “A company can have the best policies but how does it ensure that that local management and employees don’t get complacent?”
But how can we satisfy ourselves that company corporate responsibility policy, for example, health and safety policy, are being implemented in every country? “It is often hard to judge,” says McDowell. “For example, BP had a progressively improving safety record round the world but failures at their Texas City refinery resulted in an explosion that caused 15 deaths and a $700m (e579m) write-off.”
But investors must in the end have faith in the company management. “We invest in companies with good management and we rely on management to develop good policies and procedures for implementation. In general, companies are getting used to explaining how they ensure that their policies are followed on the ground.”
She adds: “Different companies have different attitudes and cultures so levels of openness can vary but most companies have come to expect that this question will be asked.”
Whether or not a multinational has a good record on environmental issues in a small installation in a developing country often seems a minor consideration until there is a catastrophe.
But getting any information at all can be the major challenge for SRI investors, especially when one looks beyond the largest companies.
“More and more companies are producing reporting on corporate responsibility so the information is becoming easier to access,” McDowell points out. “The key is the level of evidence that the companies provide to support theirn assertions. There are some very good examples where the reporting and supporting information is excellent. However some companies are just starting out on this road and still have much to learn. There is much good reporting among members of the FTSE100 but as we get into the FTSE250 there is less reporting and the information which is produced is of a lesser quality.”
She explains that the best quality of reporting comes from the extractives: gas, oil, mining etc. “It tends to be companies that operate in areas that have long been the focus of environmental pressure groups that are the most advanced in terms of the quality of their communication,” she says.
Central to the approach adopted by Standard Life Investments is the need for data. “We need to see how a company has implemented a given policy – what tools they have used,” McDowell notes. “But we don’t restrict our investments in this company or the other because we can’t get hold of information. We just continue trying to get the information we need.”
We also need to understand what their key issues are; it is important here to take account of the fact that some companies may have any significant SRI issues. An example may be a company in the computer software industry with a handful of employees. McDowell stresses: “There should be a proportionate response to corporate responsibility concerns.”