Taking things seriously
Socially responsible investment specialists EIRIS have found that 24% of companies worldwide have good or advanced systems in place to manage social, environmental and other ethical (SEE) risks. Published recently, the survey, entitled ‘SEE Risk Management: An analysis of its adoption by companies’, analysed companies in Europe, the Asia-Pacific region and Canada.
“SEE risk management is increasingly relevant to the growing number of investors who recognise that how companies handle exposure to social, environmental or other ethical issues is an important component of good corporate governance,” says EIRIS executive director Peter Webster.
The EIRIS report breaks down findings by business sector and by country. Key findings include:
q French, Norwegian, Swiss and British companies have made the greatest progress in developing SEE risk management systems, although approaches vary from company to company;
q Larger companies are generally stronger than smaller companies, particularly in the UK;
q Sectors perceived as being at greater risk have a higher proportion of companies with good or advanced systems: mining (42%), oil and gas (53%) and tobacco (50%), however, significant variations remain in corporate responses to SEE risk within these sectors;
q Japan fares notably better than Hong Kong and Singapore.
“The is evidence from the report is that many are engaged but if we take a transnational view we can see that many are not,” says Stephen Hine, head of international relations at EIRIS.
The EIRIS approach assesses companies under four headings:
q The board, covering regular review, training and pay incentives;
q Risk management system covering policy and procedures, regular assessment, and audit and verification;
q Identification and disclosure of specific SEE risks;
q Quantified potential liabilities/opportunities: specific examples.
The assessment is based on what the company says are its SEE risks. EIRIS notes that it “has generally not disputed the company view”. The scores awarded reflect the level of disclosure by the company. As its sources EIRIS uses annual and corporate social responsibility reports, company websites and company survey replies.
Just as there is variation by country, so sectors also display interesting variations.
“Sectors like tobacco which have a social risk that can influence share prices have responded by addressing them,” Hine notes. “This is not surprising, even though any negative impact may be counterbalanced by their exposure to the developing world. Other high risk sectors include oil and gas and mining which have also begun to respond as they too are more likely to fall foul if they don’t.”
There appears to be a great deal of variation within sectors. “It is clear that Nike has been damaged by allegations about their supply chain so they have been recently issuing detailed reports about that area,” Hine explains. “But there are many others in the same sector which do not address these issues.”
He adds: “It is surprising that other sectors are not taking these issues as seriously. For example, one would have thought that aerospace and airlines would be taking issues such as climate change into account more than they are.
“These issues are no longer niche,” Hine continues. “The risks are now of sufficient magnitude that they must be taken into account. The OFR requirement made companies go and think about this issue without being too prescriptive.”
But things are improving, notably among the investment management community. “I could go to 50 brokers and they would know about SEE issues and incorporate them,” says Hine. “Five years ago this would have been zero. And increasingly institutional investors are taking these issues seriously too.”
Hine cites the enhanced analytics initiative (EAI) as evidence that the institutional market is being more proactive in addressing issues of future sustainability. The EAI was established in 2004 by a group of institutional investors who agreed to allocate a minimum of 5% of their broker commissions on the basis of how well brokers integrate analysis of extra-financial issues and intangibles into their mainstream sell-side research.
“Institutional investors will be crucial in driving this forward,” Hine says. “Pension funds have a lot on their plates but trustee training will be crucial. They will come under increasing pressure to consider SEE issues – it will become a fiduciary responsibility. We need to make trustees ensure their asset managers engage with companies.