Finding Common Ground on the Metrics that Matter

Transcription

1 Review of Research Findings Finding Common Ground on the Metrics that Matter March 2012

2 Agenda Introductions Why This Research Research Review Q&A 2

3 Speakers Jon Lukomnik, IRRC Institute Executive Director Lukomnik directs program and research priorities for the Investor Responsibility Research Center Institute, a not-for-profit organization in New York, NY established in 2006 to fund environmental, social and corporate governance research. The IRRC Institute also examines the capital market context that impacts how investors and companies make decisions. Recent IRRC Institute research projects include: Discovering Shale Gas: An Investor Guide To Hydraulic Fracturing (March 2012) Finding Common Ground on the Metrics That Matter (February 2012) Mergers and Acquisitions and the Universal Investor (February 2012) Corporate Governance of Political Expenditures (November 2011) State of Engagement Between Corporations & Shareholders (February 2011) Investment Horizons: Do Managers Do What They Say? (February 2010) One Exchange Plaza 55 Broadway, 11th Floor, New York, NY jon@irrcinstitute.org 3

4 Speakers Carol Singer Neuvelt, Executive Director National Association for Environmental Management (NAEM) About NAEM Largest professional association for corporate environment, health and safety (EHS) and sustainability decision-makers Membership composed of many of the leadership companies in sustainability in the Fortune 750 Facilitate opportunities for sharing best practices and benchmarking among peers through peer-led educational conferences, research and an active network. Green Metrics that Matter An on-going research initiative to identify the core set of key performance metrics that companies track internally. The goal was to provide a voice for the business community in the broader conversation about sustainability analytics carol@naem.org 4

5 Speakers Peter A. Soyka President, Soyka & Company, LLC Soyka & Company is an environmental and sustainability management consulting business. Soyka offers 25 years of experience providing environmental policy and management expertise; executive and thought leadership; innovative, fact-based approaches to resolving complex problems; and customized, client-centric consulting services. He offers particular expertise in understanding the linkages between organizational sustainability and finance. Recent Publications/Presentations: Creating a Sustainable Organization: Approaches for Enhancing Corporate Value Through Sustainability (FT Press). February Govern Green: Driving Your Organization s Commitment to Sustainability (BoardSource). September Soyka, Peter A. and Mark E. Bateman, Greenhouse Gas Management-Are U.S. Public Utility Companies Ready? The Electricity Journal. Vol. 24, No. 1. Pp Soyka, Peter A., Beyond Regulation: The Case of Forest Certification Systems in North America. Environmental Research Journal, vol. 5, no Pp peter@soykaandcompany.com 5

6 Speakers Mark E. Bateman President, Segue Point LLC Segue Point is a new consultancy helping broaden the availability of social, environmental, and governance research to answer investor questions, particularly at the individual and small institution level. Mark s nearly 20 years of experience in working on ESG issues and with clients from the very large to the very small while working at the Investor Responsibility Research Center (IRRC) and IW Financial is the perfect background for bridging the gap that exists in supporting a market segment often ignored. Mark s background includes consultation projects with the Global Initiative for Sustainability Ratings, US EPA, the Global Reporting Initiative, Calvert Group, Ceres, World Resources Institute, Glass Lewis and others mark.bateman@seguepoint.com 6

7 Why IRRC Institute Funded This Research IRRC Institute s mission statement is to provide thought leadership at the intersection of corporate responsibility and the informational needs of investors. Academic and practitioner Includes capital market issues Information silos are both barriers to understanding and opportunities Study compares corporate management and investor perspectives Why same, why different What drives viewpoints Everyone wants lower risk/higher value, so why the differences? Survey fatigue vs. opacity Identify possible opportunities for greater clarity and convergence 7

8 About NAEM s Green Metrics That Matter Research Background: Companies receiving a growing number of external requests for ESG information with corresponding burden on staff. Questions about the materiality of questions, the use of the data, and the analytical methods within ESG researcher community. Understanding the business case for dedicating staff time to respond and develop a business strategy. Objectives: To understand how companies track ESG metrics internally, and identify the key EHS and sustainability performance indicators reported to the corporate C-Suite. To document how companies are responding to external requests for ESG data determine as well as how they use & value of that data. To establish an empirical foundation for identifying a core set of metrics that will be predictive of strong EHS and sustainability performance. 8

9 NAEM Green Metrics That Matter: Key Learnings Research Participants: 75 leadership-oriented, large- to mid-cap companies ( ) Highlights: Leading Companies are taking ESG issues seriously. Inside a company, metrics serve for a variety of purposes. Companies are committing significant resources to external reporting. The business benefits of external reporting have not yet been fully realized, but customer relationships are driving external reporting. Greater transparency needed about the requesting entity, the purpose of the requested data and its relevancy. Key Insights: NAEM s Green Metrics that Matter survey is the first, most detailed look at how companies report and track EHS/ESG metrics. Companies are interested in advancing this field and dialoguing with stakeholders in a mutually respectful way. 9

10 Major Study Findings Agreement on key corporate sustainability issues, but not on - Metrics - Purposes served Risk mitigation perspective, not value creation Greater clarity, better communication needed 10

11 Comparing the Two Perspectives- Areas of Agreement Issue Exhibit 27 Reporting and Broader Disclosure of Key E&S Metrics Percentage of ESG Researchers Evaluating Issue Percentage of Responding NAEM Survey Companies Tracking the Issue Percentage of NAEM Survey Respondents Tracking the Issue Publicly Reporting Disclosing on Request Total Disclosing Information Percentage of All NAEM Survey Respondents Disclosing Information Climate Change 93% 88% 77% 10% 87% 76% Employee Health and Safety 79% 100% 65% 23% 87% 87% Renewable Energy 36% 63% 65% 20% 85% 53% Energy Use/Efficiency 71% 93% 73% 11% 83% 78% Environment Emissions (non- Climate Change) 57% 69% 65% 17% 83% 56% Philanthropy 64% 86% 70% 9% 79% 67% Community Involvement 36% 66% 62% 16% 78% 51% Water Use/Stress 50% 86% 61% 17% 78% 67% Waste Production/Reduction 36% 88% 64% 12% 76% 67% E-Waste 7% 43% 30% 41% 70% 29% Environmental management 71% 81% 53% 12% 65% 52% Diversity Issues 86% 81% 49% 13% 62% 50% Stakeholder Engagement 29% 44% 35% 22% 57% 24% 11

12 Comparing the Two Perspectives- Different Needs, Different Metrics Corporate: Internal accountability, decision making, demonstration External audiences have limited influence Key Considerations Benefits and costs Important stakeholder expectations Opportunities for impact Core of traditional endpoints, but often Management practices and social issues Inclusion of supply chains and products in use after sale 12

13 Comparing the Two Perspectives- Areas of Agreement Exhibit 24 Overlap of Key Metrics of Interest to ESG Researchers/Investors and Corporate Decision Makers E&S Issue ESG Researchers Evaluating the Issue (of 14) Percentage of NAEM Survey Companies Tracking the Issue Climate Change 13 88% Diversity Issues 12 81% Employee Health and Safety % Energy Use/Efficiency 10 93% Environmental Management 10 81% Product Issues 9 50% Philanthropy 9 86% Environment Emissions (non Climate Change) 8 69% Supply Chain 8 58% Water Use/Stress 7 86% Environmental Fines/Compliance 7 96% 13

14 Comparing the Two Perspectives- Different Needs, Different Metrics ESG Research Evaluation of management quality and financial risk Materiality and values Qualitative assessment of firms based upon Hard data Normative evaluations of trustworthiness Both art and science Data in several different forms valued Enables evaluation from several different angles 14

15 Comparing the Two Perspectives- Different Needs, Different Metrics Differences arise because Some issues change infrequently (e.g., corporate policies) Different granularity (e.g., global versus product- or location-specific information) Company interest in engagement (e.g., host communities, potential employees) Different preferred/useable data format or units (rather than scope) 15

16 Risk Management and Reduction Exhibit 5 E&S Metrics Most Commonly Reported to NAEM Survey Respondent Company Senior Management Category Resource Consumption Metric Number of Firms Reporting Total as Percent of Metrics to C- All Respondents Level (N=72) Energy (all sources) 56 78% Electricity 43 60% Water 39 54% Resource Conservation/Recycling Energy 37 51% Emissions and Waste Management Health and Safety Performance Compliance Performance Management and Governance Source: NAEM, Greenhouse Gases/Carbon Footprint 53 74% Injuries and Fatalities 54 75% Lost Day Injuries 52 72% More than Onsite First Aid Injuries 41 57% Fines and Penalties 42 58% Notices of Violation (NOVs) 39 54% Remediation Costs (FIN 47/ Sarbanes-Oxley Compliance) 36 50% Philanthropy/Charitable Causes 44 61% EHS Programs Audited/Findings 37 51% Employee Diversity 37 51% 16

17 Risk Management and Reduction Exhibit 12 Importance of Business Drivers in Responding to EHS/ESG Information Requests Importance Nearly Universal Percentage of Respondents Indicating Importance of 4 or 5 on 5-point scale 90+ Extensive Situational Source: NAEM, Business Drivers Respond to customer request/inquiry Satisfy customer requirement(s) Improve external stakeholder relations Attract/maintain investor interest Create or demonstrate competitive advantage Demonstrate that legal requirements have been met Comply with company policy and/or culture Actively manage risk Demonstrate progressive management Improve employee morale, recruiting, and/or retention Satisfy lender concerns 17

18 Risk Management and Reduction Companies Senior management is informed about, focused on monitoring sources of risk Little evidence that companies taking a strategic approach to Defining their ESG metrics Using the data to Inform business strategy Identify new opportunities for revenue growth, or Otherwise drive improved corporate-level financial results. 18

19 Risk Management and Reduction Exhibit 20 Number of Ratings Addressing SpeciBic Environmental Issues Environmental Issues Number of Ra>ngs Climate Change 13 Energy Use/Efficiency 10 Environmental Management Environmental Emissions (non Climate Change) 8 Environmental Policy Water Use/Stress Environmental Fines/Compliance 7 Environmental Disclosure Environmental LiabiliMes Renewable Energy Waste ProducMon/ReducMon Resource Management and Use Recycling Environmental Spills 4 Biodiversity/ Habitat Product Impacts / Ingredients Environmental Product Design 2 E Waste OpportuniMes in Environmental Technology OpportuniMes in Green Building Packaging Material and Waste

20 Risk Management and Reduction Exhibit 21 Number of Ratings Addressing SpeciBic Social Issues Social Issue Number of Ra>ngs Social Issue Diversity Issues 12 Employee Benefits Employee Health and Safety 11 Political Accountability and Other Political Issues Philanthropy Training 9 Product Issues Human Capital Issues Human Rights Management Negative Economic Impact of Company Actions 8 Supply Chain Oppressive Governments Human Rights Policy 7 Privacy Protection Brand management/marketing and Access to Communications Advertising / Negative Images 6 Bribery/Corruption Issues Access to Finance Controversies Access to Healthcare Community Involvement Customer Management Labor Management Relations / 5 Employee Relations Insuring Health and Demographic Risk Anti-competitive Practices Opportunities in Health and Nutrition Stakeholder Engagement 4 Raw Material Sourcing-Social Workplace Responsible Investing Business Ethics 3 Workforce Reductions Number of Ra>ngs

21 Risk Management and Reduction ESG Researchers Researchers evaluate business potential by evaluating management ESG issues are often a lens for evaluating management Data on direct linkage between sustainability and firm value not requested of companies(or proactively provided by companies) Value creation for investors is at the portfolio level, not only at the company level. This puts investors and ESG researchers in a very different seat than companies on this question. 21

22 What s the Match in Supply and Demand for ESG Data? Exhibit 11 Number of Annual External Requests for EHS/ESG Information (Q Data) 12 Number of Respondents None 5 or fewer More than 50 22

23 What s the Match in Supply and Demand for ESG Data? Exhibit 9 NAEM Survey Results: Company-Level Public Reporting and DIsclosure of E&S Metrics (N=72) Number of EHS/ESG Metrics Publicly Disclosed Disclosed on Request Metrics Tracked but Not Disclosed 23

24 What s the Match in Supply and Demand for ESG Data? Exhibit 19 Number of Distinct Issue Areas per Rating Category Rating/ Method Environmental Count Social Count Governance Count Economic Count SRI Mutual Funds Pax World (In house research) Calvert DJSI Financial Indexes incorporating ESG factors FTSE4Good MSCI KLD CRD Analytics Research House Ratings Non investor focused ratings Historic ratings MSCI IVA Asset CR Magazine GoodGuide CSRHub Global Domini Innovest

25 What s the Match in Supply and Demand for ESG Data? GRI Category/ Sub category Exhibit 22 Summary of Ratings Mapped to GRI Number of Possible Mappings Number of Ratings Mapped Actual to Possible Mappings Percentage Economic % Environment % Social/Labor Practices % Social/Human Rights % Social/Society % Social/Product Responsibility % TOTAL GRI % 25

26 Implications More clarity (transparency) needed on relationship(s) between ESG management, performance improvements, corporate financial performance How closely does disclosure reflect ESG management quality and performance? - Additional research required Many reasonable questions appropriate to improve ESG evaluation and management Greater dialog, information sharing, and perspectives essential 26

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28 Contacts IRRC Institute Jon Lukomnik NAEM Carol Singer Neuvelt Soyka & Company Peter A. Soyka Segue Point Mark E. Bateman