Chapter 4

What Are the Responses to Sustainability Reporting?

As sustainability reporting becomes more prevalent, it is important to examine how it is perceived. There are many reasons (e.g., doing what is right, establishing a “green” reputation, creating innovative products) that motivate organizations to report their sustainable progress. On a ­practical level, the process of collecting and reporting the information requires considerable investment and eventually a return on the investment. The payoffs may be both short term and long term. In the short term, benefits could be immediate cost savings from energy efficiencies. The long-term benefits could be an organizational transformation that takes the organization in new and more profitable directions. The payoffs are not only about profits; the payoffs also may be in doing what is right. The major question needs to be asked—is all this effort worth it? Investors, rating groups, and the reporting companies seem to think so.

What Are Some of the Returns?

The popularity of sustainable development as an investment criterion is evident in the existence of sustainability and socially responsible ­investment (SRI) funds. SRI indexes have performed very competitively when compared with non-SRI indexes. Between 1990 and 2013, the total returns for the Domini 400 have outperformed the S&P 500.1 For nearly the last 30 years, the number of professional, institutional, and individual investors along with the total dollars invested has grown substantially. Total dollars under professional management in SRI from 1995 to 2014 increased from $639 billion to $6.57 trillion.2 SRI focuses on issues other than just net income, and this has proven to be a profitable approach as investors demand more of these investments. Since the beginning of 2012, many institutional investors in the United States have incorporated environmental, social, or corporate governance criteria in ­investment analysis and portfolio selection for total assets of $4.04 ­trillion—a 77 ­percent increase.

Numerous academic studies over the past 20 years have examined the effect of environmental and social performance on numerous performance measures. In a 2011 study, the researchers examined the effect of corporate sustainability on organizational processes and performance of 180 U.S. companies categorized as high sustainability companies versus low sustainability companies.3 Evidence from this study indicates that in the long term companies in the high sustainability group significantly outperformed the low group in the stock market as well as on accounting performance measures. In another study published in 2014, firms with superior performance on corporate social responsibility strategies were found to have better access to finance.4 As more companies begin to report with a more common reporting framework, examinations across companies and time will be more meaningful.

Why and What Are the Companies Reporting?

The Big Four accounting firms, university researchers, and consulting companies have been tracking sustainability reporting trends of the world’s largest companies since the 1990s. In the International ­Survey of ­Corporate Responsibility Reporting 2013, KPMG reported that 93 ­percent of companies in the Global 250 (G250) companies issued sustainability reports, of which 82 percent referred to the GRI guidelines.5 Based on the number of reports issued worldwide, corporate ­sustainability reporting is now considered mainstream among the largest companies. In a 2013 survey conducted by the Boston College Center for Corporate Citizenship and EY, companies responded that ­transparency with stakeholders was a key reason driving them to report.6 Other top reasons were competitive advantage, risk management, stakeholder pressure, company culture, and brand reputation. In another recent study conducted by Baruch College, 614 companies that were listed in the top 250 of the 2012 Fortune 500 or Fortune Global 500, were examined to determine the most relevant topics considered.7 Seven topics surfaced as important in more than 90 percent of the reports; these were ­environment (99.7 ­percent), human rights (98.4 percent), code of ­conduct (97.1 ­percent), external stakeholder engagement (96.9 percent), philanthropy and ­community involvement (96.4 percent), labor relations (95 percent), and executive’s message (92.5 percent).

How Is the Investment Services Community Responding?

The investment services community provides various information products (e.g., evaluations of companies by industry) and financial ­products (e.g., mutual funds by company size). Sustainability has become a ­valuable criterion to evaluate organizations’ performance and for establishing mutual funds. Indices providing assessments of sustainability have increased in the last 10 years. For example, the list includes KLD Domini 400 Index, the Dow Jones Sustainability Indices (DJSI), RobecoSAM, the FTSE4Good Global 100 Index, Morningstar Japan SRI Index, and Humanix 200 Global Index. To illustrate how some of these indices work, the DJSI, RobecoSAM, and FTSE4Good are described further.

What Is the DJSI?

The DJSI was established in 1999 to provide investors with a third-party assessment of leading, global sustainable companies.8 Together, ­RobecoSAM and S&P Dow Jones Indices provide the DJSI. The ­performance of the world’s leading companies is tracked in terms of ­economic, environmental and social criteria. For investors who ­integrate sustainability considerations into their portfolios, the DJSI Family of indices serve as benchmarks. These indices are DJSI World, DJSI North America, DJSI Europe, DJSI Asia Pacific, DJSI Korea, DJSI ­Emerging Markets, and DJSI Australia. Each year the DJSI invites 3,000 ­companies to submit information to RobecoSAM’s Corporate ­Sustainability ­Assessment (CSA). Information for evaluation comes from the ­RobecoSAM ­questionnaire, media, and stakeholders. The ­evaluation involves quantifying ­companies’ opportunities and risks from ­economic, environmental, and social developments that are relevant to the companies’ financial success but not necessarily found with ­conventional financial analyses. With these evaluations, the DJSI identifies and selects 2,500 companies for inclusion in the DJSI World.

RobecoSAM Questionnaire—this is considered the most ­important source of information. The economic, environmental, and social dimensions of sustainability are covered in questionnaires, which are specific to each of the 59 DJSI industries following Standard & Poors Global Industry ­Classification Standard. RobecoSAM’s analysts identify sustainability topics and apply general specific criteria relating to standard ­management practices and performance measures. These include ­Corporate ­Governance, Human Capital Development, and Risk and Crisis ­Management. Approximately 40 to 50 percent of the assessment is based on the general criteria. The questionnaire is devoted to approximately 50 percent industry-specific economic, environmental, and social challenges that face companies in similar industries. This focus allows for peer comparisons and identification of industry leaders.

Media and stakeholder analysis is integral to CSA. This involves ongoing monitoring of media coverage and other publicly available information from consumer organizations, governments, or NGOs. As part of the analysis, RobecoSAM employs RepRisk ESG Business Intelligence to gather information about the environmental, economic, and social crisis situations of companies and their responses to them. This is done daily so that companies’ environmental, social, and governance risks can be assessed on an up-to-date basis. This provides a way to assess a company’s exposure to material risks as well as how well its policies, processes, ­management systems, and commitments are working.

Who Are the DJSI World Industry Leaders?

The Dow Jones Sustainability World Index (DJSI World) includes the top 10 percent of the biggest 2,500 companies in the Dow Jones World Index in terms of economic, environmental, and social criteria. The first ­publication of the DJSI Index was September 8, 1999. To ­illustrate a ­sample of the wide variety of companies, industries, and countries ­represented in this index, Table 4.1 lists the industry group leaders as of September 2014.

Table 4.1 DJSI world: Industry leaders (2014)9 (effective as of September)

What Is RobecoSAM?

RobecoSAM (formerly SAM) was founded in 1995 in Zurich, ­Switzerland, as an asset management company dealing exclusively with sustainability investments.10 Its services include asset management, indices, engagement, voting, impact analysis, sustainability assessments, and benchmarking. In providing asset management, the company works with institutional asset owners and financial intermediaries. It focuses on a variety of ESG-integrated investments both in public and private equity. Resource efficiency themes (i.e., sustainable agribusiness, smart energy, sustainable healthy living, smart materials, and sustainable water) are a feature of its offerings.

FTSE4Good Index Series

FTSE4Good provides tradable indices and benchmarks for investors interested in environmental, social, and governance practices socially.11 Started by the FTSE Group, FTSE is an independent company that provides indices used by consultants, fund managers, investment banks, stock exchanges, brokers, and asset owners. The indices are used for asset allocation, investment analysis, portfolio hedging, tracking funds, and performance measurement.