Tomorrow’s Investment Rules 2.0 | 1
Tomorrow’s
Investment
Rules 2.0
Emerging risk and stranded
assets have investors looking
for more from nonfinancial
reporting
Welcome from EY
4
Foreword
6
Executive summary
3
Sections
1. Recognizing a new value paradigm:
a sharpened focus on stranded assets
9
*&Afn]klgjkdggclgfgfÕfYf[aYd\YlY^gjYegj]
complete understanding of performance
11
3. Investors seek consistent and comparable
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)1
,&KlYf\Yj\ar]\$k][lgj%kh][aÕ[af^gjeYlagfak
fundamental to investors’ ESG assessments
24
5. The regional view: Europe still leads, but
ESG evaluations increasing globally
29
6. Actions for issuers and investors:
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+1
About this research
42
Tomorrow’s Investment Rules 2.0 | | Ernst & Young LLP
4 5
Today more than ever, investors tell us that they’re using [gehYfa]kÌfgfÕfYf[aYd\ak[dgkmj]klgaf^gjeYf\mf\]jhaf their investment decisions. This is understandable, since we increasingly see cases where companies’ intangible assets gmlnYdm]l`]ajlYf_aZd]Ykk]lk&;]fljYdlgl`]\ak[mkkagfg^nYdm] is data on environmental, social and economic sustainability h]j^gjeYf[]&@go]n]j$\]khal][d]Yjaf\a[Ylgjkg^afl]j]kl^jge l`]afn]klgjZYk]$eYfqgj_YfarYlagfkkladd^Yadlge]]l]e]j_af_ investor expectations regarding their reporting in these areas. Can responsible and resilient companies improve their \ak[dgkmj]klg`]dhYlljY[l[YhalYd7Oal`l`]jakcg^
]fnajgfe]flYddqkljYf\]\Ykk]lklYcaf_[]fl]jklY_]^gjj]kgmj[] companies, in particular, can disclosures be improved in ways that increase market understanding and highlight purpose-led business practices?
For a second year, we commissioned Institutional Investor J]k]Yj[` AAJ!lgaf\]h]f\]fldqkmjn]qY_dgZYdkYehd]g^egj] l`Yf*((afklalmlagfYdafn]klgjk$af[dm\af_hgjl^gdageYfY_]jk$ ]imalqYfYdqklk$[`a]^afn]kle]flg^Õ[]jkYf\eYfY_af_ directors. We explored their views on the availability and quality g^[gjhgjYl]fgfÕfYf[aYdaf^gjeYlagf$Yf\gfo`]l`]jl`]qmk]\ l`akaf^gjeYlagfo`]feYcaf_afn]kle]fl\][akagfk&9fmeZ]j g^l`]k]afn]klgjko]j]l`]fafl]jna]o]\^gj^mjl`]jafka_`laflg their responses. L`akq]YjÌkj]kmdlkk]f\Yhgo]j^mde]kkY_]$oal`ka_faÕ[Yfl af[j]Yk]kafl`]fmeZ]jg^afn]klgjk]eZ]\\af_fgfÕfYf[aYd disclosures into their investment decision making. Plus, we see a much wider view on which industries and sectors are expected lgZ]aehY[l]\Zqkg[aYd$]fnajgfe]flYdYf\][gfgea[jakck&9k HYmd<jm[ceYf$;=Gg^l`]Afl]jfYlagfYdAfl]_jYl]\J]hgjlaf_ ;geeall]] AAJ;!k]lkgmlaf`ak^gj]ogj\$l`]j]]paklkZgl`Y \]Õ[alg^hjY[la[Ydaf^gjeYlagf^gjafn]klgjk$Yf\Ylj]e]f\gmk ghhgjlmfalq^gj[gehYfa]klg[YhalYdar]gfafl]_jYl]\Yf\nYdm]% driven reporting approaches that capture how and why their kh][aÕ[Zmkaf]kkeg\]dkoadd[j]Yl]nYdm]gn]jl`]dgf_]jl]je& That’s important given the questions we asked regarding the jakcg^kljYf\]\Ykk]lkYf\l`]^Y[lYl`aj\g^j]khgf\]flk[ml `gd\af_kg^Y[gehYfqafl`]dYklq]Yj\m]lgl`Yljakc& Leading companies globally are embracing purpose-led ljYfk^gjeYlagfkg^l`]ajZmkaf]kk]kÇ^g[mkaf_gfegj] sustainable models likely to be increasingly attractive to hjgna\]jkg^ÕfYf[aYd[YhalYd&
What should issuers remember
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• Stakeholders are key: Understanding what a Zmkaf]kkÌkc]qklYc]`gd\]jkZ]da]n]akaehgjlYfl^gj alk^mlmj]km[[]kkak^mf\Ye]flYdlg\]l]jeafaf_Y kljYl]_q^gjfgfÕfYf[aYdj]hgjlaf_&
• Materiality matters: Undertaking an assessment to determine what environmental, social and economic sustainability risks and opportunities are most critical to a business’s capacity to create value is important; investors expect a company to disclose these risks and to explain how it will manage them.
• 9^mlmj]ogjl`aeY_afaf_29kafn]klgjkk]]clg mf\]jklYf\`goo]dd%hdY[]\YZmkaf]kkak^gj^mlmj] growth, the business will need to consider large-scale trends and provide a narrative explaining how its Zmkaf]kkeg\]dako]dd%hdY[]\lgkm[[]]\afda_`lg^ them.
• ;gff][laf_nYdm]2Oal`l`]Y\n]flg^egj] integrated reporting, companies should articulate `gol`]ajkh][aÕ[Zmkaf]kkeg\]dk$kljYl]_a]kYf\ _gn]jfYf[]Yj][gff][l]\lgÕfYf[aYdh]j^gjeYf[]&
Can responsible and
resilient companies
improve their
disclosures to help
attract capital?
Juan Costa Climent
?dgZYdD]Y\]jg^;daeYl];`Yf_] and Sustainability Services EY
+34 915 727 756
Given today’s complex business models and operating ]fnajgfe]fl$eYjc]lkf]]\[d]Yj$`a_`%imYdalqaf^gjeYlagf afgj\]jlgYddg[Yl][YhalYd]^Õ[a]fldqYf\hjg\m[lan]dq& ;gfk]im]fldq$afn]klgjkf]]\af^gjeYlagfl`Yl_g]kZ]qgf\ ÕfYf[aYdklYl]e]flklg[geeallgeYcaf_Zgl`k`gjl%l]jeYf\ long-term investment decisions.
Aehjgnaf_l`]imYdalqg^af^gjeYlagfYnYadYZd]lghjgna\]jk g^ÕfYf[aYd[YhalYd$afgj\]jlg]fYZd]Yegj]]^Õ[a]flYf\ hjg\m[lan]Yddg[Ylagfg^^mf\af_$akY^mf\Ye]flYdYaeg^ afl]_jYl]\j]hgjlaf_&9k[`a]^]p][mlan]g^l`]Afl]jfYlagfYd Integrated Reporting Council, I am keen to ensure that through integrated reporting, analysts can better understand how Zmkaf]kk]kYj]Y\\j]kkaf_l`]aj[mjj]flYf\^mlmj][`Ydd]f_]k& This can help them not only to better understand all the resources and relationships being employed to cr eate value but, ultimately, to make improved investment assessments.
There is a recognized need globally to back movements, such Ykafl]_jYl]\j]hgjlaf_$l`Ylhjgegl]ÕfYf[aYdklYZadalqYf\ kmklYafYZd]\]n]dghe]fl&9ko]fgl]afgmjhmZda[YlagfCreating Value—Value to investors, ”these trends create a magnetism that will pull all investors in a direction towards ’integrated investment’ gn]jlae]&ÊAfl]_jYl]\j]hgjlaf_[j]Yl]kghhgjlmfala]k^gjY dgf_]jlae]`gjargfZqÕddaf_af^gjeYlagf_Yhkl`Yl\gfglYhh]Yj in traditional annual reports, enabling organizations to present l`akaf^gjeYlagfafoYqkl`Yl`]dhl`]eYjc]lmf\]jklYf\l`]aj Zmkaf]kkeg\]dk$kljYl]_a]kYf\h]j^gjeYf[]&
9kl`]mk]g^afl]_jYl]\j]hgjlaf__jgok$l`akakZ][geaf_ increasingly evident. Participants in our “<IR> Business Network” Yj]j]hgjlaf_Z]f]Õlk^jgeY\ghlaf_afl]_jYl]\j]hgjlaf_km[` YkYZ]ll]jmf\]jklYf\af_g^Zmkaf]kkeg\]dk$Z]ll]jdgf_%l]je decision making and enhanced relations with investors.
Ao]d[ge]l`akk][gf\kmjn]q^jge=Q$afngdnaf_egj]l`Yf*(( institutional investors around the world. Notably, the survey k`gokl`Ylegj]l`Yf`Yd^ -1&)!g^j]khgf\]flkna]oj]hgjlaf_ gfZjgY\]jYj]Ykg^nYdm][j]YlagfYk]kk]flaYdlgafn]kle]fl decisions. This change clearly points to a growing interest in more j]d]nYflaf^gjeYlagfYf\j]hgjlaf_gfl`]hYjlg^Zgl`afn]klgjk and preparers.
For the second consecutive year, EY has commissioned a study on afklalmlagfYdafn]klgjkÌna]okj]_Yj\af_fgfÕfYf[aYdj]hgjlaf_Zq akkm]jk hmZda[dqljY\]\[gehYfa]k!&L`ak^gddgo%mhklm\qZmad\kgf our inaugural thought leadership report, published in early 2014, which established that investors were progressively incorporating environmental, social and governance (ESG) analysis, along with gl`]jfgfÕfYf[aYd]d]e]flk$aflgl`]aj\][akagfeYcaf_&L`akq]Yj$ o]Ìn]k]]f]n]f_j]Yl]j]na\]f[]g^l`akj]daYf[]gffgfÕfYf[aYd af^gjeYlagf k]]>a_mj]=&)!&
Based on the 2014 study, EY published Tomorrow’s Investment Rules,o`a[`j]hgjl]\ )!l`Ylegklafn]klgjk\g$af\]]\$^Y[lgj =K?af^gjeYlagfaflgl`]aj\][akagfeYcaf_3 *!l`YlgfdqY minority, however, use structured, systematic methods to evaluate =K?3Yf\ +!l`YleYfqafn]klgjko`g\gfglmk]=K?af^gjeYlagf question whether companies’ disclosures are adequate to \]l]jeaf]a^=K?akeYl]jaYdlgafn]kle]fl\][akagfk&L`]j]hgjl [gf[dm\]\l`Yll`]j]akYf]]\^gj[gehYfa]klgaehjgn]l`] fgfÕfYf[aYdaf^gjeYlagfl`]qj]hgjllge]]ll`]f]]\kg^ investors.
This year’s survey, involving more than 200 institutional investors around the world, asked two questions that weren’t included in the original study:
• Afl`]dYkl)*egfl`k$`Ykqgmj^mf\\][j]Yk]\alk`gd\af_kg^Y [gehYfqÌkk`Yj]k\m]lgl`]jakcg^kljYf\]\Ykk]lk7
• Do companies adequately disclose their environmental, kg[aYdYf\_gn]jfYf[]jakckl`Yl[gmd\Y^^][ll`]aj[mjj]fl business models?
The responses about stranded assets (i.e., those that lose their value prematurely due to environmental, social or other ]pg_]fgmk^Y[lgjk!j]n]Ydl`Ylafn]klgjkÌ[gf[]jfgn]jl`akjakc might be more widespread than many expect.
Executive summary
Foreword
9e]kkY_]^jgeHYmd<jm[ceYf$;=G$
International Integrated Reporting Council
>a_mj]=&)&" ?jgoaf_afl]j]klaffgfÔfYf[aYd
j]hgjlaf_k]]fafka_faÔ[Yflk`a^lkkaf[]*(),
H]j[]flY_]g^j]khgf\]flko`gÁ
;gfka\]jfgfÕfYf[aYd\YlYj]d]nYfllgYddk][lgjks Mk]Ykljm[lmj]\$e]l`g\a[Yd]nYdmYlagfg^]fnajgfe]flYdYf\ kg[aYdaehY[laf^gjeYlagfConsider integrated reports essential or important when making investment decisionss
Consider corporate social responsibility (CSR) or sustainability reports essential or important when making investment decisions
:]da]n][gehYfa]kYj]eglanYl]\lgj]hgjlfgfÕfYf[aYd af^gjeYlagflg\]egfkljYl]eYfY_]e]flg^jakc ;gfka\]jeYf\YlgjqZgYj\gn]jka_`lg^fgfÕfYf[aYd h]j^gjeYf[]j]hgjlaf_]kk]flaYdgjaehgjlYfl
80.0%
42.1%
59.1%
70.9%
37.0%
61.5%
63.8%
29.0%
34.8%
61.0%
19.6%
33.7%
2015
2014
The responses about
stranded assets reveal
that investors’ concern
over this risk might be
more widespread than
many expect
L`]kmjn]qYdkgj]n]Ydkl`Ylem[``Yk[`Yf_]\kaf[]l`]Õjkl klm\qaf*(),&AlakhYjla[mdYjdqhd]Ykaf_^gjl`]AAJ;lgk]]^jge l`akj]hgjll`Ylafn]klgjkYj]]fl`mkaYkla[YZgmll`]Z]f]Õlkg^ afl]_jYl]\j]hgjlaf_$oal`/(&1k]]af_afl]_jYl]\j]hgjlkYk essential or important. O]`Yn]YdoYqkZ]da]n]\l`Yl^gjafl]_jYl]\j]hgjlaf_lgZ][ge] eYafklj]Yel`]j]emklZ]kljgf_kmhhgjl^jgel`]afn]klgj [geemfalq$\]egfkljYlaf_l`Ylafn]klgjk\goYflaf^gjeYlagf YZgmlkljYl]_q$_gn]jfYf[]$h]j^gjeYf[]Yf\hjgkh][lk&L`] 2015 EY survey clearly suggests that this support exists, which is why businesses need to be aware that investors will increasingly eYc]afn]kle]fl\][akagfkZYk]\gf`goYddg^YZmkaf]kkÌk resources are creating value over time.Gfl`]]na\]f[]g^l`akkmjn]q$afn]klgjkj]eYaf[jala[Ydg^l`] imYdalqg^af^gjeYlagf[mjj]fldqZ]af_hjgna\]\&L`akg^^]jkYf ghhgjlmfalq^gj[gehYfa]klghjgna\]`a_`]j%imYdalqaf^gjeYlagf$ so that investors have no excuse not to use this wider knowledge and strategic context in their investment decisions. Our
experience also shows that companies that report this broader af^gjeYlagfYj]Z]ll]jhdY[]\lgeYfY_]akkm]kl`YlYjak]egj] ]^^][lan]dq$Yf\$aflmjf$Y[`a]n]ka_faÕ[YflÕfYf[aYdkYnaf_k& Egnaf_l`]\aYd^jgejakc]nYdmYlagflgmf\]jklYf\af_nYdm]ak l`]oYq^gjoYj\&9fmeZ]jg^l`]Õf\af_kafl`]kmjn]q`a_`da_`l l`]^Y[ll`Ylegj]af^gjeYlagfakf]]\]\^gjjakchmjhgk]k$Zml afn]klgjkk`gmd\af[j]Ykaf_dqk]]l`akYkYkgmj[]g^mf\]jklYf\af_ value, too. Alak]na\]fl^jgel`akj]hgjll`Ylafl]_jYl]\j]hgjlaf_[Yf`]dh businesses meet investor needs. It gives them vital insight into Zmkaf]kkkljYl]_q$_gn]jfYf[]$h]j^gjeYf[]Yf\hjgkh][lk&L`ak j]hgjl[gfÕjekYfaehgjlYfl$_jgoaf_lj]f\lgoYj\l`]Y\ghlagf g^Yoa\]j[gf[]hlg^nYdm][j]Ylagf—supporting both better investment decisions and sustainable development.
Tomorrow’s Investment Rules 2.0 | | Ernst & Young LLP
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Afl`]dYkl)*egfl`k$`Ykqgmj^mf\\][j]Yk]\alk`gd\af_kg^Y[gehYfqÌkk`Yj]k\m]lgl`]jakcg^kljYf\]\Ykk]lk7
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Afn]klgjkÌmk]g^fgfÕfYf[aYdaf^gjeYlagf$Ydgf_oal`alkhjgnakagf Zqakkm]jk$nYja]kkmZklYflaYddqYjgmf\l`]ogjd\&Kge]g^l`] largest andegklafl]j]klaf_j]_agfYd\a^^]j]f[]kj]n]Yd]\Zql`ak q]YjÌkklm\qYj]l`]^gddgoaf_2• Investors in Europe lead their peers elsewhere in integrating fgfÕfYf[aYd^Y[lgjkaflgl`]aj\][akagfeYcaf_&L`]qYj] especially likely to use a structured approach to ESG analysis, lgd]ll`]ajafn]kle]fl\][akagfkZ]Y^^][l]\ZqfgfÕfYf[aYd af^gjeYlagfYf\lghj]^]jafl]_jYl]\j]hgjlaf_l`Yl^gddgokl`] IIRC Framework. • Afn]klgjkg^l]f_jgmh=mjgh]Yf\9mkljYdaYlg_]l`]jYk=K? d]Y\]jk&Kge]afn]klgjkYlljaZml]9mkljYdaYfafn]klgjkÌafl]j]kl af=K?lgl`]^Y[ll`Yll`][gmfljqÌkkmh]jYffmYlagf^mf\k g^l]f`Yn]afn]kle]fl[geeall]]kl`Ylaf[dm\]]ehdgq]] j]hj]k]flYlan]k&Alakljm]l`YlY^mdd0*&.g^afn]klgjkaf 9mkljYdaY— a larger portion than in any other region — consider fgfÕfYf[aYd^Y[lgjklgZ]j]d]nYflafafn]kle]fl\][akagfk Y[jgkkYddk][lgjk$jYl`]jl`Yfbmklafkh][aÕ[gf]k&
• Investors in the US and Canada have made the most notable hjg_j]kkkaf[]*(),afl`]afl]_jYlagfg^fgfÕfYf[aYd af^gjeYlagfaflgl`]aj\][akagfeYcaf_&L`akhjg_j]kkak j]Ö][l]\afnYjagmkaf\a[Ylgjkg^l`]aehgjlYf[]g^l`ak af^gjeYlagflgafn]klgjk$km[`Ykl`]nYdm]l`]qhdY[]gfZgYj\ gn]jka_`lg^Y[gehYfqÌkfgfÕfYf[aYd\ak[dgkmj]k&Gn]jl`] kYe]h]jag\$l`]hgjlagfg^MKYf\;YfY\aYfj]khgf\]flko`g see integrated reporting as essential also rose.
• 9kaY%HY[aÕ[$]p[dm\af_9mkljYdaY$dY_kZ]`af\l`]j]klg^l`] ogjd\afalkfgfÕfYf[aYd$Y[[gj\af_lgafn]klgjk&@go]n]j$l`]j] Yj]afÖm]f[]koal`afl`]j]_agfhmk`af_allgoYj\Y\]]h]j YoYj]f]kkg^l`]aehgjlYf[]g^fgfÕfYf[aYdaf^gjeYlagfaf afn]kle]fl\][akagfk&BYhYf$^gj]pYehd]$j][]fldqYffgmf[]\ plans to improve the country’s corporate governance.
• DYlaf9e]ja[Y$o`gk]afn]klgjkYf\[gehYfa]k`Yn]hj]nagmkdq k`gofd]kkafl]j]klaffgfÕfYf[aYdj]hgjlaf_l`Yf`Yn]l`]aj h]]jkafgl`]jj]_agfk$ea_`lZ]afl`]hjg[]kkg^[Yl[`af_mh& 9dYj_]jhgjlagfg^afn]klgjkafDYlaf9e]ja[Y$-/&)$j]hgjl reducing their holdings in the last year due to stranded asset risk than did so in any other region.
L`akklm\qaddmkljYl]kl`]ka_faÕ[Yfl_YhZ]lo]]fl`]fgfÕfYf[aYd j]hgjlaf_l`Ylafn]klgjkoYflYf\l`Ylakkm]jkg^^]jl`]e&:ml l`]j]akYdkgYfghhgjlmfalq`]j]&L`]j]kmdlkg^l`akklm\q[Yf j]Y\dac]YjgY\eYh^gjYfqakkm]jl`Ylogmd\dac]lg[gfljaZml]lg Õddaf_l`ak_Yh&G^^]jaf_l`]lqh]g^fgfÕfYf[aYdaf^gjeYlagfl`Yl afn]klgjkoYflafl`]^gjel`]qoYflal[Yfj]kmdlafYfakkm]jÌk gaining investor attention and, ultimately, winning an advantage over its peers in the capital markets.
Recognizing a new value paradigm:
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stranded assets
9[[gj\af_lgYfYffgmf[]e]flZq@YeZmj_:mdc;Yjja]jk @:;!
in February 2015, the company recently purchased a new cargo
n]kk]dl`YljmfkgfYÉka_faÕ[Yfldgo[gfkmehlagfÊg^^m]dYf\ gmlh]j^gjekl`]af\mkljqÌk=f]j_q=^Õ[a]f[q<]ka_fAf\]p^gj [YjZgf\agpa\]]eakkagfkZqegj]l`Yf+*&
L`akYffgmf[]e]flj]n]Ydk`gofgfÕfYf[aYd^Y[lgjk— including those pertaining to environmental, social and governance (ESG) concerns —afÖm]f[]Zmkaf]kkgh]jYlagfkYf\afn]klgjkÌ\][akagfk& Afl`]Yffgmf[]e]fl$B]fkngf@mk]f$EYfY_af_<aj][lgjg^ @:;$]phdYafkl`Ylafl`]q]YjkY`]Y\`]]ph][lk^j]a_`lZmq]jklg Z]_afaf[dm\af_]eakkagfkh]j^gjeYf[][jal]jaYafl`]ajhmj[`Ykaf_ hgda[a]k$Ékge]\jan]fZq^]Yjg^h]fYdla]k$gl`]jk\jan]fZql`] oak`^gjaehjgn]e]flkgjhj]kkmj]^jgel`]ajgof[mklge]jk&Ê9k Yj]kmdl$ngf@mk]fZ]da]n]k$ÉKge]k`ahkoaddfgdgf_]jZ]YZd] lgogjchjgÕlYZdqafkge]j]_agfkSYf\[gmd\Z][ge]UkljYf\]\ assets.” Ngf@mk]fÌk[gf[]jfgn]jkljYf\]\Ykk]ljakc][`g]kY_jgoaf_ na]og^`go=K?Yf\gl`]jfgfÕfYf[aYd^Y[lgjkYj]dac]dqlgY^^][l
investor decision making in the years ahead. Stranded assets are those that prematurely or unexpectedly lose their value due to
]pg_]fgmk^Y[lgjk&L`]\]nYdmYlagf[YfZ][gehd]l]gjhYjlaYd3
indeed, it can convert an asset into a liability.
Today, stranded assets are increasingly a risk in nearly every
af\mkljq$Zmll`]q`Yn]egklg^l]fZ]]fYkkg[aYl]\oal`l`]
energy and extraction industries, such as oil and gas, mining,
Yf\mladala]k&9j][]flYjla[d]afl`] Economist on the oil business
^]Ylmj]\l`]lald]ÉQ]kl]j\YqÌk^m]dÊYf\Yj_m]\l`YlÉlog j]ngdmlagfkafl][`fgdg_qoadd\Yeh]fl`]ogjd\Ìkl`ajkl^gjl`] ZdY[cklm^^&ÊKh][aÕ[Yddq$É^jY[caf_Êoaddlmjf_YkaflgYfYZmf\Yfl
oil substitute, and advances in automotive design will not only
[gflafm]lgaf[j]Yk][YjkÌ^m]d]^Õ[a]f[qZmloaddhghmdYjar] ]d][lja[[YjkYf\`qZja\k&9kYj]kmdl$gad[gehYfa]k$lqha[Yddq nYdm]\Y[[gj\af_lgl`]ajh]ljgd]mej]k]jn]k$^Y[]kljYf\]\Ykk]l jakcla]\lgl`]k]k`a^lkafl][`fgdg_qYf\eYjc]l\qfYea[k& K]] egj]gfl`][Ymk]kg^kljYf\]\Ykk]lkgfl`]^gddgoaf_hY_]&! 9_Yafkll`akZY[c\jgh$l`]\YlY[gdd][l]\afl`akklm\qj]n]Ydkl`Yl afn]klgjkYj]af\]]\[gf[]jf]\YZgmll`]jakcg^kljYf\]\Ykk]lk& AflglYd$.*&,g^kmjn]qj]khgf\]flk— almost two-thirds —
]phj]kk[gf[]jfgn]jkljYf\]\Ykk]ljakc&F]Yjdq+.j]hgjll`Yl l`]aj^mf\k`Yn]\][j]Yk]\`gd\af_kg^Y[gehYfqÌkk`Yj]kafl`] dYklq]Yj\m]lgl`akjakc$o`ad]Yfgl`]j*.&/]ph][llgegfalgj l`akjakc[dgk]dqafl`]^mlmj] k]]>a_mj])&)!& KljYf\]\Ykk]lkYj]Yegf_l`][d]Yj]klha][]kg^]na\]f[] j]n]Ydaf_l`Yljakckkl]eeaf_^jge]fnajgfe]flYdYf\ kg[aYd^Y[lgjkYj]af[j]Ykaf_dqY^^][laf_[gehYfa]kÌZmkaf]kk h]j^gjeYf[]&;gfk]im]fldq$afn]klgjkaf[j]Ykaf_dqk]]clg af[gjhgjYl]=K?Yf\gl`]jfgfÕfYf[aYdh]j^gjeYf[]af^gjeYlagf aflgl`]aj\][akagfeYcaf_&@go]n]j$Yko]oaddk]]afl`]hY_]k
ahead, both investors and issuers (publicly traded companies)
f]]\lggn]j[ge]^gjea\YZd]`mj\d]klgj]Ydar]l`]^mddnYdm] ]eZ]\\]\afkm[`af^gjeYlagf&
)
Yes
+-&/
Fg
*.&/
Don’t know
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*1&-but we are likely to monitor
this closely in the future
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L`]c]qÕf\af_kg^l`]*()-klm\qYj]l`]^gddgoaf_2 • 9fglYZd].*&,g^afn]klgjkYj][gf[]jf]\YZgmll`]jakcg^ kljYf\]\Ykk]lk&Egj]l`Yfgf]%l`aj\g^j]khgf\]flkj]hgjl [mllaf_l`]aj`gd\af_kg^Y[gehYfqafl`]dYklq]Yj\m]lgl`ak jakc$o`ad]YfY\\alagfYdimYjl]jg^j]khgf\]flkhdYfklgegfalgj l`akjakc[dgk]dqafl`]^mlmj]& • Oal`l`]aehY[lg^]fnajgfe]flYdYf\kg[aYd[`Yf_]kgf commercial enterprises accelerating — generally and in terms g^kljYf\]\Ykk]lk— +/&(g^afn]klgjklg\Yqmk]Ykljm[lmj]\$ e]l`g\a[YdYhhjgY[`lgYfYdqraf_fgfÕfYf[aYdaf^gjeYlagf j]dYl]\lgl`]k]jakckYkhYjlg^l`]ajafn]kle]fl\][akagfk& • @go]n]j$l`akegj]kljm[lmj]\YhhjgY[`eYq^Yddk`gjlg^o`Yl afn]klgjkf]]\lg^gj][Ykll`]aehY[lg^fgfÕfYf[aYd^Y[lgjkgf afn]kle]flk&Afn]klgjkYj]^Y[af_Y\]Õ[alg^l`]imYdalqYf\lqh] g^fgfÕfYf[aYdaf^gjeYlagfl`Yll`]qoYfl&F]Yjdqlog%l`aj\kg^ respondents say issuers do not adequately disclose ESG risks. • 9kafl`]*(),klm\q$afn]klgjkY[jgkkk][lgjkkladdÕf\ fgfÕfYf[aYdaf^gjeYlagfegklmk]^mdo`]falakZYk]\gf klYf\Yj\ar]\$af\mkljq%kh][aÕ[[jal]jaY$Yddgoaf_[gehYjakgfk between peers. • Afn]klgjkYj]]fl`mkaYkla[YZgmll`]Z]f]Õlkg^afl]_jYl]\ j]hgjlaf_3/(&1k]]afl]_jYl]\j]hgjlkYk]kk]flaYdgjaehgjlYfl$ jYfcaf_l`]ek][gf\afmk]^mdf]kkZ]`af\gfdq[gehYfa]kÌ annual reports. • KaeadYjdq$Yfgl]ogjl`q-1&)g^j]khgf\]flk[gfka\]j[gjhgjYl] social responsibility (CSR) reports to be essential or important to investment decisions.• 9eYbgjalqg^afn]klgjk .)&-![gfka\]jfgfÕfYf[aYd\YlYlgZ] relevant to all industrial sectors today.
• Fgf]l`]d]kk$egj]l`Yfgf]%imYjl]jg^j]khgf\]flkYdkgj]hgjl l`YlfgfÕfYf[aYdaf^gjeYlagf`YkfglY^^][l]\Yfqg^l`]aj afn]kle]fl\][akagfkgn]jl`]dYklq]Yj3l`]qÕf\al\a^Õ[mdl lg\]l]jeaf]`goeYl]jaYdl`akaf^gjeYlagfaklgÕfYf[aYd h]j^gjeYf[]Z][Ymk]alakg^l]ffgln]jaÕ]\gjak\a^Õ[mdllg compare across companies.
• Gf]j]Ykgfafn]klgjkYj]fgl_]llaf_l`]fgfÕfYf[aYdaf^gjeYlagf l`]qoYflakZ][Ymk][gehYfa]khjgna\]l`akaf^gjeYlagfeYafdq lgk]jn]l`]aj[mklge]jkYf\j]_mdYlgjqj]imaj]e]flk&@go]n]j$ [gehYfa]kYj]Z]_affaf_lghjgna\]mk]^mdaf^gjeYlagf^gj afn]klgjk3,*&)g^j]khgf\]flkkYql`Yl[gehYfa]kj]hgjl fgfÕfYf[aYdaf^gjeYlagflg\]egfkljYl]jakceYfY_]e]fl& • L`]\]Õ[alg^mk]^mdfgfÕfYf[aYdaf^gjeYlagfYnYadYZd]lg afn]klgjk`Yk[j]Yl]\YÕjkl%egn]jghhgjlmfalq^gjakkm]jklg hjgna\]l`]af^gjeYlagfl`Ylafn]klgjkÕf\egklmk]^mdYf\$af doing so, establish a new investor strategy.
k]]afl]_jYl]\j]hgjlkYk]kk]flaYd gjaehgjlYfl$jYfcaf_l`]e
second in usefulness behind only
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2
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9ea\_jgoaf_[gf[]jfYZgmlkljYf\]\Ykk]lkYf\gl`]j]^^][lkg^fgfÕfYf[aYd^Y[lgjk$ afn]klgjkj]hgjllYcaf_Yegj]^gjeYdYhhjgY[`lg]nYdmYlaf_fgfÕfYf[aYdaf^gjeYlagf la]\lgkg[aYdYf\]fnajgfe]flYdeYll]jk&Afgmj*(),klm\q$gfdq)1&.g^j]khgf\]flk kYa\l`]qlqha[Yddq[gf\m[lYkljm[lmj]\$e]l`g\a[Yd]nYdmYlagfg^]fnajgfe]flYdYf\ kg[aYdaehY[lklYl]e]flkYf\\ak[dgkmj]k$o`ad]+/&(j]hgjlmkaf_km[`YfYhhjgY[`af l`akq]YjÌkklm\q k]]>a_mj]*&)!&KaeadYjdq$l`]hjghgjlagfg^j]khgf\]flkkYqaf_l`]q [gf\m[ldalld]gjfgj]na]og^=K?af^gjeYlagf`Yk^Ydd]fkmZklYflaYddq& Kladd$l`]\]_j]]g^kljm[lmj]mk]\ZqafklalmlagfYdafn]klgjko`]f]nYdmYlaf_fgfÕfYf[aYd ^Y[lgjk[mjj]fldqnYja]koa\]dq&L`]]nYdmYlagf[YfZ]ZYka[$Ykakl`]af^gjeYdYhhjgY[` mk]\ZqYdYj_]:jYradaYf`]\_]^mf\$o`a[`ljmklkalkYfYdqklkkaehdqlgmk]l`]aj[geegf k]fk]j]_Yj\af_l`]j]d]nYf[]g^=K?af^gjeYlagf&>a_mj]*&)&Afn]klgjkZjaf_kljm[lmj]lgl`]aj]nYdmYlagfg^[gehYfa]kËfgfÔfYf[aYdh]j^gjeYf[]
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We usually conduct a structured, methodical evaluation of environmental and social impact statements and disclosures.We usually evaluate environmental and social impact statements informally. We usually rely on guidelines
or information from third parties such as the UN Principles for Responsible Investments or other relevant guidelines.
We conduct little or no review.
How assets become stranded
9kk]lkmkmYddq`Yn]e]YkmjYZd]da^]]ph][lYf[a]kYf\jakc%Yf\% j]lmjfhjgÕd]k— Zgl`g^o`a[`Yj]hjaf[ahYd[gehgf]flkg^l`]aj nYdmYlagf&9kk]lkZ][ge]kljYf\]\o`]f]pg_]fgmk^Y[lgjk \jYeYla[YddqYdl]jl`]k][gehgf]flk$j]kmdlaf_afl`]ajdgkkg^ nYdm]gjdaima\alq&Egj]g^l]fl`Yffgl$l`]k]]pg_]fgmk^Y[lgjk Yj]la]\lg]fnajgfe]flYdgjkg[aYd[`Yf_]$km[`Ykl`]^gddgoaf_2 • Increasing environmental risks (e.g., climate change)
• =ngdnaf_kg[aYdYllalm\]k ]&_&$^gkkad^m]d\an]kle]fl movements)
• Government regulation (e.g., carbon pricing and air pollution regulations)
• <akjmhlan]l][`fgdg_q ]&_&$^jY[caf_$oaf\%_]f]jYl]\]f]j_q and electric vehicles)
• Geopolitical risk (e.g., government instability, war, investment j]klja[lagfkYf\l`]j]hYljaYlagfg^hjgÕlk!
L`]j]Yj]fme]jgmkoYqkafo`a[`=K?Yf\gl`]jfgfÕfYf[aYd ^Y[lgjk[Yf[Ymk]Ykk]lklgZ][ge]kljYf\]\&>gddgoaf_Yj]^gmj ]phdYfYlagfkl`Yl^]Ylmj]n]jq\a^^]j]flmf\]jdqaf_[Ymk]k&
)& J]_mdYlagf2Gf]]pYehd]g^`goYkk]l\]nYdmYlagfea_`l aehY[l^gkkad^m]dkakcfgofYkl`]ÉmfZmjfYZd][YjZgfÊ Yj_me]fl&A^_gn]jfe]flko]j]lgaehd]e]flklja[l]j j]_mdYlagfkgf[YjZgf\agpa\]]eakkagfk$l`]^gkkad^m]d reserves held by oil and coal companies could exceed the imYflalql`]qogmd\Z]Yddgo]\lgk]ddYk[geZmklaZd]^m]d$ turning their reserves into stranded or partially stranded Ykk]lk&9kYj]kmdl$kge]afn]klgjkfgok`a^lYoYq^jge investments in companies with carbon-intensive assets. Indeed, lg`]dhl`]e\gkg$afn]kle]flaf\a[]kl`Ylmf\]jo]a_`l^gkkad ^m]dklg[ck$af[dm\af_l`][dgk]dqoYl[`]\EK;A?dgZYdDgo Carbon Leaders Indexes, have recently been launched.
2. Social movements and activism:L`]]^^][lg^[YjZgf ]eakkagfkgf[daeYl][`Yf_]`YkZ]]fl`]lgha[g^em[`hmZda[ debate in recent years, and activist organizations now seek lgYdl]jZgl`hmZda[Yllalm\]kYf\l`]Z]`Ynagjg^afn]klgjk& The advocacy group 350.org calls on institutional investors to divest their shares in oil, gas and coal companies whose reserves contain the highest potential carbon emissions. This Y[lanake$j]eafak[]flg^l`]9fla%9hYjl`]a\Egn]e]flg^l`] )10(kYf\l`]Yfla%lgZY[[gegn]e]flg^l`])11(k$eYq hgk]Yjakcg^kljYf\af_[YjZgfYkk]lkafl`]q]YjkY`]Y\& 3. ?]ghgdala[k2<akjmhlan]Y[lanala]kaf^gj]a_f[gmflja]kla]\lg
regime change, sanctions and embargos, and international relations pose material stranded asset risk, say investors afl]jna]o]\^gjl`akklm\q&>gj]pYehd]$l]fkagfZ]lo]]fJmkkaY Yf\l`]O]kl`YkY^^][l]\gf]kgmj[]Ìk`gd\af_kg^Yo]dd%cfgof 9e]ja[YfZjYf\&L`ak[gehYfqÉ`Y\akkm]kafJmkkaYo`]j]l`] _gn]jfe]flZYka[Yddq[dgk]\\gofYdglg^l`]ajSgh]jYlagfkU^gj Yk`gjlh]jag\$ÊkYqkYhgjl^gdageYfY_]jYlYf9mkljYdaYfYkk]l eYfY_]e]flÕje&ÉL`]JmkkaYf?gn]jfe]flkYa\aloYk\m]lg `]Ydl`j]Ykgfk$Zmlj]Yddql`]qbmkloYfl]\lgmhk]lYf9e]ja[Yf [gehYfq&Ê9dl`gm_`l`]\akjmhlagfY^^][l]\gfdqYkeYddhYjlg^ l`][gehYfqÌk_dgZYdgh]jYlagfk$kYqkl`]hgjl^gdageYfY_]j$Éal eY\]YfaehY[ll`Ylo]`Yn]lgZ]YoYj]g^&Ê
,& =fnajgfe]flYd[`Yf_]2 The link between climate change and stranded assets extends well beyond the companies that are [dgk]kllg_dgZYdoYjeaf_&9Bmf]*(),j]hgjl^jgel`]Jakcq :mkaf]kkHjgb][lgmldaf]kl`j]]][gfgea[Yddqka_faÕ[Yfljakck g^[daeYl][`Yf_]afl`]MK2 )!\YeY_]lg[gYklYdhjgh]jlq Yf\af^jYkljm[lmj]^jgejakaf_k]Yd]n]dkYf\af[j]Yk]\klgje surge, threatening vast real estate and business operations; (2) climate-driven changes in energy demand and agriculture hjg\m[lagf$l`j]Yl]faf_l`]^gg\af\mklja]k3Yf\ +!l`]aehY[l g^`a_`]jl]eh]jYlmj]kgfdYZgjhjg\m[lanalqYf\hmZda[`]Ydl`& In short, climate change is likely to have a substantial impact across nearly all industries that could result in stranded assets.
Stranded assets are among the clearest
pieces of evidence revealing that risks
stemming from environmental and social
factors can impact investor perceptions of
business performance
2014 2015
15.6%
26.5%
31.9%
35.6%
37.0%
19.6%
20.9%
12.9%
Tomorrow’s Investment Rules 2.0 | | Ernst & Young LLP
12 13
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actually look like? Consider a Swiss private bank’s structured
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system that provides transparency and control, while allowing the
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“We have developed our own scoring system so that we don’t have to rely on a black box. Basically, we have an engine that applies our ESG scores to all the companies in the MSCI World Index. We
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truly takes place.” The analyst conducted extensive research on
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said the analyst.
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investment decision making. In short, he advocates making it the
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trying to integrate it into their work,’” said the analyst.
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increasingly present and integrated role in investors’ decision
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analysis — YkY[gj]kcaddYf\kljm[lmj]\k]lg^[YhYZadala]kj]imaj]\ ZqYddafn]kle]flhjg^]kkagfYdk&Afl`]dgf_l]je$fgfÕfYf[aYd
analysis may play a similarly prominent role in the operating and
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emerge as material to investment decisions, companies will likely
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O`Yl\gafn]klgjkdggc^gjaffgfÕfYf[aYd
af^gjeYlagf7
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and valuation — as essential or important (see Figure 2.2). Institutional policies and internal mandates are less likely to spur
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codes, external advice or company-level policies as unimportant.
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to emerge as material to investment
decisions, companies will likely be
increasingly expected to provide
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consequences
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With investors’ growing realization that ESG and other fgfÕfYf[aYd^Y[lgjkY^^][le]YkmjYZd]Ykh][lkg^[gehYfa]kÌ h]j^gjeYf[]— l`Ylak$Y^^][ll`]jakcYf\j]lmjfg^hYjla[mdYj investments — alakfglkmjhjakaf_l`YlYfmeZ]jg^afn]klgjk Yj]afl]_jYlaf_Ykljm[lmj]\YfYdqkakg^fgfÕfYf[aYdjakcY[jgkk l`]ajhgjl^gdagk& L`]`]Y\g^j]khgfkaZd]afn]klaf_YlYMCYkk]leYfY_]e]flÕje oal`MK,*-Zaddagfaf9ME]phdYafk$ÉO]Ìn]Z]]fdggcaf_Yl`go o][Yfafl]_jYl]=K?^Y[lgjkaflggmjeYafklj]Yeafn]kle]fl YhhjgY[`&O]Ìn]j][g_far]\l`Yll`]k]^Y[lgjk[YfYf\oadd`Yn] YeYl]jaYdaehY[lgf[gjhgjYl]h]j^gjeYf[]&9kkm[`$o]k`gmd\ Z][gfka\]jaf_YfYfYdqkakg^o`]j]l`]k]aehY[lkea_`lY^^][lY [gehYfq$^jgealknYdm][`YafkYf\kmhhdq[`Yafklgalkgh]jYlagfk Yf\l`]\]eYf\^gjalkhjg\m[lkYf\k]jna[]k&Ê Mf\]jl`]=K?meZj]ddY$alakg^l]f_gg\_gn]jfYf[]l`Yl kh][aÕ[Yddqj][]an]kafn]klgjkÌdYj_]kl]f\gjk]e]flYknYdmYZd] lg[gehYfa]kÌh]j^gjeYf[]Yf\YkYmk]^md[jal]jagflgaf[dm\]af afn]kle]fl\][akagfk&9hgjl^gdageYfY_]jYlYf9mkljYdaYfÕje l`Ylafn]klkMK1Zaddagfaf9MEaf_dgZYddakl]\af^jYkljm[lmj] ]phdYafk`go`akÕjeYfYdqr]kl`]_gn]jfYf[]g^]n]jq[gehYfq afo`a[`al[gfka\]jkafn]klaf_&ÉO]dggcYl$Ê`]kYqk$ÉY[gmhd]g^ \gr]f\a^^]j]fl$nakaZd]e]Ykmj]kafl`]Yj]Yg^_gn]jfYf[]$o`a[` o]Yhhdqlg]n]jq[gehYfq&L`]k]e]Ykmj]kaf[dm\]$^gj]pYehd]$ l`]]phda[almk]g^ZjaZ]jqYf\[gjjmhlagfhgda[a]k3Yfla%[gjjmhlagf e]Ykmj]k3o`akld]%Zdgo]jhjg_jYek3k]hYjYlagfg^l`][`YajYf\ ;=G3k]hYjYlagfg^c]qhYjla]koal`afl`][gehYfq3\an]jkalq3 Ym\al[geeall]]af\]h]f\]f[]3l`]Yegmflg^egf]qkh]flgf hgdala[YddgZZqaf_3l`]\ak[dgkmj]g^`Y[ck$Yf\j]emf]jYlagf&Ê Egj]km[[af[ldq$Yf\][`gaf_eYfqg^l`]afn]klgjko] afl]jna]o]\$Yhgjl^gdageYfY_]jYlY?]jeYfYkk]leYfY_]e]fl ÕjekYqkkaehdq$É?gn]jfYf[]akYfYj]Yo`a[`g^l]feYqZ] YZd]lghjg\m[]Z]f]Õlk^gjdgf_%l]jeh]j^gjeYf[]&;Yddalbmkl ‘proper investing.’”
Business impact of regulation
Minimize risk
Evidence of improved future valuation with business forecasts
Good corporate citizenship — company policy on business ethics
Client demand from corporate investors
Return on investment in ESG activities
;gehYfq`YkYhgda[qgfYkk]kkaf_fgfÕfYf[aYd^Y[lgjk
Personal values
Investment codes/advisors — Principals for Responsible Investments (PRI) Pensions & Investment
Research Consultants (EIRC)
Essential
Important
Sometimes important
Not important
11.8%
0.7%
44.4%
11.1%
43.8%
33.3%
11.8%
16.9%
49.4%
22.7%
11.0%
16.9%
61.0%
18.8%
3.2%
22.9%
41.2%
28.8%
7.2%
24.7%
48.1%
20.8%
6.5%
27.3%
55.8%
14.3%
2.6%
28.8%
45.1%
22.9%
3.3%
42.2%
44.8%
11.0%
1.9%
43.1%
@go]n]j$eYfqafn]klgjkkladdk]]=K?YkYfa[`]hjg\m[l$g^^]j]\ dYj_]dqlgkYlak^ql`]afl]j]klkg^kh][aÕ[[da]flk&NYjagmkh]fkagf ^mf\k$^gj]pYehd]$oaddfglafn]klaf[gehYfa]kl`Yll`]qk]]Yk `Yje^mdlgkg[a]lqgjaf\ana\mYdk3gl`]jkkaehdqoaddfglafn]klaf Ékaf&ÊAfgl`]jogj\k$l`]akkm]jkafl`]ajhgjl^gdagkemklhYkk []jlYaff]_Ylan]k[j]]fk&Gf]_dgZYdÕp]\af[ge]eYfY_]jYlY EYdYqkaYfh]fkagf^mf\oal`MK*((Zaddagfaf9MEj]hgjlkl`Yl$ Yegf_l`]j]\ÖY_kl`Ylogmd\[Ymk]l`]^mf\lgjmd]gmlYf afn]kle]fl$ÉfmeZ]jgf]akl`]]fnajgfe]fl&A^o]Yj]afn]klaf_$ ^gj]pYehd]$afYfaf^jYkljm[lmj]hjgb][lÁo]f]]\lgbmkla^q l`Yll`]j]akfgeYl]jaYdY\n]jk]S]fnajgfe]flYdUaehY[llgl`] society.”
Certain other institutional investors are interested in including afl`]ajhgjl^gdagk[gehYfa]kl`Yl`Yn]hYkk]\hgkalan]k[j]]fk — l`Ylak$[gehYfa]kl`Yl[j]Yl]nYdm]^gjaf\ana\mYdkgjkg[a]lq& 9fmeZ]jg^afn]klgjkafl]jna]o]\YkhYjlg^l`akklm\qg^^]j ]pYehd]kg^l`]ajeYcaf_km[`afn]kle]flkaf[gehYfa]kjYf_af_ ^jgegf]kl`YlYj]_gg\]fnajgfe]flYd[alar]fklggf]kl`YlYj] charitable donors. Finally — o`ad]eYfqafn]klgjkZmad\YfYfYdqkakg^=K?jakcaflgYdd g^l`]ajafn]kle]fl\][akagfkYf\gl`]jkj]k]jn]al^gjl`][j]Ylagf g^Yfa[`]hjg\m[l— afn]klgjk[gflafm]lg\]ZYl]o`Yll`]]^^][l g^=K?oaddZ]gfl`]dgf_%l]jej]lmjfkg^^]j]\Zq[gehYfa]k&Ak alYfY\\]\[gklgjYkgmj[]g^[gehYfa]kÌaehjgn]\h]j^gjeYf[] and, hence, returns?
L`]hgjl^gdageYfY_]jYll`]?]jeYfYkk]leYfY_]e]fl company says more generally, “I see ESG personally as an added [gkldYq]j&QgmZYka[YddqhYq^gjala^qgmoYflal3a^h]j^gjeYf[] is not necessarily your main concern because you have other standards and commitments.”
@go]n]j$eYfqafn]klgjkZ]da]n]l`Yl=K?[Yf`Yn]Yf]mljYdgj ]n]fhgkalan]]^^][lgfhgjl^gdagj]lmjfk&ÉAl`afcqgm[YfY[`a]n] Yf=K?gZb][lan]oal`gmlkY[jaÕ[af_j]lmjfk$ÊkYqkl`]`]Y\g^ ]imalqhgjl^gdageYfY_]e]flYlYMKYkk]leYfY_]e]flÕjeoal` MK+0(Zaddagfaf9ME&ÉAl`afcj]lmjf$Yll`]]f\g^l`]\Yq$ak j]Yddqo`YleYll]jkegkllgl`]Õ\m[aYjq$ja_`l7Al`afcl`]k]log objectives, ESG and returns, can be achieved at the same time; qgmbmkl`Yn]lgZ]n]jql`gm_`l^mdaf`goqgmY[`a]n]l`]k]log goals.” 9ddafYdd$l`]j]Yj]eYfqj]Ykgfkl`Ylafn]klgjkYj]af[j]Ykaf_dq afl]j]kl]\afl`]fgfÕfYf[aYdh]j^gjeYf[]g^l`][gehYfa]k afo`a[`l`]q[gfka\]jafn]klaf_&9kl`]h]fkagf^mf\YfYdqkl ^jgeH]jm]fl`mkaYkla[Yddq]phdYafk$ÉO`]l`]jalÌk^gjl`]`a_` j]lmjfkafl`]dgf_l]je$^gjeYjc]laf_hmjhgk]k$gjZ][Ymk] qgmoYfllg\g_gg\^gjkg[a]lq$fgfÕfYf[aYd[gfka\]jYlagfkdac] =K?g^^]jal&Ê@go]n]j$^gjafn]klgjklgÕf\[gehYfa]kl`Yl[Yf `]dhl`]eY[[gehdak`Yfqg^l`]k]_gYdk$akkm]jkf]]\lgj]hgjl l`]ajfgfÕfYf[aYdaf^gjeYlagfafoYqkl`Yl]YkadqYddgoallgZ] incorporated into investors’ decision making.
Investors are increasingly
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h]j^gjeYf[]$jYf_af_
^jge[gehYfa]kl`Yl
are good environmental
citizens to ones that are
charitable donors
Gf]]pYehd][ge]k^jgeY[gfkme]jk][lgjYfYdqklYlY H]jmnaYfh]fkagf^mf\oal`egj]l`YfMK)(Zaddagfaf9ME&@] l]ddkg^j][gee]f\af_l`Yll`]^mf\Zmqk`Yj]kg^YMK_jg[]jq [`Yafkh][aYdaraf_affYlmjYd$`]Ydl`q^gg\kÉYkcaf\g^Yl`]eYla[ afn]kle]fl$Z][Ymk]o]Yj]ljqaf_lg`]dhkgdn][]jlYaf]^^][lan] problems in the world, including obesity. We are trying to improve l`]`]Ydl`YoYj]f]kkg^h]ghd]afl]jekg^]Ylaf_o]dd&Kg$o] afn]klafl`Yl[gehYfq&L`YlÌkYfY^ÕjeYlan]oYqg^mkaf_=K? k[j]]faf_lg[j]Yl]nYdm]^gjkg[a]lq&ÊTomorrow’s Investment Rules 2.0 | | Ernst & Young LLP
16 17 13.5% 68.6% 17.9% 17.9% 61.8% 20.3% 18.6% 60.9% 20.5% 12.4% 54.0% 33.5% 8.0% 52.5% 39.5% 15.5% 57.0% 27.5% 8.7% 61.5% 29.8%
Risk from resource scarcity — e.g., water
Not asked in 2014
Limited verification of data and claims
No link to financial performance Risk from climate change
>a_mj]*&+&FgfÔfYf[aYd\ak[dgkmj]kY^^][laf_jakcYf\h]j^gjeYf[]Yj]egkldac]dq
to stall an investment
@googmd\l`]^gddgoaf_\ak[dgkmj]kYZgmlYhjgkh][lan]afn]kle]flY^^][lqgmjafn]kle]fl\][akagf7
L`]9mkljYdaYfYkk]leYfY_]e]flÕjekh][aYdaraf_af_dgZYddakl]\ af^jYkljm[lmj]Zmad\kkge]g^l`]kh][aÕ[fgfÕfYf[aYdjakckl`Yl investors consider most serious directly into its decision making e]lja[k&ÉO`]fo]Ìj]hmllaf_lg_]l`]jgmjÕfYf[aYdeg\]dk$Ê ]phdYafkYk]fagjYfYdqklYf\hgjl^gdageYfY_]jYll`]Õje$Éo] ljqlgZjaf_=K?aflggmj[Yk`Ögo^gj][Yklk$o`]j]hgkkaZd]&O] consider costs to the revenue line that are impacted by social gj]fnajgfe]flYdj]klja[lagfkYf\^]]\l`akaf^gjeYlagfaflggmj ]ph][l]\j]lmjf^jgeYklg[c&Gfl`]jakcka\]$gmjhgjl^gdag eYfY_]jkYhhdqYjakc^Y[lgjlg_gn]jfYf[]$afhYjla[mdYj$kaf[]alÌk the area that has the most impact on valuation. For governance, we typically use metrics that have to do with shareholder structure, board compensation, remuneration and the alignment between the company and investors.”L`]lqh]kg^=K?Yf\gl`]jfgfÕfYf[aYd\ak[dgkmj]kl`Ylegkl g^l]f[Ymk]afn]klgjklgjmd]gmlYfafn]kle]flYj]l`gk]l`Yl mdlaeYl]dq`Yn]YÕfYf[aYdaehY[lgf[gehYfa]k&L`]YfYdqkl Yll`]MKYkk]leYfY_]e]flÕjeoal`MK,*-Zaddagfaf9ME kmeeYjar]kalo]dd2É=K?akfglYdoYqkfgfÕfYf[aYd&>gjYf =K?^Y[lgjlgZ]afl]j]klaf_lgYdYj_]hgjlagfg^afn]klgjk$alÌk _gllg`Yn]kge]dafclgÕfYf[aYdaehY[l&O`q\g]kYeafaf_ [gehYfqj]d]Yk]\YlYgfogjc]jkY^]lq$^gj]pYehd]7AlÌkZ][Ymk] the company and its investors, obviously, realize it can impact production, which can impact sales, which impacts the value g^l`]klg[c&Aogmd\dac]lg_]lYoYq^jge=K?Z]af_na]o]\Yk fgfÕfYf[aYd$Z][Ymk]Al`afcl`]k]Yj]ÕfYf[aYdakkm]k&L`]q happen to have social or environmental or other important jYeaÕ[Ylagfk$Zmll`]qÌj]Ydkg[d]YjdqÕfYf[aYd&Ê
L`]akkm]Z][ge]k`goafn]klgjk[Yf_]ll`]fgfÕfYf[aYd af^gjeYlagfl`Yll`]q[gfka\]jegklmk]^mdlgl`]ajafn]kle]fl decision making — l`Ylak$af^gjeYlagfla]\lg[gehYfa]kÌnakaZd]$ e]YkmjYZd]h]j^gjeYf[]&L`]AAJ;akgf]gj_YfarYlagf`]dhaf_ investors and issuers achieve this goal. In 2013, it released the Integrated Reporting Framework, which helps companies produce afl]_jYl]\j]hgjlkl`Yldafcl`]aj=K?Yf\gl`]jfgfÕfYf[aYd \ak[dgkmj]klgl`]aj]ph][l]\h]j^gjeYf[]Yf\hdYfk^gjnYdm] [j]Ylagf&9k[gehYfa]kYf\af\mklja]k[gflafm]lgY\ghll`] _ma\af_hjaf[ahd]kaf[gjhgjYl]\aflgl`akj]hgjlaf_^jYe]ogjc$ al[gmd\Z]Yka_faÕ[Yflkl]hlgoYj\afn]klgjkÌ_]llaf_l`] fgfÕfYf[aYdaf^gjeYlagfl`]qoYfl& Absence of a clear strategy to create value
in the short, medium and long term 40.7% 52.2% 7.2% 42.2% 51.6% 6.2% 30.2% 66.0% 3.7% 26.9% 65.9% 7.2% 15.4% 72.6% 12.0% 11.9% 73.1% 15.0% 11.7% 74.7% 13.6% 9.1% 75.6% 15.3% 19.1% 63.2% 17.7% 21.7% 54.0% 24.2% Risk or history of poor governance Risks in supply chain not addressed
Risk or history of poor environmental
performance
Human rights risk from operations
How do investors react to different types of
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=[`gaf_l`]ajna]okYZgmll`]lqh]kg^fgfÕfYf[aYdaf^gjeYlagf they consider most important, survey respondents in 2015 indicate that their investment decisions are most likely to be Y^^][l]\ZqfgfÕfYf[aYd\ak[dgkmj]kla]\lgnakaZd]$e]YkmjYZd] jakcklgY[gehYfqÌkh]j^gjeYf[] k]]>a_mj]*&+!&KlYl]e]flk l`Yl$^gj]pYehd]$\]egfkljYl]YdY[cg^nYdm]%[j]YlagfkljYl]_q$ ]phgk]l`]jakcg^hggj_gn]jfYf[]$gjj]n]Ydjakckl`Yl\aj][ldq Y^^][lh]j^gjeYf[] km[`YkjakcklgY[gehYfqÌkkmhhdq[`Yaf$ ]fnajgfe]flYdh]j^gjeYf[]gj`meYfja_`lkj][gj\!Yj]egkl likely to cause investors to rule out a potential investment or, at least, reconsider it.
Gfl`]gl`]j`Yf\$fgfÕfYf[aYdjakckl`YlYj]d]kke]YkmjYZd]$ not directly linked to a company’s business practices, or less pressing in the near term (e.g., those tied to climate change) are less likely to spur investors to abandon or reconsider an investment opportunity.
Viewed year-on-year, survey data reveals substantial consistency afafn]klgjkÌna]okj]_Yj\af_l`]aehY[lg^nYjagmk\ak[dgkmj]k& L`]YZk]f[]g^YfY\]imYl]nYdm][j]YlagfkljYl]_qYf\ [gf[]jfkYZgml_gn]jfYf[]lghl`]daklg^\ak[dgkmj]kl`Yl[Ymk] respondents to rule out a prospective investment in both 2015 Yf\*(),$YdZ]all`]qkoYhhdY[]kafl`]logkmjn]qk&9f\o`ad] l`]j]Yj]kge]gl`]jkeYddk`a^lkafl`]gj\]jg^j]khgfk]k^jge last year to this year, the data remains quite consistent.
2015
2014
2015
2014
Reconsider investment No change in investment plan Rule out investment immediately
I would like to get away
from ESG being
na]o]\YkfgfÕfYf[aYd$
because I think these
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“
13.5% 68.6% 17.9% 17.9% 61.8% 20.3% 18.6% 60.9% 20.5% 12.4% 54.0% 33.5% 8.0% 52.5% 39.5% 15.5% 57.0% 27.5% 8.7% 61.5% 29.8%
Risk from resource scarcity — e.g., water
Not asked in 2014
Limited verification of data and claims
No link to financial performance
Risk from climate change
Investors seek consistent and
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3
Kmjn]qj]khgf\]flkkYql`]qYj]dggcaf_Ylegj]fgfÕfYf[aYd af^gjeYlagfafegj]kljm[lmj]\oYqk$ZmlalYhh]Yjkl`Yll`ak Y\\alagfYd]^^gjl`Ykfglqa]d\]\YZjgY\k`a^lafafn]kle]fl \][akagfk&Afl`]*()-klm\q$*+&/g^j]khgf\]flkkYq fgfÕfYf[aYdh]j^gjeYf[]^j]im]fldqhdYq]\YhanglYdjgd]afl`]aj investment decisions over the previous year (see Figure 3.1); this akZYka[Yddq[gfkakl]floal`l`]*+&+o`gkYa\l`]kYe]af*(),&>a_mj]+&)&:]lo]]f*()-Yf\*(),$l`]
hjghgjlagfg^afn]klgjkÔf\af_fgfÔfYf[aYd
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investment decision making?
L`]egkll]ddaf_YfYdqkakeYqZ]l`ak29dl`gm_`YeYbgjalqg^ afn]klgjkhYqkge]\]_j]]g^Yll]flagflg[gehYfa]kÌfgfÕfYf[aYd h]j^gjeYf[]$Yj]dYlan]dqkeYddhjghgjlagfÕf\kl`ak[jal]jagflg Z]^j]im]fldqhanglYdlgl`]ajafn]kle]fl\][akagfk&Gf]j]Ykgf investors’ decision making does not, at present, rely more heavily gf[gehYfa]kÌfgfÕfYf[aYdh]j^gjeYf[]akl`Ylafn]klgjkÕf\ l`]qYj]fgl_]llaf_l`]egklmk]^mdaf^gjeYlagfYZgml[gehYfa]kÌ fgfÕfYf[aYdh]j^gjeYf[]&Afn]klgjkkYqj]h]Yl]\dql`Yll`]q \gfglj][]an]]fgm_`Y[[mjYl]$klYf\Yj\ar]\fgfÕfYf[aYd af^gjeYlagfj]d]nYfllg[gehYfa]kÌjakcYf\h]j^gjeYf[] Ykk]kke]fl&Kh][aÕ[Yddq$Ydegkllog%l`aj\kg^j]khgf\]flkkYq [gehYfa]k\gfglY\]imYl]dq\ak[dgk]af^gjeYlagfYZgml=K? jakck$Yf\f]Yjdq,([Ydd^gj[gehYfa]klg\gkgegj]^mddqafl`] ^mlmj] K]]>a_mj]+&*!&
>a_mj]+&*&Afn]klgjkkYq[gehYfa]k\gfglY\]imYl]dq\ak[dgk]l`]aj=K?jakck
<g[gehYfa]kY\]imYl]dq\ak[dgk]l`]aj=K?jakckl`Yl[gmd\Y^^][ll`]aj[mjj]flZmkaf]kkeg\]dk7
2015
*+&/
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+,&,
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2014
Frequently Occasionally Seldom Never
In which sectors do investors consider
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Afn]klgjk`Yn]ZjgY\]f]\l`]jYf_]g^k][lgjkafo`a[`l`]q [gfka\]jfgfÕfYf[aYdaf^gjeYlagflgZ]j]d]nYfl&Egj]l`Yf .(g^j]khgf\]flkafl`akq]YjÌkklm\qk]]km[`af^gjeYlagfYk j]d]nYflY[jgkkl`]^mddkh][ljmeg^af\mklja]k$mh^jge++&/af 2014 (see Figure 2.4). O`ad]YeYbgjalqg^afn]klgjk[gfka\]jfgfÕfYf[aYd^Y[lgjk j]d]nYfllgYddk][lgjk$fglYdd`gd\l`akna]o&9kYj]kmdl$egj] j]khgf\]flk[gfka\]jfgfÕfYf[aYd\YlYaehgjlYfllgl`]]f]j_q k][lgjl`YflgYfqgl`]jk][lgj&AfY\\alagflgl`].)&-g^ j]khgf\]flko`gkYqfgfÕfYf[aYd\YlYakj]d]nYfllgYddk][lgjk$ Yfgl`]j*-&-g^j]khgf\]flkkYqalakj]d]nYfllgl`]]f]j_q k][lgjkh][aÕ[Yddq$qa]d\af_0/&(g^j]khgf\]flko`g[gfka\]j alaehgjlYfllgl`akk][lgj&9kl`]h]fkagf^mf\YfYdqklafH]jmputs it, “There are some industries that are more prone to ESG risk. These are energy, mining and probably the consumer sector
— l`]dYklZ][Ymk]g^ZjYf\nYdm]afl]jekg^[mklge]jkYf\
reputation issues.”
<]khal]afn]klgjkÌ]phYf\]\mk]g^fgfÕfYf[aYdaf^gjeYlagfY[jgkk
all industries, it is clear, as we will see in the next section, that
l`]q^Y[]Y\]Õ[alg^`a_`%imYdalqfgfÕfYf[aYdj]hgjlaf_&Akkm]jk lggg^l]f\gfglhjgna\]]fgm_`fgfÕfYf[aYdaf^gjeYlagfafl`] ^gjeafn]klgjkÕf\mk]^mdo`]feYcaf_afn]kle]fl\][akagfk&
>a_mj]*&,&Afn]klgjafl]j]klaffgfÔfYf[aYdaf^gjeYlagfkhYfkYddk][lgjk
Afo`a[`k][lgjkYj]qgmegj]dac]dqlg[gfka\]jfgfÕfYf[aYd\YlYegklj]d]nYfl7
25.5%
44.8%
Energy
21.2%
46.6%
Mining and metals
16.8%
32.5%
Industrial
14.4%
23.9%
Consumer products
13.5%
28.8%
Manufacturing
11.5%
14.1%
Financial services
3.8%
5.5%
Business services
61.5%
33.7%
All of the above
2015 2014
*)&0
Yes
+0&0
No,
but companies
should disclose
these risks more
fully
*,&0
No
),&.
Tomorrow’s Investment Rules 2.0 | | Ernst & Young LLP
20 21
>a_mj]+&+&Afn]klgjko`g\gfglmk]fgfÔfYf[aYdaf^gjeYlagf[gfka\]jalaeeYl]jaYdgjdY[caf_
quality
O`a[`g^l`]^gddgoaf_klYl]e]flkZ]klj]Ö][lkqgmjna]okgfo`qqgm\gfgl[gfka\]j=K?akkm]kafqgmj\][akagf
making?
L`]j]Yj]eYfqj]Ykgfk^gjl`]hggjYf\mf]n]fj]hgjlaf_g^=K? Yf\gl`]jfgfÕfYf[aYdjakckYf\Z]f]ÕlkZqakkm]jk& 9[[gj\af_lgafn]klgjk$l`]k]j]YkgfkYj]g^l]fla]\lgYfakkm]jÌk kar]&DYj_][Yh[gehYfa]kYj]lqha[Yddqegj]^gjl`[geaf_oal` fgfÕfYf[aYdaf^gjeYlagfYf\g^l]f`Yn]egj]j]kgmj[]kYnYadYZd] lgmk]afhj]hYjaf_fgfÕfYf[aYdj]hgjlk^gjafn]klgjk&L`] YfYdqklYll`]KoakkhjanYl]ZYfc]phdYafk$ÉEgklg^l`]dYj_][Yh companies nowadays have the means, ability and willingness to report on ESG issues, whereas small microcaps likely do not. So, when I screen the whole 2,500-plus companies in the world, I’d kYqYjgmf\Yl`aj\j]hgjlgfl`]k]akkm]k&9egf_l`]dYj_][Yhk$ Ydegkl1(g^l`][gehYfa]keYc]=K?\YlYYnYadYZd]&A[Yfk]]Y [d]Yj[gjj]dYlagfZ]lo]]fl`]h]j[]flY_]g^[gehYfa]kj]hgjlaf_ and their market cap. I would suggest the smaller companies don’t have the ability, rather than the willingness, to disclose to a decent d]n]dg^k[jmlafq&Ê;gfkakl]floal`l`ak$gl`]jafn]klgjk]phdYafl`Ylakkm]jkg^l]f[al] cost — or perceived cost — \aj][ldqYkYj]Ykgf^gjl`]ajafY\]imYl] \ak[dgkmj]g^=K?Yf\gl`]jfgfÕfYf[aYdaf^gjeYlagf&=phdYafk l`]`]Y\g^kmklYafYZadalqj]k]Yj[`YlYMCYkk]leYfY_]e]fl Õje$ÉL`]Yj_me]flS^jgeakkm]jkUakl`YlalÌkYZgml[gkl&:ml l`]]na\]f[]k`gokl`Ylgf[]qgmklYjlhjg\m[af_fgfÕfYf[aYd j]hgjlk$qgmklYjleYfY_af_l`]k]akkm]kegj]]^^][lan]dq$Yf\ qgmkYn]Yka_faÕ[YflYegmflg^egf]qZqZ]ll]jeYfY_af_ Yllalm\]kYf\j]kgmj[]k$ZqY\\j]kkaf_hmZda[kY^]lqakkm]k$Yf\ so on. So, I think it’s more than just cost. Cost is an excuse that’s _an]f&Kge][gehYfa]kbmkl\gfÌll`afcl`Yll`akakaf^gjeYlagf that investors should take an interest in, and so they aren’t willing to invest in the reporting. There is an initial investment to be made afZmad\af_l`]kqkl]eklgj]hgjll`akaf^gjeYlagf&Ê
?anaf_Ykh][aÕ[]pYehd]$`][gflafm]k$ÉO]Ìn]]f_Y_]\afl`] US with a very large electrical equipment company. It’s been ^g[mk]\gfSZ][geaf_Uegj]j]kgmj[]]^Õ[a]fl$Yf\o][gY[`]\ them to do a sustainability report.” The question, he explains, is why had this company not done a sustainability report sooner. ÉL`]Yj_me]fll`Yl[Ye]lgl`]kmj^Y[]akl`YlaloYkYZgml[gklÊ \]khal]l`]^Y[lkl`YlÉl`ak[gehYfq`YkY_gg\=K?klgjqÊYf\ that such reporting can result in savings.
L`mk$][`gaf_YfmeZ]jg^afn]klgjkafl]jna]o]\^gjl`akklm\q$ l`akMCj]k]Yj[``]Y\k]]kfgfÕfYf[aYdj]hgjlaf_YkYhgl]flaYddq ka_faÕ[YflZgllgedaf]kljYl]_qZYk]\gfalkmdlaeYl]YZadalqlg save companies money.
9fgl`]j]phdYfYlagf^gjakkm]jkÌhggj\ak[dgkmj]kj]_Yj\af_ fgfÕfYf[aYd^Y[lgjkea_`lda]afl`]]e]j_af_klYl]g^fgfÕfYf[aYd j]hgjlaf_&O`ad]afn]klgjkfgo]fbgql`]j]kmdlkg^`mf\j]\k g^q]Yjkg^ÕfYf[aYdj]hgjlaf_$fgfÕfYf[aYdj]hgjlaf_akafalk early stages — and is not yet based on standardized reporting [gfn]flagfk&L`]j]kmdlakl`Yll`]hjgh]jj]hgjlaf_g^=K?Yf\ gl`]jfgfÕfYf[aYdaf^gjeYlagf[Yfk]]efglgfdq]ph]fkan]Zml also overly complex to companies.
9lhj]k]fl$f]al`]jafn]klgjkfgjakkm]jkYj]j]khgfkaZd]^gj kh][a^qaf_`go[gehYfa]kk`gmd\j]hgjlfgfÕfYf[aYdaf^gjeYlagf& @go]n]j$YfmeZ]jg^gj_YfarYlagfkafngdn]\afk]llaf_klYf\Yj\k ^gj[gehYfqj]hgjlaf_g^^]jj]e]\a]k^gjl`]dY[cg^[gfkakl]f[q Yf\[gehYfq%lg%[gehYfq[gehYjYZadalqaffgfÕfYf[aYd af^gjeYlagf&L`j]]g^l`]egj]afÖm]flaYdg^l`]k]gj_YfarYlagfk Yj]l`]AAJ;$l`]KmklYafYZadalq9[[gmflaf_KlYf\Yj\k:gYj\ K9K:!Yf\l`]?dgZYdJ]hgjlaf_AfalaYlan] ?JA!& K]]j]dYl]\ j]^]j]f[]kgfhY_]*)&!
9_Yafkll`ak[mjj]flZY[c\jghg^mf]n]ffgfÕfYf[aYdaf^gjeYlagf ^jge[gehYfa]k$al[ge]kYkdalld]kmjhjak]l`Ylegj]l`Yfgf]% imYjl]jg^j]khgf\]flkj]hgjll`Yl[gehYfa]kÌfgfÕfYf[aYd h]j^gjeYf[]\a\fglhdYqYhanglYdjgd]afl`]ajafn]kle]fl decisions even once during the previous year (see Figure 3.1). 9egf_l`]k]afn]klgjk^gjo`gefgfÕfYf[aYdaf^gjeYlagff]n]j hdYq]\YhanglYdjgd]$,.&,]phdYafl`Yll`]q\gfgl[gfka\]j fgfÕfYf[aYd\ak[dgkmj]kafl`]aj\][akagfeYcaf_Z][Ymk]l`]q im]klagfl`]eYl]jaYdalqgjÕfYf[aYdaehY[lgfl`][gehYfa]k that they are evaluating (see Figure 3.3). Others believe that the fgfÕfYf[aYdaf^gjeYlagfl`]qj][]an]akaf[gfkakl]fl$mfmkYZd]af [gehYjaf_gf][gehYfqlgYfgl`]j$gjmfn]jaÕYZd]&
The evidence shows that once
qgmklYjlhjg\m[af_fgfÕfYf[aYd
reports, you start managing
these issues more effectively,
Yf\qgmkYn]Yka_faÕ[Yfl
amount of money.
“
,.&,
It’s unclear whether
fgfÕfYf[aYd\ak[dgkmj]kYj] eYl]jaYdgj`Yn]YÕfYf[aYd impact
*0&.
FgfÕfYf[aYdaf^gjeYlagfak inconsistent, unavailable, or fgln]jaÕ]\
),&+
FgfÕfYf[aYd measurements are inconsistent, and we are unable to compare them
to those of other companies
)(&/
Other
Gf]hjgZYZd]j]Ykgf^gjafn]klgjkÌ
\akkYlak^Y[lagfoal`fgfÕfYf[aYdaf^gjeYlagf
lies in the strategy behind companies’
reporting — it is not currently created to
k]jn]l`]f]]\kg^afn]klgjk
Gf]hjgZYZd]j]YkgfZ]`af\afn]klgjkÌ\akkYlak^Y[lagfoal` =K?Yf\gl`]jfgfÕfYf[aYdaf^gjeYlagfda]kafl`]jYlagfYd] Yf\kljYl]_qZ]`af\[gehYfa]kÌj]hgjlaf_km[`af^gjeYlagf& 9eYbgjalqg^afn]klgjkkYql`Ylakkm]jkhjgna\]fgfÕfYf[aYd af^gjeYlagfafgj\]jlgZmad\l`]aj[gjhgjYl]j]hmlYlagfk with customers or to comply with governmental regulatory j]imaj]e]flk k]]>a_mj]+&,!$Zmlfgllgk]jn]l`]f]]\kg^ investors themselves.Afl`]Õjkl[Yk]$j]_Yj\af_fgfÕfYf[aYdj]hgjlaf_l`Ylk]jn]k [mklge]jk$akkm]jklqha[Yddqk]]clghmll`]ajZ]kl^ggl^gjoYj\& “Certainly, the ESG leaders are the ones that want to broadcast l`]aj\ak[dgkmj]kegkldgm\dq$Êfgl]kl`]k]fagjYfYdqklaf9mkljYdaY quoted earlier.
EYfq[gehYfa]k$lgYhh]Ydlg[mklge]jk$g^^]jmk]^mdYf\ ljYfkhYj]flfgfÕfYf[aYdaf^gjeYlagf&Mf^gjlmfYl]dq$l`]j]Yj] YdkgafklYf[]kafo`a[`l`]af^gjeYlagfhj]k]fl]\e]j]dqafl]f\k to put a positive spin on ESG issues.
Afl`]k][gf\[Yk]$j]_Yj\af_fgfÕfYf[aYdj]hgjlaf_Yf\ j]_mdYlgjq[gehdaYf[]$[]jlYaf[gehYfa]k^g[mkgfe]]laf_ the minimum regulatory requirement, rather than on telling investors a more complete story about the value and business aehY[lg^l`]aj=K?]^^gjlk&ÉKge][gehYfa]keYqgfdq\gl`] ZYj]eafaemeo`]fal[ge]klgj]hgjlaf_$kYqaf_$ËA^l`]j]Ìkfg regulation that requires me to report this, I won’t,’” explains the `]Y\g^]imalqhgjl^gdageYfY_]e]flYlYMKYkk]leYfY_]e]fl Õjeoal`MK+0(Zaddagfaf9ME&ÉAl`afcl`YlÌkhjgZYZdql`]egkl [geegfj]YkgfS^gjl`]dY[cg^j]hgjlaf_U&Ê
While investors might not be the intended primary audience g^lg\YqÌkfgfÕfYf[aYdj]hgjlk$kmjn]q\YlYkm__]klkl`Yl akkm]jkeYqY[lmYddqZ]hjgna\af_egj]Yf\Z]ll]jaf^gjeYlagf ^gjafn]klgjkÌmk]&Lg\Yq$j]khgf\]flkYj]egj]dac]dqlgkYq [gehYfa]k\ak[dgk]fgfÕfYf[aYdaf^gjeYlagfafj]khgfk]lgl`] [gf[]jfkg^afn]klgjkl`Yfl`]q\a\afl`]*(),klm\q&>gjlq% logh]j[]flg^j]khgf\]flkaf*()-kYql`Yl\]egfkljYlaf_Y [gehYfqÌkjakceYfY_]e]fleglanYl]kalkfgfÕfYf[aYdj]hgjlaf_$ mh^jge*1&(af*(),&KaeadYjdq$,(&)kYql`Yl]phdYafaf_Y company’s long-term capital value strategy motivates a company’s fgfÕfYf[aYdj]hgjlaf_$mh^jge+)&/af*(),&
9ll`]kYe]lae]$l`]hjghgjlagfg^j]khgf\]flko`gZ]da]n] l`Yl[gehYfa]keYc]fgfÕfYf[aYd\ak[dgkmj]klgZmad\l`]aj j]hmlYlagfkoal`[mklge]jk^]ddlg.+&0af*()-^jge.1&(af 2014. Similarly, the portion stating that companies make these \ak[dgkmj]klg[gehdqoal`j]_mdYlgjqj]imaj]e]flk^]ddlg-1&* af*()-^jge.1&(af*(),&AlYhh]Yjkl`Yl[gehYfa]keYq Z]klYjlaf_lgegn]^jgefgfÕfYf[aYd\ak[dgkmj]kYkYe]Yfk g^ZjYf\Zmad\af_Yf\j]_mdYlgjq[gehdaYf[]lgYegj]afn]klgj% centric strategy.
>a_mj]+&,&;gehYfa]khjgna\]fgfÔfYf[aYdaf^gjeYlagfafYf]^^gjllgk]jn][mklge]jkYf\
j]_mdYlgjk$egj]kgl`Yflgk]jn]afn]klgjk
O`Yl\gqgmZ]da]n]eglanYl]kY[gehYfqlgj]hgjlalkaehY[lgffgfÕfYf[aYdakkm]k7
;gfkakl]floal`l`ak\YlY$afn]klgjkafl]jna]o]\YkhYjlg^l`ak klm\qfgl]YeYjc]\aehjgn]e]flaf=K?Yf\gl`]jfgfÕfYf[aYd reporting in recent years, especially among large-cap companies. L`]MC`]Y\g^j]khgfkaZd]afn]klaf_imgl]\]Yjda]j]phdYafk$ ÉO`]fAklYjl]\af*((($Yn]jqkeYddhjghgjlagfg^l`]>LK= 100 had environmental policy statements, and that was it. Now, )-q]YjkdYl]j$0(gj1(`Yn]n]jq[gehj]`]fkan][gjhgjYl] j]khgfkaZadalqj]hgjlk&ÊKh]Ycaf_^jge9mkljYdaY$Yhgjl^gdag manager concurs, “ESG data is improving all the time, especially with larger-cap companies. They understand that this is a bigger akkm]$Yf\l`]qÌj]j]hgjlaf_Ydglg^l`Yl\YlY&L`]qÌj]Ydegkl hmllaf_YÖY_hgklafl`]kYf\So`]j]l`]\YlYUaklg\Yq$Yf\ they’re trying to improve on that year-on-year, which I think is a j]Yddqhgkalan]l`af_&9f\oal`l`][gehYfa]kZ]af_YoYj]g^Sl`ak \YlYU$Al`afco`]fl`]ZgYj\Yf\eYfY_]e]fll`afckljYl]_a[Yddq YZgmlo`Yll`]qÌj]_gaf_lg\goal`l`][gehYfq$l`]q^Y[lgjaf ESG to a larger extent every year.”63.8%
69.0%
Build corporate
reputation with customers
69.0%
59.2%
Comply with regulatory
requirements
42.1%
29.0%
Demonstrate risk
management
40.1%
31.7%
Explain strategy to
maintain and grow
long-term capital value
37.5%
33.8%
Responding to investor
requirements for
disclosure
19.7%
9.0%
Prove important
cost saving
18.4%
25.5%
Competitive
pressure
2015 2014
When I started in 2000,
a very small proportion
of the FTSE 100 had
environmental policy
statements, and that
was it. Now, 15 years
later, 80% or 90% have
very comprehensive
corporate responsibility
reports.
“
Tomorrow’s Investment Rules 2.0 | | Ernst & Young LLP
24 25 Afn]klgjk[gfkakl]fldqY^Õjel`]aj\]kaj]^gj\ak[dgkmj]kl`Yl Yddgol`]Yhhd]k%lg%Yhhd]k[gehYjakgfg^[gehYfa]k$ZmldYe]fl l`]^Y[ll`Yl[gf\m[laf_km[`[gehYjakgfkakg^l]f\a^Õ[mdlYf\ lae][gfkmeaf_&L`]MC`]Y\g^j]khgfkaZd]afn]klaf_imgl]\ ]Yjda]j]phdYafkl`][mjj]fl\a^Õ[mdlqaf\gaf_[jgkk%[gehYfq=K? [gehYjakgfk2É=n]fo`]f[gehYfa]khjgna\]af^gjeYlagfgf ESG, the challenge is making it cross-comparable, because the [gehYfa]kgZnagmkdq`Yn]\a^^]j]floYqkg^[gdd][laf_l`]aj\YlY$ Yf\l`]af\a[Ylgjkl`Yll`]qmk]Yj]\a^^]j]fl&O`]j]l`af_kYj] more regulated, there is better comparability and more data, but where there’s less regulation, we have to go out there and seek to improve the disclosures by the companies that we own. Our ESG l]Ye^mddq]f_Y_]koal`)*(%hdmk[gehYfa]kh]jq]Yj3YZgml,( g^l`gk]j]im]klkYj]^gjaehjgn]\\YlY\ak[dgkmj]&Ê
Investors consistently
Y^Õjel`]aj\]kaj]
^gj\ak[dgkmj]kl`Yl
allow the
apples-to-Yhhd]k[gehYjakgfg^
companies, but lament
l`]^Y[ll`Yl[gf\m[laf_
such comparisons is
g^l]f\a^Õ[mdlYf\lae]
consuming
9k]fagjYfYdqklYlYf9mkljYdaYfYkk]leYfY_]jY\\kl`Yl\gaf_ [jgkk%[gehYfq[gehYjakgfkak[gehda[Yl]\^mjl`]jZ][Ymk]l`] hjg[]kkYf\klYf\Yj\kYj]kgk][lgjkh][aÕ[2ÉL`]e]Ykmj]kl`Yl we are interested in vary quite a lot across industries. While we ea_`lZ]afl]j]kl]\af$kYq$l`]afbmjqjYl]kg^[gehYfa]kl`Yl haul dangerous materials, the impacts we’re interested in are imal]\a^^]j]fl^gj`q\jg\YekZ]af_Zmadlo`]j][geemfala]k emklZ]k`a^l]\&L`]e]Ykmj]k\gnYjqimal]Ydgl$o`a[`ako`q o]\g\]lYad]\$Zgllge%mhj]k]Yj[`lgmf\]jklYf\l`]kh][aÕ[ ghhgjlmfala]kYf\jakck^gj]n]jq[gehYfq&ÊO`gklYf\k^gjl`]klYf\Yj\k7
9fmeZ]jg^klYf\Yj\kZg\a]kYj]lg\YqYll]ehlaf_ lgÕddl`]f]]\^gjklYf\Yj\ar]\$[gehYjYZd]$k][lgj% kh][aÕ[fgfÕfYf[aYdaf^gjeYlagf&L`]j]kmdlakYfYjjYq g^j][gee]f\]\j]hgjllqh]k&Egkl$`go]n]j$dafc=K? af^gjeYlagflgY[gehYfqÌkhj]\a[l]\h]j^gjeYf[]afYf integrated report — that is, they integrate a company’s ÕfYf[aYdYf\fgfÕfYf[aYdj]hgjlaf_aflgYkaf_d]YfYdqkak& These links, along with other characteristics seen in many g^l`]k]j]hgjleg\]dk km[`Ykk][lgj%kh][aÕ[klYf\Yj\k!$ are among the priorities that investors would like to see in fgfÕfYf[aYdj]hgjlaf_$Y[[gj\af_lgl`akklm\q&L`j]]g^l`]egklafÖm]flaYdYegf_l`]k]klYf\Yj\k gj_YfarYlagfkYj]l`]^gddgoaf_2
• The International Integrated Reporting Council (IIRC) has issued the Integrated Reporting Framework that allows [gehYfa]klgj]hgjleYl]jaYdaf^gjeYlagfYZgmll`]aj kljYl]_q$_gn]jfYf[]$h]j^gjeYf[]Yf\hjgkh][lkafl`] [gfl]plg^l`]aj]pl]jfYd]fnajgfe]fl$mkaf_Yfafl]_jYl]\$ [gf[ak]^gjeYll`YleYc]k[jgkk%[gehYfq[gehYjakgfk easy. • L`]KmklYafYZadalq9[[gmflaf_KlYf\Yj\k:gYj\ K9K:! akYfaf\]h]f\]fl$MK%ZYk]\$fgl%^gj%hjgÕlgj_YfarYlagf whose mission is to develop and disseminate industry-kh][aÕ[kmklYafYZadalqY[[gmflaf_klYf\Yj\kl`Yl`]dh hmZda[[gjhgjYlagfk\ak[dgk]eYl]jaYdaf^gjeYlagfmk]^mdlg investor decision making within 80 industries.
• The Global Reporting Initiative (GRI) has pioneered a comprehensive Sustainability Reporting Framework that hjgna\]ke]lja[kYf\e]l`g\k^gje]Ykmjaf_Yf\j]hgjlaf_ kmklYafYZadalq%j]dYl]\aehY[lkYf\h]j^gjeYf[]& 9ll]ehlaf_lgkgdn]l`]af[gfkakl]f[qYf\gl`]jhjgZd]ekoal` o`a[`fgfÕfYf[aYdj]hgjlaf_ak^Y[]\Ylalk[mjj]flfYk[]flklY_] Yj]YfmeZ]jg^klYf\Yj\kgj_YfarYlagfkafl`]Õ]d\g^[gjhgjYl] j]hgjlaf_$af[dm\af_l`]AAJ;$l`]K9K:Yf\l`]?JA&L`]aj recommendations, some quite recent, are gaining international Y[[]hlYf[]$Yf\l`][gehYfa]kl`Yl^gddgol`]_ma\]daf]kg^ Yfqgf]g^l`]k]gj_YfarYlagfkYj]YlY\aklaf[lY\nYflY_]oal` investors.
KlYf\Yj\ar]\$k][lgj%kh][aÕ[
af^gjeYlagfak^mf\Ye]flYdlg
investors’ ESG assessments
,
Survey data indicates that investors are especially eager to
e]Ykmj]Y[gehYfqÌkfgfÕfYf[aYdh]j^gjeYf[]Y_Yafkll`Ylg^ alkk][lgjh]]jkYf\lgdafcY[gehYfqÌkfgfÕfYf[aYdaf^gjeYlagf lgalk]ph][l]\h]j^gjeYf[]&Kh][aÕ[Yddq$Ydegkll`j]]%imYjl]jk g^j]khgf\]flk[gfka\]jk][lgj%kh][aÕ[j]hgjlaf_[jal]jaYYf\c]q h]j^gjeYf[]af\a[Ylgjk CHAk!lgZ]n]jqgjkge]o`YlZ]f]Õ[aYdlg l`]ajafn]kle]fl\][akagfeYcaf_$Yf\egj]l`Yf/(k]]e]lja[k
>a_mj],&)&Afn]klgjkoYfllge]Ykmj]Y[gehYfqËkfgfÔfYf[aYdh]j^gjeYf[]Y_Yafkll`Ylg^alk
k][lgjh]]jkmkaf_[geegfh]j^gjeYf[][jal]jaY
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l`YldafcfgfÕfYf[aYdjakcklg]ph][l]\h]j^gjeYf[]Yk]imYddq Z]f]Õ[aYd k]]>a_mj],&)!&L`ak]fl`mkaYke^gjk][lgj%kh][aÕ[ \ak[dgkmj]kakj]af^gj[]\Zqj]khgf\]flkÌ[gehYjYlan]dqdgojYfcaf_ g^hj]k[jahlan]Y[[gmflaf_klYf\Yj\koal`Õp]\[jal]jaY$l`Ylogmd\ k]]clgYhhdqYd]n]dg^mfa^gjealqY[jgkkYddk][lgjk&J]hgjl^gjeYl
24.0%
21.4%
5%
41.3%
37.8%
36.6%
31.7%
39.8%
56.4%
1.4%
1.0%
1.5%
1.4%
0.0%
0.5%
K]hYjYl]kmklYafYZadalqYf\ÕfYf[aYdj]hgjlaf_
Integrated reports that follow the IIRC Framework
Self-declared integrated reports
Very
Z]f]Õ[aYd
Somewhat
Z]f]Õ[aYd
No Impact
Somewhat
detrimental
Very
detrimental
J]hgjl[gfl]flk
1.0%
2.4%
3.9%
3.0%
0.5%
0.0%
0.0%
0.5%
32.7%
41.5%
24.4%
K][lgjgjaf\mkljq%kh][aÕ[j]hgjlaf_[jal]jaYYf\CHAk
32.4%
39.6%
25.6%
Statements and metrics on expected future performance and links to
fgfÕfYf[aYdjakck
28.8%
30.7%
36.6%
Company disclosures based on what they feel is most material to
their value creation story
13%
44%
39.5%
Hj]k[jahlan]Y[[gmflaf_klYf\Yj\k^gjfgfÕfYf[aYde]lja[koal`
Õp]\[jal]jaY
<]khal]l`]gn]jYddk`gjl[geaf_kg^fgfÕfYf[aYdj]hgjlaf_afl`] ]q]kg^afn]klgjk$l`]qnYdm]l`]imYdalq\ak[dgkmj]kl`Yll`]q\g j][]an]YZgmll`]jakckl`YleYll]jlgl`]e&ÉDggcYlkge]g^l`] af\mklja]kl`YlYj]lqha[YddqYkkg[aYl]\oal`Y`a_`d]n]dg^=K? risks — mainly the extractive industries such as oil and gas and mining,” points out an analyst at a large US asset management Õje&É9ll`]`a_`]j%imYdalq[gehYfa]k _]f]jYddql`]fgf%keYdd% [Yh[gehYfa]kl`Ylo][gfka\]j^gjhmj[`Yk]!$l`]qÌj]imal] _gg\Ylj]d]Ykaf_l`]af^gjeYlagfl`Ylqgmogmd\oYfllgk]]&>gj ]pYehd]$dggcaf_Yll`]lae]%dgkl%lg%afbmjqjYl]^gjYddg^l`]Õjek$ qgm[Yf_]ll`Ylaf^gjeYlagf$Yf\qgm[Yf[gehYj]al]YkadqY[jgkk [gehYfa]k&L`]j]Yj]Ydglg^gl`]jaf\mklja]ko`]j]alÌk`Yj\]jlg _]ll`Yld]n]dg^ljYfkhYj]f[q$kge]lae]kZ][Ymk]l`]lgha[kYj]Y little harder to assess.”
>mjl`]jegj]$afn]klgjkÌna]okgfl`]lqh]kg^fgfÕfYf[aYd[gfl]fl af\ak[dgkmj]k`Yn]j]eYaf]\^Yajdq[gfkakl]flj][]fldq&9kafl`] 2014 study, respondents this year consider disclosures containing k][lgj%kh][aÕ[j]hgjlaf_[jal]jaYYf\CHAkl`]egklnYdmYZd] when making investment decisions, and they consider disclosures reporting links between ESG risks and measurable projected h]j^gjeYf[]lgZ]l`]k][gf\egklnYdmYZd]&FglYZdq$o`ad]l`]k] lqh]kg^fgfÕfYf[aYdj]hgjlklghafn]klgjkÌoak`daklkafZgl`q]Yjk$ l`]aj]fl`mkaYke^gj]Y[`jgk]Zq]a_`lgjegj]h]j[]flY_]hgaflk ^jge*(),lg*()-& J]_Yj\af_l`]nYjagmk^gjeYlkafo`a[`fgfÕfYf[aYdaf^gjeYlagf [YfZ]j]hgjl]\Èl`Ylak$k]hYjYl]dqgjafl]_jYl]\oal`ÕfYf[aYd af^gjeYlagfÈafn]klgjkÌna]okafalaYddqk]]elgk]f\eap]\ e]kkY_]k&Gfgf]`Yf\$Ykgda\eYbgjalqg^j]khgf\]flk$-1&*$ k]]afl]_jYl]\j]hgjlkl`Yl^gddgol`]AAJ;>jYe]ogjcYkn]jq gjkge]o`YlZ]f]Õ[aYd$Yf\,)&.k]]k]d^%\][dYj]\afl]_jYl]\ j]hgjlkYkkaeadYjdqmk]^md&Gfl`]gl`]j`Yf\$j]khgf\]flkYdkg af\a[Yl]Y_jgoaf_afl]j]klafk]hYjYl]kmklYafYZadalqYf\ÕfYf[aYd j]hgjlaf_3afl`]*()-kmjn]q$.-&+g^j]khgf\]flkk]]k]hYjYl] kmklYafYZadalqYf\ÕfYf[aYdj]hgjlaf_Ykn]jqgjkge]o`Yl Z]f]Õ[aYd$mh^jge,*&-af*(),& Dggcaf_Yll`]\YlYYZalegj][dgk]dqj]n]Ydkl`Yl+,&.g^Ydd j]khgf\]flk[j]\alYld]Yklgf]lqh]g^j]hgjlaf_^gjeYlYkZ]af_ n]jqZ]f]Õ[aYdlgl`]aj\][akagfeYcaf_&G^l`ak_jgmh$+1&/ k]]gfdqk]hYjYl]j]hgjlaf_Ykn]jqZ]f]Õ[aYd$o`ad]+)&-k]] gfdqafl]_jYl]\j]hgjlaf_ o`]l`]jal^gddgokl`]Afl]jfYlagfYdAJ >jYe]ogjcgjfgl!Ykn]jqZ]f]Õ[aYd&9f\*0&0g^l`]_jgmhk]] Zgl`k]hYjYl]Yf\afl]_jYl]\j]hgjlaf_Ykn]jqZ]f]Õ[aYd k]] Figure 4.2). @go]n]j$o`]fYkc]\lgjYfcYoa\]jjYf_]g^^gjeYllqh]k mk]\lg[geemfa[Yl]fgfÕfYf[aYdaf^gjeYlagf$afn]klgjkÌkljgf_ ]fl`mkaYke^gjafl]_jYl]\j]hgjlaf_ak[d]YjÈYf\akgfl`]jak]&Af l`akq]YjÌkklm\q$/(&1g^j]khgf\]flkk]]afl]_jYl]\j]hgjlkYk ]kk]flaYdgjaehgjlYfl$mh^jge.)&(af*(), k]]>a_mj],&+!&Af ^Y[l$afl]_jYl]\j]hgjlkjYfc]\k][gf\gfdqlg[gehYfa]kÌYffmYd j]hgjlk oal`gmlkh][aÕ[YlagfYklgo`]l`]jl`]qYj]afl]_jYl]\ annual reports or not).
Investors’ strong
enthusiasm
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reporting is
clear — and is
on the rise
G^[gmjk]$l`akakfgllgkYql`Ylk]hYjYl] reporting is not appreciated, as well. Af\]]\$Yfqj]hgjlaf_g^fgfÕfYf[aYd af^gjeYlagfak[gfka\]j]\Y_gg\l`af_& Af*()-$-1&)g^j]khgf\]flkk]] companies’ separate corporate social responsibility (CSR) or sustainability reports Yk]kk]flaYdgjaehgjlYfl$mh^jge+,&0af 2014.In addition, investors largely seem to hj]^]jl`YlfgfÕfYf[aYdaf^gjeYlagf [ge]k\aj][ldq^jgeakkm]jkl`Yf^jge third parties. Companies’ annual reports o]j]]f\gjk]\Yk]kk]flaYdkgmj[]kg^ l`akaf^gjeYlagfZq,,&,g^afn]klgjk$ and corporate websites were endorsed Yk]kk]flaYdZq*+&/&Af^gjeYlagf^jge third parties, such as press organizations gjÕfYf[aYd%\YlYhjgna\]jk$j][]an]\ [gfka\]jYZdqkeYdd]j]f\gjk]e]flk2)1&, g^afn]klgjk[gfka\]jhj]kk[gn]jY_]g^ Y[gehYfqÌkfgfÕfYf[aYdakkm]klgZ] essential to their decision making, and gfdq/&0[gfka\]jkmklYafYZadalqgj;KJ index rankings produced by third parties to be essential.
>a_mj],&+&Afn]klgjkoYflfgfÔfYf[aYdaf^gjeYlagf
directly from issuers
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when making an investment decision?
39.7%
Separate reporting akn]jqZ]f]Õ[aYd+)&-*0&0
Separate and integrated reporting are bothn]jqZ]f]Õ[aYd Integrated reporting AAJ;gjk]d^% declared) akn]jqZ]f]Õ[aYd
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5.8%
18.2%
31.8%
44.2%
7.8%
33.8%
32.5%
26.0%
11.2%
37.5%
32.2%
19.1%
16.2%
39.0%
31.2%
13.6%
19.5%
39.6%
29.9%
11.0%
19.4%
45.8%
29.0%
5.8%
23.7%
45.4%
26.3%
4.6%
26.5%
44.4%
25.2%
4.0%
44.4%
35.9%
17.6%
2.0%
Integrated report
Corporate website (including sustainability/corporate governance)
Press coverage and business commentary
Corporate social responsibility (CSR) or sustainability report
Environmental, social and governance (ESG) information
^jgeYÕfYf[aYd\YlYhjgna\]jÈ]&_&$:dggeZ]j_
Sustainability Accounting Standards Board indicators
Sustainability or CSR index rankings produced by a third party
Social media channels including a company’s Twitter,
Facebook or YouTube page
Annual report
Essential
Important Somewhat
useful
Seldom
useful
Tomorrow’s Investment Rules 2.0 | | Ernst & Young LLP
28 29 9_Yaf$kaf[]*(),$afn]klgjk`Yn]k`gof[gfkakl]f[qj]_Yj\af_ l`]kgmj[]k^jgeo`a[`l`]qhj]^]j_]llaf_l`]ajfgfÕfYf[aYd af^gjeYlagf&;gehYfa]kÌYffmYdj]hgjlk$[gfka\]j]\]kk]flaYd Zq,,&,g^j]khgf\]flkafl`]*()-klm\qYf\Zq,.&0afl`] *(),klm\q$jYfcÕjklafZgl`q]Yjk&Afl]_jYl]\j]hgjlk oal`gmlY kh][aÕ]\kgmj[]!$k]]fYk]kk]flaYdZqYZgml*.g^j]khgf\]flk
in 2015 and 2014, rank second in both years.
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YouTube) gained popularity with investors since 2014. They
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them to this level in 2015. (Still, social media endorsement in
Zgl`q]Yjk`YkZ]]fj]dYlan]dqkeYdd$h]j`Yhk^gjYfmeZ]jg^
reasons. Perhaps institutional investors have simply not yet joined
l`]kg[aYde]\aYj]ngdmlagf$Yj]kmkha[agmkg^l`akkladd%f]oe]Yfk g^\akk]eafYlaf_af^gjeYlagf$gjk]]l`]gn]jYddkgmj[]Ykd]kk mk]^md\m]lgalkZjgY\Yf\mf]n]fjgd]af\akk]eafYlaf_[gehYfq af^gjeYlagf&!O`]l`]jgjfglkg[aYde]\aYYkYo`gd]oadd[gflafm]
to gain popularity with investors warrants watching.
AfY\\alagflghj]^]jjaf_akkm]jkl`]ek]dn]kYkl`]kgmj[]g^ fgfÕfYf[aYdaf^gjeYlagf$afn]klgjkkh][aÕ[YddqnYdm]ZgYj\%d]n]d Y[[gmflYZadalqZ]`af\Y[gehYfqÌkfgfÕfYf[aYdaf^gjeYlagf3 0(&(g^j]khgf\]flkk]]eYf\Ylgjqgn]jka_`lg^Y[gehYfqÌk fgfÕfYf[aYdj]hgjlaf_ZqalkZgYj\Yk]al`]j]kk]flaYdgjaehgjlYfl& KaeadYjdq$egj]l`Yfl`j]]%^gmjl`kg^j]khgf\]flk[gfka\]j gn]jka_`lg^km[`j]hgjlaf_Zql`]ZgYj\ÌkYm\al[geeall]]Èoal` gjoal`gmlaf\]h]f\]fln]jaÕ[YlagfÈlgZ]]kk]flaYdgjaehgjlYfl (see Figure 4.4). L`]`]Y\g^j]khgfkaZd]afn]klaf_YlYMCYkk]leYfY_]e]fl Õjeoal`MK,*-Zaddagfaf9ME$imgl]\]Yjda]j$]phdYafkl`] Y[[gmflYZadalq`akÕjek]]ck^jge[gehYfa]kj]_Yj\af_=K? Yf\gl`]jfgfÕfYf[aYdaf^gjeYlagf2É:gYj\%d]n]dgn]jka_`lak
increasingly important. We’re starting to think, ‘What is the
dgf_%l]jekljYl]_qg^l`]k][gehYfa]k$Yf\`goYj]l`]qlYcaf_
into account these environmental limits to growth in their duty
h]j^gjeYf[]SYkZgYj\e]eZ]jkU7ÌL`]gfdqYj]Yo`]j]qgm _]ll`YlnakaZadalqak^jgel`]ZgYj\alk]d^&Kg$`Ynaf_ZgYj\%d]n]d
oversight is incredibly valuable.”
Indeed, the value investors assign to the company accountability
Z]`af\fgfÕfYf[aYdaf^gjeYlagf`Yk_jgofgfYddd]n]dk&L`] 0(&(g^afn]klgjko`g[gfka\]jeYf\YlgjqZgYj\gn]jka_`l aehgjlYfllg\Yq`Yk_jgof^jge.+&0af*(),&KaeadYjdq$l`] hjghgjlagfkg^afn]klgjko`gk]]gn]jka_`lZqY[gehYfqÌkYm\al [geeall]]oal`Yf\oal`gmlaf\]h]f\]fln]jaÕ[Ylagf`Yn]Ydkg grown since 2014. ;d]Yjdq$Ykafn]klgjk`Yn]eY\]fgfÕfYf[aYdaf^gjeYlagfYegj] \]daZ]jYl]$kljm[lmj]\hYjlg^l`]aj\][akagfeYcaf_hjg[]kk$
they have grown more concerned about the accuracy and
l`gjgm_`f]kkg^l`akaf^gjeYlagf&Afl]jekg^l`][gfl]flg^l`ak af^gjeYlagf$afn]klgjknYdm]af^gjeYlagfl`Yl`]dhkl`]e[gehYj] [gehYfa]koal`afYk][lgjYf\hjgna\]kl`]eoal`Y^gjoYj\% dggcaf_na]oaflg[gehYfqh]j^gjeYf[]Yf\jakc&Afl]jekg^l`] kgmj[]g^l`akaf^gjeYlagf$afn]klgjknYdm]af^gjeYlagf\aj][ldq ^jgel`][gehYfa]kYZgmlo`a[`l`]qYj]eYcaf_afn]kle]fl \][akagfk&Afl]jekg^Y[[gmflYZadalq^gjl`akaf^gjeYlagf$afn]klgjk oYflallg[YjjqYk]Ydg^YhhjgnYd^jgel`]n]jqlghg^l`] [gjhgjYl]dY\\]j& 9ko]k]]dYl]jafl`akj]hgjl$l`akoak`daklgf l`]hYjlg^afn]klgjkg^^]jkYj][ah]lgakkm]jkdggcaf_lgoaff]o investment.)
>a_mj],&,&Afn]klgjknYdm]Y[gehYfqËklgh%d]n]dYhhjgnYdg^alkfgfÔfYf[aYdj]hgjlaf_
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FgfÕfYf[aYdaf^gjeYlagfÈalkhjgnakagfZqakkm]jkYf\alkmk] by investors — varies substantially around the world, largely due lgl`]eYlmjalqg^l`]][gfgea]kafo`a[`akkm]jkYf\afn]klgjk gh]jYl]&KYqkl`]`]Y\g^j]khgfkaZd]afn]klaf_YlYMCYkk]l eYfY_]e]flÕje$ÉAl`afcl`Ylafegklg^l`]]e]j_af_eYjc]lk$ l`]eYlmjalqg^l`]][gfgea]k$l`]hgdala[Ydkqkl]ek$Yf\ j]_mdYlgjqkqkl]eke]Yfl`Yld]n]dkg^\ak[dgkmj]$af[gehYjakgf to Western markets, tend to be a lot lower.”É@go]n]j$]n]fafl`]]e]j_af_eYjc]lk$Ê[gflafm]kl`akafn]klgj$ “there’s a lot more concern about governance because their corporate governance standards seem to be lower than in the =mjgh]YfgjFgjl`9e]ja[YfeYjc]lk&ÊAfn]klgjkogjd\oa\] Y[cfgod]\_]l`YlYegf_fgfÕfYf[aYd^Y[lgjkYf\kh][aÕ[Yddq =K?$alak[gjhgjYl]_gn]jfYf[]l`Ylegklg^l]fafÖm]f[]kl`] potential value that can be captured by investors.
Europe and Australia
Alk]]ek[d]Yjl`Ylafn]klgjkafl`]\]n]dgh]\eYjc]lkg^=mjgh] d]Y\l`]ajh]]jk]dk]o`]j]afegj]^gjeYddqafl]_jYlaf_=K? aflgl`]aj\][akagfeYcaf_&Af=mjgh]$,*&*g^j]khgf\]flkÈ more than any other region — report conducting a structured, e]l`g\a[Yd]nYdmYlagfg^[gehYfa]kÌ]fnajgfe]flYdYf\kg[aYd impact statements (see Figure 5.1).
The regional view: Europe still
leads, but ESG evaluations
increasing globally
->a_mj]-&)&Kgda\eYbgjala]kafYddj]_agfkkmjn]q]\]nYdmYl]=K?af^gjeYlagfmkaf_kljm[lmj]\
e]l`g\k$af^gjeYd]nYdmYlagfgjl`aj\%hYjlq_ma\]daf]k
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Mandatory board oversight
9m\al[geeall]]gn]jka_`loal`af\]h]f\]fln]jaÕ[Ylagf
Audit committee oversight
Shareholder approval at a company’s annual meeting
31.6%
37.4%
19.4%
11.6%
36.4%
40.9%
18.2%
4.5%
38.7%
39.4%
14.8%
7.1%
37.4%
42.6%
18.7%
1.3%
Essential
Important Useful
Not important
We usually conduct a structured, methodical evaluation
We usually evaluate environmental and
kg[aYdaehY[lklYl]e]flkaf^gjeYddq O]mkmYddqj]dqgf_ma\]daf]k^jgeY l`aj\hYjlqkm[`Ykl`]MFHjaf[ahd]k^gj
Responsible Investments We conduct little or no review
42.2% 22.9% 15.7% 19.3% 41.0% 16.4% 11.5% 31.1% 30.4% 43.5% 13.0% 13.0%
