ESG Reporting – Does it make a difference ?

Kirein Franck

Triple bottom lime investing conference 2006

Paris, November 10th, 2006

imug Beratungsgesellschaftfür sozial-ökologische InnovationenBrühlstraße 1130169 Hannover

Fon: +49.511.12196-19Fax: +49.511.12196-95Email: franck@imug.dewww: ethisches-investment.de

                                                      

Content

1. ESG reporting today

2. New key public policy initiatives

3. Investors‘ alliances

4. ESG reporting and performance

5. Perspectives

Continuous rise of reports on ESG topics

ESG Reporting

How does public policy respond?Overview on key new initiatives

Legislation based on EC accounts modernisation directive2003 / 51

UNCTAD Guidance on Corporate Responsibility Indicators

Governement-linked pension funds establish SRI strategies (France, Belgium, Norway..)

Public policy

UK – Operating and Financial Review OFR

Responding to EC accounts modernisation directive 2003/51 Currently under construction A balanced and comprehensive analysis of the development,

performance and position of the business The OFR will describe principal risks and uncertainties, which

are likely to affect the business’ future development, performance and position

It will use appropriate financial and other key performance indicators

And it will include detailed environmental, employee, social and community matters and policies

Public policy – modernisation directive

UK – Operating and Financial Review OFR

Study of Black Sun (UK) on current reporting performance of 23 FTSE companies

Public policy – modernisation directive

Germany – Handelsgesetzbuch (Commercial Code)

Responding to EC accounts modernisation directive 2003/51 Legislation is completed (§315) The annual report has to contain a „balanced and

comprehensive analysis of the development and the position of the considated group“

It will use appropriate financial and other key performance indicators

And it needs to include non-financial key performance indicators like information on environmental and employee matters as far as they are relevant to the understanding of the business’ development or its position”.

Public policy – modernisation directive

UNCTAD Guidance on Corporate Responsibility Indicators in Annual Reports

Pursued by the UNCTAD Intergovernmental Working Group of Experts on Standards of Accounting and Reporting (ISAR)

Comprised of 217 experts in 72 countries

Ongoing process, recent meetings in October 2006

Giving recommendations to governements and regulators in developing economies + companies operating there

Aiming at attracting investors through greater transparency

Public policy – UNCTAD (UN Conference on Trade and Development)

UNCTAD focus

Two key point on the agenda of ISAR

Practical implementation of IFRS standards globally

Corporate responsibility

Annual review papers make explicit mention of ESG Reporting(Review of International Accounting Issues, Corporate Governance Disclosure, Corporate Responsibility)

Reporting should focus on impact at national level (rather than compiling aggregated data).

Areas for which indicators are recommended include eco-efficiency, corporate governance, human rights, corruption, health and Safety, labour practices

Public policy – UNCTAD (UN Conference on Trade and Development)

Norwegian Governement Pension Fund

One of the largest pension funds globally with 180 bio. €

Has set up ist Council of Ethics which did exclude 19 companies from its portfolio so far (including Wal Mart)

Regular reviews take place based on information and analysis and reporting provided by EIRIS

Criteria include systematic violation of human rights and severe environmental damage

Public policy – Pension fund strategy

Further interesting cases

Denmark: Law on environmental reporting (2002) France: New Economic Regulations (2001) require reporting on

environmental and social issues from 700 listed companies Throughout Europe: Pension funds are required to report on

SEE criteria (B, F, DE, ES, SE, UK) South Africa: King Report (2002) on Corporate Governance

mandates directors of companies listed on the Johannesburg Stock Exchange to undertake Social and Ethical Accounting, Auditing and Reporting exercisess

Public policy

Who is asking for more ESG reporting?

Investors lobbying on more ESG disclosure

Investor Statement on Climate Change will influence and encourage governments, engage with

companies, develop tools to assess risks

Major US institutional Investors press S&P 500 for better disclosure and reporting in accordance with GRI

UN Principles for Responsible Investment „We will seek appropriate disclosure on ESG issues by the entities

in which we invest“

Carbon Disclosure Project Covering 2100 companies in 2006, support letters from Angela

Merkel and Tony Blair

Investors’ alliances

Effects

Stock quoted companies are reporting (more than privately held companies), because investors keep asking for it

Governments respond to the investors‘ demand by various initiatives mainly aiming at transparency

Companies which are reporting on ESG issues are more likely to be involved in ESG related activities

Reports are the key source of information on companies‘ practices

Does this mean public disclosure is leading to a better ESG performance ?

Investors’ alliances

How does public disclosure affect performance ?

Stock quoted companies do report more, but reporting alone does not improve performance

Performance is improved if and when somebody is monitoring it systematically

Investors regularly monitor stock quoted companies

-> see next chart for improvements on environmental performance for ESG reporters and non-reporters

ESG Reporting and Performance

Environmental performance improvement

ESG Reporting and Performance

Environmental Performance Global Comparison 2003-2006*

0

200

400

600

800

High impact - nodata/no

improvement

Med impact - nodata/no

improvement

Low impact - nodata/no

improvement

minorimprovement

significantimprovement

majorimprovement

2006 - all countries 2003 - all countries

Companies reporting on ESG issues improve over time.

(Data from the Ethical Portfolio Manager Database, EIRIS)

ESG reporting will make a difference

1. There is growing demand for analysis and assessment of ESG reporting results

Problems are comparability of data, strategic integration of ESG issues, credibility of content availability of assessments

2. Public policy initiatives will focus on increasing transparency

As a consequence it will be important for investors and public interest groups interested in disclosure to be transparent on performance on ESG issues

Perspectives

ESG reporting will make a difference

3. Based on market demand and emerging public policies ESG reporting will continue to improve both on scope and quality

There is a clear link between reporting and performing and ESG issues.

While it is a great challenge to report adequately on ESG issues, reporting formats will be diverse and independent assessments will make reporting and performance comparable.

Perspectives

Kontakt

imug GmbHKirein Franck

Brühlstraße 1130169 Hannover

Fon: +49.511.12196-19Fax: +49.511.12196-95Email: franck@imug.dewww.imug.de www.ethisches-investment.de