transparency, audit & control within a sri regulatory ... · pdf filesummary report on sri...

Federation of the

Belgian Financial Sector

Transparency, audit & control within a SRI regulatory framework

Working paper of the Febelfin/Belsif SRI Platform meetings,

aiming at detailing the substance and procedures regarding transparency, verifiability and control of SRI products

Indispensable parts for a minimal norm on SRI

SRI Platform supervision

& guidance by BELSIF

Research & advice by Forum ETHIBEL

Commissioned by Febelfin

Brussels, November 2011

Forum ETHIBEL asbl, Rue du Progrès 333/7, 1030 Brussels T: 02 206 11 11 | E: [email protected] | W: www.ethibel.org

Summary report on SRI transparency, verifiability and control – p. 2/33

“Transparency, audit & control within a SRI regulatory framework”

is a summary report of the Febelfin/Belsif SRI platform 2010-2011 meetings, which discussed a roadmap

for detailing the contents and procedures regarding transparency and verifiability of SRI products

Brussels, November 2011

© Forum ETHIBEL asbl, Rue du Progrès 333/7, 1030 Brussels T: +32 2 20611 11 | E: [email protected] | W: www.ethibel.org

Research, advice & editing: Herwig Peeters, Forum ETHIBEL

with gratitude to Matilde Defraeije


TABLE OF CONTENTS

TABLE OF CONTENTS 3

Introduction 5

The Febelfin Platform 5

Reference documents and the three pillar model 5

Assistance to the process 5

The Platform sessions 6

CHAPTER 1 7

Modus operandi & philosophy 7

Beyond voluntariness 7

Proposed working method 7

CHAPTER 2 8

Type 1 regulation: 8

Non-directive, missionary laws and open end transparency 8

Evaluation of the transparency laws for Belgian pension institutions and UCI 8

SRI disclosure in Belgium 8

Possible ideas and mindsets 8

POD DO/SPP DD and SRI disclosure in Belgium 9

Enhancing market reward for CSR (EC communication 25/10/2011) 9

EFAMA Report on Responsible Investment (04/2011) 9

Conclusions and advice 10

CHAPTER 3 11

Type 2 regulation: More directive, regulatory initiatives and closed end transparency

and the case of Australia 11 Practical lessons from the Australian Disclosure Guidelines 11

Multidimensional guidelines 11

Disclosure principles 11

What must be disclosed? 11

Guidance and monitoring 12

Reported conclusions 12

Conclusions and advice on ASIC Guidelines 12

Institutional investors, superannuation funds and the Cooper review 12

Progress report on the implementation of ESG practices 13

The APRA review 13

RIAA and the Responsible Investment Certification Program 13

Some referred organisations 14

Conclusions and advice on the ‘Australian case’ 14

CHAPTER 4 15

Debate on the enlargement of fiduciary duties to ESG risk management issues 15

Changing regulatory environment 15

A legal framework for integration of ESG issues into institutional investment 15

How and when should government play a role? 15

CHAPTER 5 17


Voluntary codes of conduct and their audit schemes 17

Stewardship codes possibly mark a new SRI era 17

UN PRI: United Nation Principles of Responsible Investment 17

The UK Stewardship Code 17

The Code for Responsible Investing in South Africa (CRISA) 18

The United Nations Global Compact 19



CHAPTER 6 21


Product labelling 21

Das Österreichische Umweltzeichen für Grüne Fonds 21

RIAA Certification 21

The Novethic SRI label 21

Ethibel PIONEER and Ethibel EXCELLENCE 22


CHAPTER 7 24


Auto-regulation for transparency with reality check 24

EUROSIF Transparency Code for SRI Retail Fund Sector: consumer concerns 24

The European Sustainable Investment Forum 24

The 2011 update 24


Belgian Asset Managers Association’s approach 25

CHAPTER 8 26


Supply chain approach with quality audit and professional requirements 26

EC view on convergence, diversity and transparency of CSR tools 26

Corporate Sustainability and Responsibility Research (CSRR) Quality Standard 26

Basic principles and referential 26

Association for Independent Corporate Sustainability and Responsibility Research 26

11 Commitments and 9 Integrity Principles and Ethical Commitments 26

The “Transparency Matrix” 27


The Global Initiative for Sustainability Ratings (GISR) 28

GISR’s mission 28

How will GISR certify conformance with its ratings standard? 29


CHAPTER 9 30

Conclusions: 30

Features and components of the required accountability and verification system 30

Transparency and disclosure 30

Accountability 30

15 general principles and conclusions 30

Platform discussion on the advice and format of the deliverables 32

Next steps 32


Introduction

The Febelfin Platform In May 2010, Febelfin1 launched a “Platform on Socially Responsible Banking and Investing” (abbrevi-ated “the Febelfin Platform” or “the Platform”), composed of NGO’s and Febelfin members. One of the objectives of this platform was to identify how financial institutions could gain or restore the confi-dence of the public after the financial crisis of 2008.

During the first meeting, several solutions were proposed by the attendees and working groups were created in order to explore these different solutions. The Socially Responsible Investments (SRI) and the Socially Responsible Banking platforms were created.

The SRI working group was first lead by Febelfin, then (as from April 2011) by BELSIF, the Belgian Fo-rum for Sustainable & Socially Responsible Investments.

The goal of this working group was to establish a minimal norm for Socially Responsible Investing (ab-breviated “the SRI norm”) to guarantee the quality of SRI products and the protection of the con-sumers/investors (both retail and institutional). The SRI norm would define the minimal requirements for any SRI product on the Belgian market.

Reference documents and the three pillar model Right from the start, the SRI norm was conceived by the Platform to be based on 3 complimentary as-pects, for which minimal requirements would be recommended:

(1) The use of negative (exclusion) criteria (2) The use of positive criteria and other pro-active approaches (3) The aspects of transparency, verifiability and control

The idea of a 3 pillar model itself is based on a number of preliminary documents:

(1) The Réseau Financement Alternatif study, « Étude portant sur une proposition de définition d’une norme légale d’investissement socialement responsable », published early 2009.

(2) The pre-law propositions (projets de loi) and law propostions (proposition de loi) Mahoux-Arena, “Proposition de loi visant la promotion des investissements socialement responsables”, published on 25 02 2011.

(3) The position paper of Belsif on a minimal norm, a consensus document supported by all members of Belsif.

The Platform decided to separate the positive & negative criteria aspects on the one hand and the transparency & control aspects on the other hand in terms of operational meetings.

The Platform decided as well to react and to design a position paper reflecting the opinion of the differ-ent members of the Platform regarding the pre-law proposition. In the meanwhile, the pre-law propo-sition became a law proposition. The final position paper of the platform, together with the position paper from Assuralia, was sent to the politicians for consultation in July 2011.

As the Platform had numerous concerns over this law proposition and serious doubts about the chanc-es to see this law proposition adopted, it decided to formulate its own recommendations for SRI prod-ucts and to continue the work that was already realised.

Assistance to the process Forum ETHIBEL was engaged to provide assistance to the Platform while working out a roadmap for the aspects transparency, audit and control of a SRI minimal norm.

The inputs, contributions and proposals must meet the following requirements:

(1) Provide the content and procedural details enabling transparency, verifiability and control for SRI

1 Febelfin is the Belgian Financial Sector Federation representing 238 members, which are large banks, small and medium-sized banks, niche players, providers of infrastructure, etc. Febelfin speaks on behalf of the financial sector as a whole (ex-cept for the insurance companies) and tries to reconcile their interests with those of the policy makers, supervisors, trade associations and pressure groups at the national and European level.


products on the Belgian market; (2) Be applicable in the Belgian context; (3) Have the ability to be implemented on a European level; (4) Incorporate other elements of the minimal norm into the proposals; (5) Create a framework for self-regulation, however practicable as well for legislative work and juridi-

cal refining; (6) Include proposals that can be supported by all (quasi-consensus based); (7) Pay attention to the governance aspects, having the potential to take into account political scenar-

io’s, however formulating alternatives as well; (8) Support dialogue within the Platform

The following aspects should be included into the dialogue and proposals:

(1) The existing transparency laws in Belgium, especially the one on the level of ICB’s; (2) The possibilities and limitations to self-regulation; (3) The difference between “comply or explain”, “comply and explain”, “apply or explain”; (4) Examples of other national, legal frameworks on the level of SRI; (5) The difference between reality check of quality check; (6) The supply chain approach; (7) Considerations on the Eurosif Transparency Code (Eurosif TC 3.0) and the Quality Standard on

Corporate Sustainability and Responsibility Research (CSRR-QS 2.1).

The Platform sessions

13/09/2010 Introductory session

14/12/2010 SRI Transparency, ongoing trends and the changing regulatory environment Proposed working method: learn from best practices and design the soundest solutions Type 1 regulation: Non-directive, ‘missionary’ laws = open end transparency [UK, FR,

DE, SE, NO, AT, IT, BE] The case of Belgium and its transparency laws

20/01/2011 Type 2 regulation: More directive, regulatory initiatives = closed end transparency The case of Australia and its ASIC guidelines; the Cooper Review and the APRA review;

the RIAA Certificate

28/04/2011 The debate on the enlargement of fiduciary duties to ESG risk management issues Type 3 regulation: Voluntary codes of conduct and their audit schemes. The UN Principles on Responsible Investment; the UK Stewardship Code; the Code for

Responsible Investing in South Africa; the UN global Compact. Type 4 regulation: Product labelling. Eco-labels, Das Österreichische Umweltzeichen für Grüne Fonds; RIAA certification; the

Novethic SRI label; Ethibel Pioneer and Excellence.

27/06/2011 Type 5 regulation: Auto-regulation for good transparency with reality check verification Eurosif Transparency Code and its reality checks and verifications Type 6 regulation: Supply chain approach with quality audit CSRR Quality Standard and its audit cycles

25/11/2011 Last updates What lessons can be learned? Which are the core requirement and features of a minimal norm on the level of audit,

verifiability and control? What should be the minimal keystones?


CHAPTER 1

Modus operandi & philosophy

Beyond voluntariness Even without expressing a preference for a self-regulatory or a legal framework, the Platform opts for solutions that are not voluntary or noncommittal regarding voluntary transparency and accountability.

Most existing self-regulation or legal initiatives and frame-works seem to be based on voluntary disclo-sure clauses. Seemingly WG SRI has chosen another stance. Disclosure is not an add on, but should be a full and integral part of a minimal norm.

Proposed working method The proposed working method consists in learning from best practices, discuss the strong and weak points and the applicability in a Belgian and European context and design the soundest solutions.

Therefore it is instructive to have a practical reading of best available frameworks and deduce im-portant features and backgrounds.

The Platform should define what it expects as connoted to SRI ‘transparency’, ‘accountability’, ‘audit’ and ‘certification’. Also the scope of the SRI audit should be defined, including the stakeholders, mar-ket players and supply chain issues.

Even after many years of experience it remains difficult to define the boundaries of SRI. What is in-cluded in “SRI” and what is not? What level of complexity is ‘allowed”? Are there any limitations or re-quirements? How far may diversity and pluriformity go? The discussion on the definitions has recently been reopened on the level of Eurosif.

A roadmap is defined with multiple tracks to investigate. The output of the sessions should be defined by the Platform and every participant’s input is contributory and directive.


CHAPTER 2

Type 1 regulation: Non-directive, missionary laws and open end transparency

Among at least 7 other European countries (UK, France, Germany, Sweden, Norway, Austria and Ita-ly), Belgium created its own transparency regulations in 2003 for pension systems and in 2004 for UCI2 under Belgium law and for UCI without a European passport.

Evaluation of the transparency laws for Belgian pension institutions and CIS Pension systems and UCI are legally obliged to disclose whether or not their investments take SEE as-pects into account.

In 2008 POD DO/SPP DD has ordered an evaluation study on the Transparency Laws: “Onderzoek en evaluatie van de transparantieregeling in het kader van de aanvullende pensioenen en de instellingen voor collectieve belegging. Het effect van de invoering van transparantieclausules inzake het betrekken van sociale, ethische en leefmilieuaspecten bij het beheer van de middelen”, Forum ETHIBEL, 10/2009.

The POD DO study has shown that these regulations improved transparency to a small degree, but were not effective in stimulating SRI. The regulations had a zero impact on the management of pen-sion systems and UCI.

In general, the interviewees argued that there a framework, a minimum norm or a best practice that they could use to design a SEE policy, was non-existent.

SRI disclosure in Belgium The analysis of UCI sector illustrates compliance in every prospectus and around 63% in case of the annual report.

Unfortunately, the statement about the SEE policy is rather limited, except in the case of SRI funds. 60% of the UCI referred to the law prohibiting financing the production of antipersonnel mines and submunitions. This cannot be taken as a well-considered SEE policy.

Moreover, the transparency regulation led to an increase of the administrative burden and was fre-quently delegated to the legal and compliance department or actuarial consultants.

The Belgian SRI market has grown steadily in terms of percentage of the total UCI market at the end of 2010 (6.96% according to Beama3 ; Mira4 index for public sustainable investing: 8.65%). The inter-viewed asset managers have confirmed the success and attributed the growth to the financial innova-tion, internal policy and a clear choice for SRI. They argued that the development evolved inde-pendently without any influence of the transparency laws.

Possible ideas and mindsets Mindset 1: Strengthen or clarify or detail the existing legal requirements [regulatory]

Mindset 2: Mandatory publication of the transparency report. Mandatory inclusion of ESG aspects into the Statement of Investing Principles [regulatory]

Mindset 3: Minimal norm SRI [regulatory]

Mindset 4: Audit of the SRI research/assessment practices [procedural]

Mindset 5: Progress reports, statistics, benchmarks [facilitating]

2 UCI = Undertaking for Collective Investments 3 BEAMA = Belgian Asset Managers Association. Since 2001, BEAMA is active in the monitoring and quality control of sus-tainable and socially responsible investing UCI. 4 MIRA = Flanders Environment Report, produced by the Flemish Environment Agency (VMM). MIRA provides annual statis-tics and a progress report on Socially Responsible Investments (SRI) and Savings (SRS) in Belgium backtracked until 1995.


Mindset 6: ‘Special purpose vehicles’ (SPVs) for pensions systems enabling investment in socially responsible projects in the local/social economy [facilitating]

Mindset 7: Organise a debate on fiduciary duties, liability and the mandatory integration ESG inte-gration into institutional investments [facilitating]

Mindset 8: Organise ESG education and training [facilitating]

POD DO/SPP DD and SRI disclosure in Belgium Some of the conclusions as expressed by the federal agency sound like:

“The federal action plan on CSR and SRI should be updated”.

“The key conclusion is that the law falls short grossly. By lack of any benchmark or “best practice” or any standard or international convention, the law looses its authority as “soft law”. The “comply or ex-plain” rule is simply not applicable. According to the analyst, the law rather has the status of a “zero impact law”. The Working Group CSR/SRI (a governmental think thank) proposes to consider the Aus-tralian directives as a basis to reformulate and tighten the Belgian law”.

Enhancing market reward for CSR (EC communication 25/10/2011) In a recent communication the European Commission announces its intention to consider a require-ment to all investment funds and financial institutions to inform their clients about any ethical or re-sponsible investment criteria.

“Communication from the Commission to the European Parliament, the Council, the European Econom-ic and Social Committee and the Committee of the Regions. A renewed EU strategy 2011-14 for Corpo-rate Social Responsibility”, Brussels, 25/10/2011 [COM(2011) 681 final]:

(…)

4. An Agenda for Action 2011-2014

4.4. Enhancing market reward for CSR

4.4.3. Investment

“In response to the financial crisis, the Commission is making a number of regulatory proposals

to ensure a more responsible and transparent financial system. By taking adequate account of

relevant non-financial information, investors can contribute to a more efficient allocation of

capital and better achieve longer-term investment goals. The Commission is supporting capaci-

ty-building for investors on how to integrate non-financial information into investment deci-

sions. In this context, the Commission encourages enterprises to disclose information related

to the implementation of good tax governance standards.

European asset managers and asset owners, especially pension funds, are invited to sign up to

the UN Principles for Responsible Investment. Public authorities have a particular responsibility

to promote CSR in enterprises which they own or in which they invest.

The Commission intends to:

7. Consider a requirement on all investment funds and financial institutions to inform all their

clients (citizens, enterprises, public authorities etc.) about any ethical or responsible invest-

ment criteria they apply or any standards and codes to which they adhere.

(…)

The above extracts of the awaited communication of the EC on the renewed EU strategy 2011-14 for Corporate Social Responsibility show the (preliminary) defensive position of the EC regarding SRI transparency and accountability, in line with the existing voluntary initiatives of a number of member states.

EFAMA Report on Responsible Investment (04/2011) EFAMA5 has issued a report on Responsible Investment on 08/04/2011.

According to EFAMA, RI cannot be captured by a single regime; a variety of approaches need to be al-

5 EFAMA = the European Fund and Asset Management Association


lowed for. EFAMA recognizes of lack of standardisation in this area and considers this to be an issue which is not easily resolved. The European Union should support self regulatory initiatives on transpar-ency of RI.

Furthermore, if an investment manager provides RI products, it must commit to an adequate amount of transparency regarding its processes so that investors are able to evaluate and compare how in-vestment managers meet demands for RI. EFAMA would welcome universal standards in this area. This would be facilitated by European industry guidance on transparency, which EFAMA aims to be instru-mental in developing.

Conclusions and advice The national legislations regarding ESG transparency intend to broaden up SRI to traditional investing. The regulatory framework must be considered as weak and poorly detailed. The definitions of ESG and SRI remain non univocal. Furthermore most regulations seem to be connected to retail SRI products, which are embedded in quite a different liability context than institutional products, such as pension funds.

National initiatives, providing regulatory rules regarding ESG and/or SRI transparency for all or most investment funds and institutes seem to inspire the European Commission for ditto regulations, despite the observed lack of performance and success.

These non-directive, ‘missionary’ laws try to convince traditional players to include ESG considerations into asset management. The open end transparency character of the regulations offers a weak back-bone for transitions. The transparency laws fail in providing real, precise rules to promote transparency and offer no guidance to the Platform.


CHAPTER 3

Type 2 regulation: More directive, regulatory initiatives and closed end transparency and the case of Australia

The Australian Financial Services Reform Act 2001 was promulgated in March 2002 and requires fund managers and financial product providers to state “the extent to which labour standards or environ-mental, social or ethical considerations are taken into account in the selection, retention or realization of the investment”. [Regulatory Guide 45: Section 1013DA disclosure guidelines. ASIC guidelines to product issuers for disclosure about labour standards or environmental, social and ethical considera-tions in Product Disclosure Statements (PDS), December 2003]. The Australian Disclosure Guidelines and the structures of and the dialogue between the Australian fi-nancial authorities and players and the SRI community are a source of (critical) inspiration.

Practical lessons from the Australian Disclosure Guidelines ASIC guidelines require product issuers to disclose the applied labour standards or environmental, so-cial and ethical considerations in the Product Disclosure Statements (PDS) (similar to our prospectus).

The financial authorities, the Australian Securities & Investments Commission, are involved in the regulation and control. The system is mandatory and detailed and is mainly consumer oriented (retail clients).

The purpose of the guidance is to: (1) Enhance consumers’ ability to compare products and to select the product that best matches any

goals they may have regarding these standards or considerations; (2) Provide industry with greater certainty about how it can meet disclosure requirements without in-

hibiting developments in this area or product design, and without being commercially unrealistic or exposing product issuers to unreasonable levels of risk;

(3) Ensure that products are “true to label” and do what they say they do.

Multidimensional guidelines These guidelines are designed to facilitate: (1) Transparency. Provide consumers with sufficient relevant information to understand the approach

of a fund to these issues; (2) Accuracy. Ensure presented or omitted information does not create a misleading or deceptive im-

pression; (3) Comprehensibility. Present information in a simple and concise manner, recognising that too much

information is as potentially problematic for consumers as too little; and (4) Comparability. Present information in a manner that allows consumers to compare different prod-

ucts.

Disclosure principles “These guidelines do not set out what constitutes a labour standard or an environmental, social or eth-ical consideration, or what methodology product issuers should use for taking these issues into ac-count.

The guidelines do, however, make it clear that you must disclose which of these standards and consid-erations you take into account and how.

If you have no predetermined approach, then this too must be clear.

The more a product is marketed on the basis that such standards and considerations are taken into account, the more detail is required”.

What must be disclosed? A product issuer must disclose:


(1) If labour standards or environmental, social or ethical considerations are taken into account in se-lecting, retaining and realising an investment;

(2) The extent to which these standards and considerations are taken into account in selecting an investment, including methodology and any weighting system used;

(3) A description of the retention and realisation policies.

Guidance and monitoring ASIC provides qualitative, yet very precise guiding principles on how detailed the disclosure should be. The Guidelines contain a strong background section with information to the guidelines, including Princi-ples of good disclosure, which should: (1) Be timely (2) Be relevant and complete (3) Promote product understanding (4) Promote comparison (5) Highlight important information (6) Have regard to consumers’ needs

The ASIC disclosure guidelines provide clear statements on the required “Disclosure appearance” and “Monitoring and enforcement” rules to prevent breaches.

Reported conclusions In some instances, the quality of information had declined relative to the information supplied on a voluntary basis before the legislation took effect. The evidence supports a criticism of a regulatory lais-sez faire approach to self-reporting and an argument for more directed regulation of management pro-cesses.

How does it work in practice? A study of 86 SRI disclosure documents in Australia and New Zealand (which has an similar obligation) over a 4-year period from 2004-2007 found PDS summaries deficient in its ability to accurately reflect the portfolio construction styles and qualitative assessment processes which took into account ESG factors. It is hard to see whether this reference period still

Conclusions and advice on ASIC Guidelines The ASIC Guidelines seem to meet their objectives and provide genuine, flexible yet prescriptive rules. A key feature is the consumer orientation, which surely has a number of practical consequences. The ASIC Guidelines clearly go further than many existing disclosure initiatives.

Despite the many pros and comparative advantages, for some there are still plenty of improvements to be done, in terms of lack of information (supply chain, stakeholder approach, quality management sys-tems, professional rules, integrity rules, etc.). A key question is to what level self-declarative reports should be subjected to external audit practices.

Institutional investors, superannuation funds and the Cooper review The Superannuation System Review did comprehensively examine and analyse the Governance, Effi-ciency, Structure and Operation of Australia's superannuation system, including both compulsory and voluntary aspects (07/2010). The principle changes that the Australian Government had adopted from the Cooper recommendations are the establishment of low cost, simple superannuation accounts, based on the industry funds model of not-for-profit, with no commission and low fees. Other changes include infrastructure efficiencies through better use of technology, and heightened duties of superan-nuation trustees.

Another outcome, and more important for the work of the Platform, is the advice to Superannuation fund trustees to consider environmental, social and governance (ESG) risks in their investment deci-sions where appropriate, while guidelines such as those laid out by the United Nations Principles for Responsible Investment (UN PRI) should not be prescribed, according to the final report of the Cooper superannuation review. Recommendation 6.17 states that in developing investment strategies, trus-tees should explicitly consider both short and long term risks, consistent with their stated investment horizon. Trustees would not be required to make decisions based on ESG issues but as ESG issues rep-resent one type of long term risk, trustees should consider ESG issues as they think appropriate.


Progress report on the implementation of ESG practices A study by CAER and Seaclif Consulting (“Australian Superannuation Investments, A report on pro-gress made in implementation of ESG practices”, 12/2010) found out that, while some superannuation trustees are considering ESG factors in the investment process, many are confused about terminology and competing views about the extent to which they are able to take into account non-financial out-comes.

The study proposes 5 measures to encourage industry-wide implementation progress in ESG investing. These include: (1) Major super industry bodies should work together to establish a consistent understanding of the

term "ESG practices". (2) Regulators should clarify trustees' duties. (3) Super funds should demand more transparency from their investment managers. (4) Relevant industry bodies should promote the discussion of implementation experiences. (5) (last but not least) Funds should consider elevating the issue of ESG practices to the board and

management level, if they have not already done so.

The APRA review Senator Nick Sherry, the Minister for Superannuation and Corporate Law has asked the Australian Pru-dential Regulation Authority (APRA), to review its guidance to superannuation funds to take greater account of ESG issues in their investment practices.

“As large investors in Australian listed companies, super funds can have significant influence over those companies' operations and practices. This gives super funds the capacity to influence approaches to corporate social responsibility including management of non-financial risk. While companies are answerable to their shareholders in providing returns to them, there is a range of other factors which are also relevant. The APRA review is aimed at giving companies guidance as to finding an appropriate balance between returns and ESG factors”.

RIAA and the Responsible Investment Certification Program Responsible Investment Association Australasia (RIAA) promotes throughout Australia and New Zea-land the concept, practice and growth of investing that takes into consideration environmental, social, and ethical or governance issues. Membership is open to any business, organisation or investment pro-fessional (excluding listed companies) participating in the responsible investment field and who is committed to the RIAA's objectives and charter.

RIAA manages the “world's first certification program” (the Responsible Investment Certification Pro-gram) for providers of responsible investment products and services.

Current license categories include: Fund Manager | Superannuation Fund | Dealer Group | Financial Adviser | NGO. Licensees must adopt educational and disclosure practices. Applicants are being as-sessed pursuant to strict eligibility criteria by RIAA.

The Certification Program provides independent verification for the category of ‘Fund Manager’ per-formed by chartered accounting firm Grant Thornton.

The RIAA logo helps consumers to identify products and services that take environmental, social, and ethical or governance issues into account and is intended to make it easier for consumers to compare and contrast investment opportunities and make an informed choice.

Fund managers certified under the Responsible Investment Certification Program must meet the fol-lowing requirements: (1) Apply a systematic responsible investment methodology in selecting, realising and retaining in-

vestments. (2) Describe in detail their responsible investment methodology and explain the specific processes,

management systems and reporting frameworks followed for their responsible investment product or products.

(3) Disclose past performance results and a full list of stock holdings or investments (current six months prior for reasons of commercial in confidence);

(4) Have had their responsible investment methodology and processes independently verified by Grant Thornton.


Some referred organisations The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian fi-nancial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.

The Australian Securities & Investments Commission (ASIC) is an independent Australian Government body that acts as Australia’s corporate regulator. ASIC's role is to enforce and regulate company and financial services laws to protect Australian consumers, investors and creditors.

The Centre for Australian Ethical Research (CAER) was established to provide independent social and environmental data on companies operating in Australia and the Asia-Pacific region.

The Finance & Investment Advisory Board (the Board) was established to contribute to better out-comes in the ACT government’s financial dealings by enhancing financial returns and improved Gov-ernance.

Conclusions and advice on the ‘Australian case’ Australia surely has an interesting institutional and regulatory set-up to promote ESG/SRI transparen-cy, verifiability and audit aspects.

On the level of retail clients apparently two complimentary systems exist.

The ASIC Guidelines, particularly strong on the level of consumer orientation and comprehensibility, with levelled transparency requirements depending on the ESG exposure, with clear prescriptions and strong guidance, embedded in a regulatory and enforceable framework. The level of success and pene-tration is not yet entirely visible.

The success of RIAA’s Responsible Investment Certification Program shows somewhat embarrassingly the need for more basic transparency rules, however supported by external control and a (voluntary) consumer oriented certification logo.

On the level of institutional products and superannuation funds, no specific transparency regulations exist. However both the Cooper Review and the APPRA Review prompt trustees to consider ESG issues as risk and return factors.


CHAPTER 4

Debate on the enlargement of fiduciary duties to ESG risk management issues

This chapter describes the changing regulatory environment, provoked mainly by the rise of non-mandatory market-based codes of conduct and the changed mindset of governments. At the heart of the discussion lies the debate on the enlargement of fiduciary duties to ESG risks management issues.

Changing regulatory environment The discussions on the enlargement have been initiated by the UN Financial Initiative Asset Manage-ment Working Group (AMWG). Two publications have determined the shift: the ‘Freshfields’ and ‘Fidu-ciary II’ reports (see below).

Upcoming self-regulatory codes of conduct propel the incorporation of ESG considerations: UN PRI, UK Stewardship Code and the South African Code.

Strong recommendations on ESG integration have been issued in other countries, e.g. in Australia, where the APRA reviews guidance to superannuation funds to take account of ESG issues and the Cooper Review inciting trustees to consider ESG issues as they think appropriate.

A legal framework for integration of ESG issues into institutional investment A major focus of the UN FI Asset Management Working Group (AMWG) has been the work on the ma-teriality of ESG issues to securities valuation. Resistance remained on the basis of the belief that insti-tutional principals and their agents are legally prevented from taking account of such issues.

A key document in the ‘ESG literature’ is the 2005 report commissioned to Freshfields Bruckhaus Der-inger: “A legal framework for the integration of environmental, social and governance issues into insti-tutional investment”.

“Is the integration of ESG issues into investment policy voluntarily permitted, legally required or ham-pered by law and regulation; primarily as regards public and private pension funds, secondarily as re-gards insurance company reserves and mutual funds”? The “Freshfields Report” investigated 9 jurisdic-tions (AU, CA, DE, ES, FR, GB, IT, JP, US) and concluded that “Integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions”.

A major step forwards since the Freshfields Report is the initiation of the Principles of Responsible In-vestment in 2006.

The 2009 follow-on report “Fiduciary responsibility II” provides a legal roadmap for fiduciaries looking for concrete steps to make their commitment to responsible investment: “Fiduciary responsibility. Le-gal and practical aspects of integrating environmental, social and governance issues into institutional investment”. The report is giving more details, for specific users, such as the pension funds, with prac-tical modules for contracts, etc. A section is devoted on the 4 main sustainable and responsible in-vestment (SRI) strategies and the investment implications.

How and when should government play a role? Mandatory integration of ESG into risk assessments and fiduciary duties of (all) institutional mandates may obstruct or hamper typical SRI legislation.

Organising a debate within the financial sector on the advisability and impact of mandatory integration of ESG aspects into institutional investing was one of the proposals (‘Mindset 7’) in the POD DO/SPP DD Report on the Evaluation of the transparency laws for Belgian pension institutions and UCI.

A key question is the role of government and how and when governments should play a role in defining SRI, and how companies and investors should accordingly function. To that end, government roles seem to be quickly changing.

The role of governments may be the provision of a central framework with which companies and insti-tutional investors can refer to, when seeking to make a coordinated shift towards socially responsible


actions.

In essence, each piece of legislation requires institutional investors to develop an SRI framework by which they can be measured, yet leaves the specifics of what is socially responsible in the hands of each individual.

Central governments are beginning to assume a more active role in responsible investing. This role thus far has been less of a legislative one, and more of a way to measure institutional investors’ volun-tary willingness to operate within the best interest of society.


CHAPTER 5

Type 3 regulation: Voluntary codes of conduct and their audit schemes

Stewardship codes possibly mark a new SRI era Three upcoming self-regulatory codes of conduct, driving forwards the incorporation of ESG considera-tions are highlighted in this chapter: the UN PRI, the UK Stewardship Code and the South African Code. A fourth one, the Global Compact is included in this chapter and is briefly examined as well.

These codes are not extensively evaluated; the related transparency & disclosure requirements and possible screening or audit clauses however are of interest for the Platform.

UN PRI: United Nation Principles of Responsible Investment The United Nations-backed Principles for Responsible Investment Initiative (PRI) is a network of inter-national investors working together to put the six Principles for Responsible Investment into practice.

The Principles were devised by the investment community. They reflect the view that environmental, social and corporate governance (ESG) issues can affect the performance of investment portfolios and therefore must be given appropriate consideration by investors if they are to fulfil their fiduciary (or equivalent) duty. The Principles provide a voluntary framework by which all investors can incorporate ESG issues into their decision-making and ownership practices and so better align their objectives with those of society at large.

The Principles for Responsible Investment has two UN partners: United Nations Environment Pro-gramme Finance Initiative (UNEP FI) and the United Nations Global Compact.

The number of the signatories is 915 (10/2011) including asset owners, investment managers and pro-fessional service partners.

6 principles of Responsible Investment

“Signatories will: (1) Incorporate ESG issues into investment analysis and decision-making processes. (2) Be active owners and incorporate ESG issues into our ownership policies and practices. (3) Seek appropriate disclosure on ESG issues by the entities in which we invest. (4) Promote acceptance and implementation of the Principles within the investment industry. (5) Work together to enhance our effectiveness in implementing the Principles. (6) Report on activities and progress towards implementing the Principles.”

Audit and control. The UN PRI investigates annually the implementation progress of the principles by its signatories (Report on Progress). Questionnaires are being sent to all members. Participation is not mandatory. Generally, the response rate is significant (80%). The questions focus on each principle and are analysed by the UN PRI. There is no sanction system in case commitments and implementa-tions are not in line. UN PRI justifies the lack of legal or regulatory sanctions by the fact that progress is made anyway.

PRI plays an important role in the SRI community. Its aim is at improving the quality of SRI products and services, not only involving financial institutions, but also the industry and the companies.

The UK Stewardship Code The UK Stewardship Code is an extension of the UK Corporate Governance Code. This Code, published by the FRC (Financial Reporting Council), aims at facilitating effective, entrepreneurial and prudent management that can deliver the long term success of a company. The Code is a guide to a number of key components of effective board practice. It is based on the underlying principles of all good govern-ance: accountability, transparency, probity and focus on the sustainable success of an entity over the longer term.

The Stewardship Code applies to “firms who manage assets on behalf of institutional shareholders such as pension funds, insurance companies, investment trusts and other collective investment vehicles”. This means fund managers, but the Code also “strongly encourages” institutional investors to disclose


their own level of compliance with the code's principles.

The Code adopts the same "comply or explain" approach used in the UK Corporate Governance Code. This means, it does not require compliance with principles. But if fund managers and institutional in-vestors do not comply with any of the principles set out, they must explain why they have not done so, on their websites. The information is also sent to the Financial Reporting Council, which links to the information provided to it.

The UK Stewardship Code aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of govern-ance responsibilities. Engagement includes pursuing purposeful dialogue on strategy, performance and the management of risk, as well as on issues that are the immediate subject of votes at general meet-ings.

7 principles of the UK Stewardship Code

“Institutional investors should: (1) Publicly disclose their policy on how they will discharge their stewardship responsibilities. (2) Have a robust policy on managing conflicts of interest in relation to stewardship and this pol-

icy should be publicly disclosed. (3) Monitor their investee companies. (4) Establish clear guidelines on when and how they will escalate their activities as a method of

protecting and enhancing shareholder value. (5) Be willing to act collectively with other investors where appropriate. (6) Have a clear policy on voting and disclosure of voting activity. (7) Institutional investors should report periodically on their stewardship and voting activities”.

The Stewardship Code does not have explicit ESG requirements, however strong stewardship rules that demand full disclosure on investment processes apply.

FAS (Financial Services Authority) would propose a compulsory requirement for authorised asset man-agers. The initiation of a first review was planned for the 2nd half of 2011.

Criticism. There was fierce criticism (e.g. Fair Pensions) for the « tick-box » and « platitudinous » kind of disclosures. There is a call for more transparency, independent monitoring, market assessment us-ing rankings or awards and the involvement of a broader range of stakeholders. Also recommendations were issued including standardised ESG reporting by managers and mandatory voting disclosure.

The Code for Responsible Investing in South Africa (CRISA) The Code for Responsible Investing in South Africa (CRISA) gives guidance on how the institutional investor should execute investment analysis and investment activities and exercise rights so as to promote sound governance. The voluntary code was unveiled in July 2011 and it comes into force on February 1/02/2012. CRISA applies to institutional investors as asset owners, for example, pension funds and insurance companies and to service providers of institutional investors, for example, asset and fund managers and consultants. CRISA has been endorsed by the Institute of Directors in South-ern Africa (IoDSA), the Principal Officers Association (POA) and the Association for Savings and In-vestment South Africa (ASISA). There’s also backing from the Financial Services Board (FSB), the Jo-hannesburg Stock Exchange (JSE), and the PRI.

“ESG issues are mainstream investment considerations and not peripheral, especially at a time the world is facing serious sustainability challenges. These challenges range from the effects of the recent financial crisis, which left most pension schemes underfunded and government debts in developed markets at unsustainable levels, to socio-economic challenges and climate change which threatens our own existence as human society. This is a trend that cannot be allowed to continue. As long-term in-vestors and fiduciaries, institutional investors have the responsibility to ensure that we invest in a way that promotes long-term sustainability”.

5 principles of CRISA

“An institutional investor should: (1) Incorporate sustainability considerations, including environmental, social and governance, in-

to its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.

(2) Demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities.

(3) Where appropriate, consider a collaborative approach to promote acceptance and implemen-


tation of the principles of CRISA and other codes and standards applicable to institutional in-vestors.

(4) Recognise the circumstances and relationships that hold a potential for conflicts of interest and should proactively manage these when they occur.

(5) Be transparent about the content of their policies, how the policies are implemented and how CRISA is applied to enable stakeholders to make informed assessments”.

All principles are further detailed. Some of the details of Principle 5 include: (…) � An institutional investor should regularly engage with its stakeholder groupings, including in-

vestee companies and the ultimate beneficiaries, in order to, inter alia, identify and understand information requirements and, at least once a year, fully and publicly disclose to what extent it applies to CRISA.

� If an institutional investor does not apply some or any of the principles or recommendations in CRISA or applies them differently from how they are set out, it should in a transparent manner explain the reasons for this and the alternative measures employed.

� The disclosure by institutional investors should be made public in order that it is readily acces-sible by all stakeholders, including investee companies and the ultimate beneficiaries.

� The following policies should be disclosed publicly upon CRISA becoming effective and subse-quently in the event of changes to the policies: policy on incorporation of sustainability consid-erations, including ESG, into investment analysis and investment activities with reference to the matters as set out under Principle 1 (…).

The United Nations Global Compact Global Compact is a United Nations initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. The Global Compact is a prin-ciple-based framework for businesses, stating ten principles in the areas of human rights, labour, the environment and anti-corruption. Under the Global Compact, companies are brought together with UN agencies, labour groups and civil society. The Global Compact is considered as the world's largest cor-porate citizenship initiative.

The Global Compact is not a regulatory instrument, but rather a forum for discussion and a network for communication including governments; companies and labour organisations, whose actions it seeks to influence; and civil society organizations, representing its stakeholders.

The Compact itself says that once companies declared their support for the Global Compact principles "This does not mean that the Global Compact recognizes or certifies that these companies have fulfilled the Compact’s principles." The Compact's goals are intentionally flexible and vague, but it distinguishes the following channels through which it provides facilitation and encourages dialogue: policy dialogues, learning, local networks and projects.

Criticism. Many civil society organizations believe that without any effective monitoring and enforce-ment provisions, the Global Compact fails to hold corporations accountable. Moreover, these organiza-tions argue that companies can misuse the Global Compact as a public relations instrument.

The Communication on Progress (COP) is an annual disclosure through which a signatory business in-forms stakeholders about its efforts in implementing the Global Compact and its principles. As a public disclosure, the COP is an important demonstration of a business participant’s commitment to transpar-ency and accountability. Failure to submit a COP for publication on the Global Compact website will thus result in a change of participant status and can eventually lead to the delisting of a business par-ticipant.

10 principles of Global Compact

The Global Compact was initially launched with nine Principles. June 24, 2004, during the first Global Compact Leaders Summit, Kofi Annan announced the addition of a tenth principle against corruption. This step followed an extensive consultation process with all Global Compact participants.

Human Rights. Businesses should: (1) Support and respect the protection of internationally proclaimed human rights. (2) Make sure that they are not complicit in human rights abuses.

Labour Standards. Businesses should uphold: (3) The freedom of association and the effective recognition of the right to collective bargaining. (4) The elimination of all forms of forced and compulsory labour. (5) The effective abolition of child labour. (6) The elimination of discrimination in employment and occupation.

Environment. Businesses should:


(7) Support a precautionary approach to environmental challenges. (8) Undertake initiatives to promote environmental responsibility. (9) Encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption. Business should: (10) Work against corruption in all its forms, including extortion and bribery.

Conclusions and advice Some of the most influential voluntary code of conducts, and in fact all those related to ESG/CSR/SRI objectives, have been summarized. What counts to the Platform are the aspects related to mobilisation and impact, to transparency and accountability and to compliance issues and enforcement.

Furthermore the Platform wants to have a look at the recipe books in order to observe whether the principles and suggested practices and the prescriptions of the voluntary frameworks are useful for a minimal norm or a regulatory framework.

The ambiguity of codes of conduct is known: they are fine instruments to raise awareness and volun-tary engagement, while at the same time some observe them as required tickets into the SRI commu-nity or blue washing ingredients.

The impact and success of the Codes are unquestionable. The balance between prescriptions and re-quirements on the one hand and voluntariness and deployment on the other hand is the key for suc-cess. At the same time this non mandatory approach and the lack of binding rules and proofs of con-formity hinder the adoption in a regulatory framework. PRI probably and Global Compact maybe might introduce more strict verification processes in time.

Some of the rules regarding reporting and accountability and on disclosure of SRI policies and method-ologies are knowable. Despite the mobilizing and referential character of the voluntary codes, the lack of ruling details and of operational indicators, ready for verification schemes make them unsuitable for direct application in a minimal norm.


CHAPTER 6

Type 4 regulation: Product labelling

“Given the complexity of financial products, the heterogeneity of SRI approaches, the difficulty of ac-cessing information on these characteristics, the lack of financial education of retail clients, and the lack of financial advisor training on SRI, the SRI retail market is inefficient. In this context, labels can help reduce information asymmetry and signal the quality of SRI funds to retail clients”.

Neither the European Eco-label nor the Nordic Swan Eco-label covers categories on financial products. Austria has the Blue Angel eco-label system for green funds; Australia has the RIAA Certificate Sys-tem; France has the Novethic label for SRI funds and Belgium has the ETHIBEL quality label for SRI.

Label systems may be very different, depending on the nature of the: (1) Label organisation (2) Label concept, the methodology and the level of selectivity (3) Control, enforcement and sanctions mechanisms (4) Communication.

Das Österreichische Umweltzeichen für Grüne Fonds Austria has a “A Blue Angel for Green Funds”, the Austrian UZ 49 “Grüne Fonds” label. The label is a governmental label, awarded by the Federal Ministry of Agriculture, Forestry, Environment and Water Management.

Four categories of criteria apply in order to award the product label: (1) Suitable criteria and some exclusions (2) Quality requirements based on CSRR-QS (3) Transparency criteria, based on the EUROSIF Transparency Code (4) Economic quality based on VÖIG Quality Standard

The label is not an outstanding success. The criteria are well accepted however as a standard for SRI investment in Austria, and there is optimism that more SRI funds will apply for the Austrian Eco-label. By now 12 SRI funds issued by 4 investment companies are certified, on a total of more than 100 SRI funds in Austria.

There are 2 more (voluntary) initiatives concerning SRI in Austria: (1) The OeSFX ‘SRI funds index’ containing 21 SRI funds which are authorised to be purchased

in Austria. There is an advisory board which selects SRI funds according to the strength of the SRI concept.

(2) The annual certification of “custom clearance” of institutional investors having sustainability criteria their investment policy.

RIAA Certification Fund managers certified under the Australian Responsible Investment Certification Program have met the following requirements:

(1) Apply a systematic responsible investment methodology in selecting, realising and retaining investments.

(2) Describe in detail their responsible investment methodology and explain the specific process-es, management systems and reporting frameworks followed for their responsible investment product or products.

(3) Disclose past performance results and a full list of stock holdings or investments (current six months prior for reasons of commercial in confidence).

(4) Have had their responsible investment methodology and processes independently verified by Grant Thornton.

The Novethic SRI label The Novethic SRI label, launched in 2009, aims to provide individual investors with a framework for Socially Responsible Investment (SRI) products offered by investment managers. Novethic is the lead-


ing research centre in France on Corporate Social Responsibility (CSR) and Socially Responsible In-vestment (SRI) and is a sustainable development media expert. The position of Novethic (and its em-beddedness in and financial support by Caisse des Dépôts et Consignations) is unique and seems to create an operating environment characterized by independence and autonomy and by a commitment for quality and transparency in SRI. Novethic has no financial or economic objectives and is not driven by any market player.

As the label is awarded by Novethic’s SRI Research Centre, which is considered as an independent body, investors are ensured that an SRI process exists with the greatest transparency possible regard-ing the SRI products available. The Novethic label has a solid instrumental and governance basis and is technically well managed. It promotes ‘fair and true’ SRI with an eye on a good conceptual assimilation by consumers and it handles no-nonsense concepts of quality.

The purpose of Novethic’s SRI label is to encourage the development of the most transparent infor-mation possible on SRI funds. By introducing an SRI label, Novethic seeks to improve the availability of these funds to individual investors by providing them with a simple benchmark.

The following four fundamental criteria must be met to obtain the SRI label: (1) Environmental, Social and Governance (ESG) screening

To be awarded the SRI label, the fund manager must take into account ESG issues, a process to which he may add company or sector-based ethical exclusions. The SRI management ap-proach must encourage the best extra-financial practices amongst issuers. These practices must apply to at least 90% of the portfolio in terms of both assets (excluding cash and community investing) AND holdings, covering all asset classes. Whatever specific combina-tion is applied, Environmental AND Social AND Governance issues must all be screened, even if the management approach emphasises one or more of these areas.

(2) Transparency Investors must be able to understand the fund's extra-financial characteristics and their im-

pact on its management approach. To meet this criterion, fund managers have to comply with the EUROSIF or AFG-FIR Transparency Code, which must be easily accessible in the SRI section of the fund manager's website and preferably on the fund's dedicated pages. This document must also provide information regarding the SRI process, including available re-sources AND the steps taken during the ESG screening process.

(3) Extra-financial reporting An SRI fund's monthly and/or quarterly reporting must feature an additional section that is

not included in non-SRI fund reporting. It must comprise qualitative information on ESG practices that have resulted in recent investments and divestments, and/or quantitative in-formation on the fund's ESG characteristics. This information must encompass all assets and can be separate from financial reporting, provided it does cover the securities in the portfo-lio, is disclosed on a regular basis and is as readily available to the public as financial infor-mation.

(4) Disclosure of all portfolio holdings The full list of portfolio holdings must be disclosed at least on a half-yearly basis and be suf-

ficiently clear and comprehensible.

The Novethic label has a strong quality control and reality check focus. In comparison to CSRR-QS 2.1, Novethic’s systems are less formalised and less supply chain oriented. However, Novethic’s audit sys-tem could be named the ‘missing link’ between the thick box approaches of Eurosif TC 3.0 (focusing on Transparency) and the full supply chain quality management approach of CSRR-QS 2.1 (which addi-tionally focuses on Integrity and Quality control).

Ethibel PIONEER and Ethibel EXCELLENCE The Ethibel labels are (private) quality labels, certified by an independent, specialised body. These la-bels are probably the longest existing quality labels in the field: they have been initiated in 1992. The label is private, owned by Vigeo SA and managed by Forum ETHIBEL, which provides the specifica-tions. Forum ETHIBEL is a consultancy agency for corporate social responsibility (CSR) and socially re-sponsible investing (SRI). Forum ETHIBEL aims “for a society which respects the balance between eco-nomic progress, social fairness and attention for the environment”. This objective is being achieved by developing specific SRI instruments and methodologies.

The Ethibel labels are ‘collective quality labels’. Collective quality labels are applied to products of dif-ferent origin, which comply with the same specifications. Users are subjected to the same regulations, monitoring obligations and sanctions. This approach also makes it possible to divide the costs of an extensive and in-depth study over many customers. All this allows for a solid and objective working


method. That is why Forum ETHIBEL explicitly opted to work with such a European collective label.

The reason for mentioning this private label system is to clarify that the use of the terms ‘label’ and ‘certificate’ may cover quite different contents. Labels may refer to transparency requirements only, or to SRI typologies and/or to specific methodological rules and regulations and/or to strict quality man-agement systems, etc.

Conclusions and advice None of this “labels” is directly transferable to a broadly supported minimal norm. However the type of criteria, lots of the content and the morphology of the labelling systems may inspire the Platform. The Novethic SRI label surely is a best practice in terms of no-nonsense approach and its quality control audit process guaranteeing “fair and true SRI”.


CHAPTER 7

Type 5 regulation: Auto-regulation for transparency with reality check

EUROSIF Transparency Code for SRI Retail Fund Sector: consumer concerns The code has been supported by the European Commission: “SRI funds empower consumers to take environmental and social choices in their investment decisions. We must ensure that consumers are not being misled and that they have access to information to support such decisions. The development of pan-European transparency guidelines for retail SRI funds will address this need and help the fi-nance sector lead the way in encouraging best practise in corporate social responsibility” (Dominique Bé, commissioner for DG Employment and Social Affairs)

The European Sustainable Investment Forum Eurosif is a pan-European group whose mission is to address sustainability through financial markets.

The Transparency Code has two key drivers: (1) The opportunity for funds to proactively clarify their approach to SRI and therefore, positively

reflect their transparency to investors and other stakeholders (2) Strengthen a proactive auto-regulation which contributes to the development and promotion

of SRI funds by setting up a common framework around good transparency practices

The “EUROSIF Transparency Guidelines 1.0” were launched in 2004 and updated in 2010 into the “EU-ROSIF Transparency Code 2.0”.

The detailed requirements and guidelines are classified in 6 categories Section 1. Basic Details Signatories should be clear about who they are and provide background information on

the fund management company, and the fund(s) Section 2. ESG Investment Signatories should be clear about the fund(s) purpose and its (their) ESG investment

criteria Section 3. ESG Signatories should provide clear information on the ESG research process of their in-

vestments. Section 4. Evaluation and Implementation Signatories should provide information on how the ESG research is used to build and

maintain their portfolio Section 5. Engagement Approach Signatories should explain their approach to engagement if the fund has such a policy Section 6. Voting Policy Signatories should make clear their policies on voting

The EUROSIF TC 2.0 had a compliance level ‘Comply AND explain’ and provided brief guidance notes for fund managers, a “Transparent” logo and a mandatory disclaimer.

In Belgian most market players became signatories since the TC was promoted by BEAMA (Belgian As-set Managers Association), which made the adoption of the code mandatory for its SRI assignment and statistics and supported by BELSIF (the Belgian Sustainable and Socially Responsible Investment Fo-rum).

The 2011 update Throughout 2011 the code was reworked to the EUROSIF Transparency Code 3.0; a major update with the objective of being a real code of conduct, with verifiable statements and consistent and similar compliance levels for al signatories. TC 3.0 should provide a European-wide harmonised audit protocol with clear guidance for signatories and for the accredited auditors.

A large consultation round with the member social investment has been organised. The new Transpar-ency Code should be adopted in 2011 and the certifications should start in 2013.


A number of decisions were to be taken such as on: (1) Fixing the level of compliance (2) Accepting the new two pillar Certification Management System (3) Fixing agreements on legal issues and the commercial use (4) Resolving issues regarding national standards versus European impact (5) Determining the administrative and audit fee structure (6) Scope issues (7) Accreditation of auditors (8) Selection of the Certification Board (9) Selection of the Advisory Panel

Conclusions and advice The new EUROSIF Transparency Code is (or could be) an excellent point of departure for the work of the Platform.

Notable strengths are: � Relative broad basis for acceptance and consensus � Clear overview and straightforward structure � Readiness for public use (one pager is a necessary add on) � Instalment of Advisory Panel and Certification Board (2012) � External verification (2013) � Potential for legal framework

Weaknesses are:

� End of the pipe (in terms of the multiple supply chain of actors and market players) � Responsibility and liabilities limited to fund managers � (Hence) no entire traceability � National reflexes � No quality management considerations � Still some level of in transparency � Limited scope (retail market)

Belgian Asset Managers Association’s approach BEAMA adopted a Code of Conduct (06/2009) that describes the “best practices” concerning Principles of Governance in Asset Management and their implementation. The code takes the “fiduciary duty” as a starting point. BEAMA handles an all-encompassing concept of “SRI Funds”, with active monitoring as well as taking care of their quality control. BEAMA promotes compliance with the UN Global Compact.

BEAMA supervises the way in which the UCI complies with the SRI investment policy and processes and requires clear and regular reporting and justification by the UCI itself and a regular verification by an independent third party.

BEAMA states that explanation of compliance is best offered in line with the Eurosif Transparency Code.


CHAPTER 8

Type 6 regulation: Supply chain approach with quality audit and professional requirements

EC view on convergence, diversity and transparency of CSR tools Both the EC 2001 Green Paper (“Promoting a European framework for corporate social responsibility”) and the 2002 Communication (“Corporate social responsibility, a business contribution to sustainable development”):

� Called for “More convergence and transparency of SRI rating methodologies” � Request that “Quality and objectivity should be ensured, not only on the basis of the in-

formation submitted by the management, but also by the stakeholders” � Suggest that “External audit and internal quality procedures should be used to assure ac-

curacy in the research and assessment processes”.

Corporate Sustainability and Responsibility Research (CSRR) Quality Standard Both CSRR-QS and the EUROSIF Transparency Code are rooted in this EC view.

CSRR-QS is an international and sector wide best practices standard offering the following features: � A verifiable standard requiring regular checks and audits, providing a conformity certificate � A well tested and powerful tool, which passed the stress tests of numerous pilots, pre-

audits and a full 3-year audit cycle � A warranty for (professional) customers for the best available products and services � A key instrumental “Transparency Matrix”, enabling a calibrated comparison of the practic-

es of various CSRR providers � An initiative driven by a European wide consultation process with stakeholders and cus-

tomers � A process standard, with strong principles and requirements, however sufficiently general

to allow and encourage diversity � An open standard, providing a certificate to all that comply with the specifications

Basic principles and referential � Integrity and independency codes � Strong professional principles � Quality management requirements � Continuous improvement engagements � Accountability specifications � Transparency rules

Association for Independent Corporate Sustainability and Responsibility Research AI CSRR has been created to develop, promote and maintain high professional standards, expertise and codes of conduct for the CSRR sector. AI CSRR is a trade association that owns and manages the Voluntary Quality Standard and its related instruments and processes. AI CSRR organizes an inde-pendent, external verification, leading possibly to the certification of signatories.

What is being certified are both the functioning of the CSRR groups/networks and the methodologies, with all their related practices and quality management systems. External verification processes exist since 3 years. The nature of the compliance is “full compliance”.

Important supportive instruments are the Transparency Matrix and detailed Guidance Documents.

11 Commitments and 9 Integrity Principles and Ethical Commitments The basic quality principles consist of 11 production commitments and 9 organisational commitments.

Signatory CSRR groups should: (1) Independent sources


… assess/rate companies using more than company-provided information, such as inde-pendently collected data, regulatory sources, and information from stakeholders

(2) Global activities … ensure that assessments/ratings include the relevant global impacts and operations of the

quoted company (3) Beyond compliance … use a research methodology which allows identification of best practices and 'beyond com-

pliance' performance. (4) Social and environmental … include criteria covering environmental and social areas (5) Balance

… ensure a balanced approach to corporate assessment/ratings by balancing quantitative and qualitative indicators, management oriented and performance indicators, past and current performance

(6) Relevance/Materiality … ensure assessments/ratings capture issues material to or relevant for the sustainability and responsibility of that company

(7) Consistency and comparability … ensure that the criteria and methodology are applied equally to comparable companies (8) Stakeholder involvement … actively include inputs and information, wherever possible, from relevant stakeholders (9) Up-to-date

… ensure assessments of companies are updated (10) Transparency

… be transparent about the methodology (11) Continuous improvement

… be a learning organisation, involving staff development, and the monitor and assess quali-ty and performance of research services

The Integrity Principles and Ethical Commitments detail requirements on the level of: (1) Independence (2) Professionalism (3) Accountability (4) Objectivity (5) Impartiality (6) Equal treatment (7) Responsible relationships (8) Selective disclosure (9) Avoidance of personal interest

The “Transparency Matrix” The Transparency Matrix is a tool enabling a calibrated comparison of the practices of various CSR rat-ing providers and a key document for the audit procedure. Some of the checked items are summarised in the table below.

Production Organisation

Research methodology Underlying concepts & approach |Scope Ownership |Development and reviews Inclusion of stakeholder issues

Integrity and Independence Integrity principles and ethical commitments Independence and conflicts of interest | Integrity Confidentiality

Research framework The extent of criteria & indicators The content of criteria & indicators

Quality Management Systems Organisation & staff | Quality management systems Quality improvement | Dialogue with companies

Research process Data collection and data processing Sources of information |Stakeholder input Geographical scope |Reference universe Monitoring and updating | Organigram + responsibil-ity and accountability | Records Company contact protocols | Sub-contracting + research partnerships | Liability


Assessment process Assessment responsibilities | Assessment principles Assessment procedures

Products and services Pre-selection methodology

Pro-active stakeholder involvement Stakeholder dialogue | Accountability of stakeholder management |Stakeholder groups

Disclosure and Communication Availability of documents Public inquiries and feedback

Conclusions and advice The CSRR-QS clearly is a complimentary standard:

� Offering monitoring and assurance in the supply chain (ESG research, assessments and se-lection processes), and providing the best available warranties for ESG backtracking

� Requiring strong quality management systems and proofs of continuous improvement � Requiring professional and ethical conduct with integrity � Having a certification system that has been tested in several contexts and geographies and

which is conform with modern audit standards6 � Providing an international scope (EU, NA, AP)

The Voluntary Quality Standard will go through further update processes, in order to extent its product range, its scope and covered ESG/CSR/SRI activities.

Its complimentary scope and deep quality features makes this standard probably to one of the strong-est in terms of accountability, assurance and confidence for professional users and consumer credibil-ity.

The Global Initiative for Sustainability Ratings (GISR) The Global Initiative for Sustainability Ratings (GISR) is a newly launched initiative (June 2011).

GISR claims to become an independent, global, non-commercial, initiative whose mission is to design and continuously improve a generally-accepted ratings standard for assessing the sustainability per-formance of companies. GISR “seeks to raise the bar for all sustainability ratings by providing a benchmark of excellence from a principles, process and content standpoint”.

According to GISR “The proliferation of sustainability ratings has brought both substantial intellectual capital and complexity to the market. Consolidation of some ratings services concurrent with the emergence of new raters creates problems for investors and other stakeholders - including companies themselves - that face a growing number of inconsistent and non-transparent ratings approaches. The ratings field is rich in diversity and innovation. However, a number of conditions impair its capacity to reach full potential as a sustainability driver. For companies, survey fatigue is a significant issue. It is not uncommon for a firm to annually receive a dozen or more disparate questionnaires leading to rat-ings that span the spectrum from leading to intermediate to lagging performance. (…) Competing schemes foster “cherry-picking” where organizations highlight favourable ratings and side-step those that depict unfavourable performance. These and other shortcomings hinder progress toward continu-ally higher sustainability performance-based decisions by stakeholders and companies which, in turn, impair progress toward long-term global economic, environmental and social well-being”.

GISR’s mission GISR’s mission is to expand and accelerate the contribution of business and other organizations world-wide to sustainable development through the design and dissemination of a generally-accepted, sus-tainability performance ratings standard.

GISR aims at becoming a ratings standard that serves as a normative, best practice, vehicle for ad-vancing a specific purpose, in this case, enhancing the sustainability performance of companies.

By analogy, the Global Reporting Initiative (GRI) guidelines are de facto reporting standards focusing

6 ISO 19011:2002 (2011) is an international Auditing Standard issued by the International Organization for Standardiza-tion (ISO): “Guidelines for quality and/or environmental systems auditing”. ISO/IEC 17021-2:2006 (2011) is a standard on “Conformity assessment - Requirements for bodies providing audit and certification of management systems”


on sustainability information disclosure; ISO 14000 is an environmental management systems stand-ard; and FASB and IASB create financial accounting standards for, respectively, US and international application. In the same mode, GISR will be a standard setter for entities that rate sustainability per-formance of companies worldwide.

The GISR standard will comprise three components: � Principles. Pillars that support excellence in ratings, for example: Materiality (relevance to deci-

sion-makers in capital and other markets); Boundary-Setting (to determine what entity and op-erations are being rated), Timeliness (timing and frequency of ratings), Comprehensiveness (coverage of all material sustainability issues), Data Quality (quality control of data systems and, auditability), and Sustainability Context.

� Process. Attributes of the ratings process aimed ensuring state-of-the-art technical excellence, dynamism and inclusiveness with regard to stakeholder input.

� Performance. ESG governance indicators, focused on outcomes of the organization’s activities. Continuous tracking of emerging sustainability opportunities and risks and their integration into the GISR update process. Strategy and management, sustainability culture, Board commit-ment, and capacity to innovate sustainable products and services.

Governance of GISR would be multi-tiered and gradually unfold over a period of 24 months. A multi-stakeholder Steering Committee will oversee GISR’s schedule for a beta version of its sustainability ratings standard in December 2012 and a Version 1.0 in mid-2013.

Initial Founding Partners include AMD, Bloomberg, TIAA-CREF, and UBS. GISR’s initial Collaborating Organizations include The Global Reporting Initiative (GRI), National Association of Environmental Managers (NAEM), and Sustainability Accounting Standards Board (SASB).

How will GISR certify conformance with its ratings standard? GISR will pursue a two-pronged approach to its overarching goal of bringing convergence, rigor and transparency to the sustainability ratings field via:

(1) A "stand-alone" standard in the form of a public good for rating sustainability performance, comprising principles, processes and content (i.e. specific quantitative indicators) compo-nents.

(2) Certification of non-GISR rating methodologies as "GISR-compliant" based upon their overall adherence to most core aspects of the stand-alone standard, while allowing for customization according to raters' expertise, emphasis and user base.

Conclusions and advice GISR clearly recognizes the need of some ‘regulation’ and standard setting for corporate sustainability rating activities. It intends to improve the supply chain, going from improved corporate reporting ac-cording to GRI and Integrated Reporting standards, over enhanced corporate performance to the rat-ing process of ESG rating agencies and the adoption of integrated ESG metrics investment decisions.

GISR’s says its “paramount priority is better integration of sustainability into investment decisions”. Therefore, a key objective is to reach investment professionals that currently do not utilize, or un-derutilize, sustainability information to support their decision-making. The ambition to have a standard that encompasses both cross-sectoral and sector-specific key performance indicators (KPIs) to assess corporate sustainability performance should be applauded. KPIs are defined by GISR as variables that demonstrate both financial and sustainability materiality, that “concurrently create value for both in-vestors and value for society at large”. This integration might be one of the prominent benefits of GISR. It would be based on another KPI consultation round and trial efforts for some sectors. It is not known yet how GISR will keep the balance between corporate sustainability opportunities and risk as-sessments on the one hand and societal and stakeholder oriented intangibles on the other hand.

GISR seems to comfort the understanding and readiness of companies to fit consciously into the CSR rating supply chain. GISR is largely inspired by CSRR-QS and it includes many of its characteristics, such as its principles and the inclusiveness with regard to stakeholder input. CSRR-QS seems to be more open to various approaches, yet at the same time is much more exigent in terms of procedural requirements, quality management and professional rules. It is however much too early to predict the precise outlines of the framework and the impact of GISR.

CHAPTER 9

Conclusions: Features and components of the required accountability and verification system

Transparency and disclosure For the third pillar of a minimal normative system, the concept “Transparency” or “Disclosure” is im-portant but in itself too weak. “Transparency” is a container concept or a passe-partout, having differ-ent meanings. For some it includes the regulatory information published in the prospectus. For others transparency equals the disclosure of SRI fund selection criteria, or the portfolio positions. For others liability is the key focus and - consequently - elements of quality management and continu-ous improvement should be included. For the platform what really matters is “Accountability”, the ability to backtrack and justify decisions.

Accountability Accountability implies the obligation of an individual or organization to account for its activities, accept responsibility for them, and to disclose the results in a transparent manner. It may also include the responsibility for money or other entrusted property.

Accountability may be dictated or implied by law, regulation, or agreement. Professionals in any field can be called upon to justify their professional actions. The criteria against which they can be held ac-countable are those embodied in the normative standards of their particular profession. These stand-ards are expressed in ethics guidelines or codes of conduct for each specialty area within their profes-sional domain. Alternatively they also may be embodied in law.

If any undesirable consequences result from professional mistakes, every effort must be made to undo the damage, without dismissing or denying the problem. Various assessment techniques are available to help ensure that one's work is serving its intended purpose. Professionals can defend themselves against accusations of malpractice of any kind when they can show that they have behaved in an ethi-cal fashion consistent with professional standards. Transparent documentation helps in defending one's actions and makes a person's professional actions "transparent" or easily assessed.

Transparency and accountability generally mean that processes and criteria for decision-making are available for public inspection as a start. SRI researchers and asset managers have a duty to make their research practices transparent to the community.

15 general principles and conclusions (1) Transparency is most connected to the principles of accountability and therefore it is a multi-

level and multi-stakeholders oriented concept.

(2) Supply chain. The liability aspects should include the full “SRI production chain”, not only end-of-the-pipeline disclosure.

(3) Existing national regulatory rules regarding ESG and/or SRI transparency for all or most invest-ment funds and institutes seem to inspire the European Commission for ditto regulations, despite the observed lack of performance and success. These non-directive laws try to convince tradi-tional players to include ESG considerations into asset management. The open end transparency character of the regulations offers a weak backbone for transitions. The transparency laws fail in providing real, precise rules to promote transparency and offer no guidance to the Platform.

(4) Allowing diversity. Within the limitations suggested by the first (exclusions and negative screen-ing) and the second (positive selection criteria) pillars of a minimal norm, a diversity of SRI ap-proaches should be allowed, since no harmonised standards or univocal application criteria for SRI exist.

(5) Principle of relative (levelled) disclosure. SRI professionals should disclose which standards and considerations they take into account and how. The more a product is marketed on the basis that ESG standards and considerations, the more detail should be demanded, resulting in levelled


transparency requirements.

(6) Enhance consumers’ ability to compare products. The transparency and accountability documents should provide comprehensible and consistent information that allows comparability to investors.

(7) Level of detail. Players should describe in detail their responsible investment methodology and explain the specific processes, management systems and reporting frameworks followed for their SRI products.

(8) Codes are appealing but unsuitable for verification purposes. Despite the mobilizing and referen-tial character of the voluntary codes (UN PRI, UK SC, CRISA, UN GC), their lack of ruling details and of operational indicators, ready for verification schemes make them unsuitable for direct ap-plication in a minimal norm.

(9) Product quality labels can help reduce information asymmetry and signal the quality of SRI funds to retail clients. SRI labels may be managed by government (Austrian UZ 49) or be private of nature (RIAA, Novethic, Ethibel). They provide the most distinct features: independent verifica-tion, disclosure of all portfolio holdings, specific quality management requirements, quality con-trol and benchmarking or differentiated labels.

(10) The Eurosif Transparency Code for SRI Retail Fund Sector has detailed requirements and guide-lines, classified in 6 categories: basic details on the fund management company and the funds; their ESG investment criteria; their use of ESG research process of their investments to build and maintain their portfolio; their approach to engagement and their policy on voting. The (new) Eu-rosif TC could be an excellent point of departure to build an accountability framework. An update, the TC 3.0 should provide a European-wide harmonised audit protocol with clear guidance for signatories. Notable strengths of the TC are its relative broad basis for acceptance and consensus and its clear overview and straightforward structure, its readiness for public use and its (future) external verification. Weaknesses are its end of the pipe character, with a poor supply chain ac-countability, limited quality management considerations and restricted scope (retail market). The existing verification process is way too weak.

(11) Supplemental features are provided by CSRR-QS: enhanced monitoring and assurance in the supply chain, the best available warranties for ESG backtracking, requirements for strong quality management systems and proofs of continuous improvement, requirements for professional and ethical conduct with integrity and an international scope (EU, NA, AP). It has an operational cer-tification system that has been tested in several contexts and geographies and which is conform to modern audit standards.

(12) Role of the regulators. The potential role of the regulators is to ensure that presented (or omit-ted) information does not create a misleading or deceptive impression and to create a regulatory and enforceable framework.

(13) Institutional context. The instalment of an SRI Council, as suggested and described by the Bel-gian Law Proposal (Conseil d'ISR - MVI Raad), or another advisory body will not be the most ad-equate solution to manage and to overview the verification and/or certification procedures. Whatever the nature of the authority it is advised to take the multi-stakeholder perspective of SRI into account. The authority should have affinity with the SRI community and the market (multi-partnership-oriented). Quite various models of ‘authorities’ have been observed. One is the market authority (govern-mental) model (such as the FSMA7). A second one is the rather unique model of Novethic in France, which may be typified as both independent and semi-governmental. A third model may be described as the one driven by the SRI community itself (such as Eurosif or national SIF’s supported by audit bodies or such as AI CSRR and its running audit and certification processes). A fourth one is driven by AM organisations. The fifth one may involve consumer organisations.

(14) Nature of auditors. One approach suggests simplifying the audit methodology into a set of mini-mum requirements to be double checked by an auditor who would then prepare findings to use as evidence of the audit process. In this view the audit process can be executed by any kind of auditor (including financial auditors). For credible back-tracking and SRI quality assessments/ verifications it may be better to revert to the idea of specialised auditors, with an in depth knowledge of SRI methodologies and techniques. Formalisation up to a level of box thicking au-

7 FMSA= the (Belgian) Financial Services and Markets Authority. FMSA has a robust role in the supervision of the rules of conduct applicable to financial institutions, in view of ensuring that all clients are treated honestly, fairly and professionally.


dits may be inadequate.

(15) The further lay-out and acceptance and possible juridical framework of the ESG fiduciary duties of traditional asset management could radically change the need for minimal norms.

Platform discussion on the advice and format of the deliverables Based on the suggested/presented synthetic features and based on further discussion the Platform has proposed a general frame on how the audit framework should look like and to picture the elements that are needed in a valuable framework.

As a ‘table of content’ the subdivision of Das Österreichische Umweltzeichen was sought as a useful starting point.

The following should be required:

(1) Criteria & exclusions: for details, reference is made to the Belsif Report. (2) Quality management requirements: the CSRR-QS 2.1 system offers a good framework for ac-

countability and continuous improvement. (3) Transparency criteria: the new version of the Eurosif Transparency Code offers a good (verifi-

able) framework for disclosure requirements. The French Novethic SRI label is less developed horizontally, but vertically much more in depth

(4) General quality requirements: this should highlight the governance structure of the fund, the professional and integrity requirements for SRI analysts, the importance of multi-source data and the supply chain and quality control.

2 more components should be added: (5) Comprehensibility: label, one-pager, light report, full prospectus … (cascade model) (6) Comparability

Objective: increase confidence

Accuracy

Completeness

Accountability

Comprehensibility

Accessibility Comparability

AUDIT

Certification

QUALITY

SUPPLY

CHAIN

Next steps At the end of the SRI Platform dialogue meetings, the members have well defined the general minimal principles, but have not selected the most adequate system (or combination of systems).

In general, for the mandatory (Febelfin) two options are open for further development: (1) The question whether an own detailed frame should be worked out is left open. (2) Alternatively, and more interesting in terms of European convergence, the option to rely on the

best available system(s) should be paid proper attention. In this case a roadmap for promoting best practices and subsequently implementing mandatory rules and installing adequate struc-tures can be worked out.


In addition, the question whether a SRI (quality) label should be awarded or kind of a (‘fair and true’) SRI homologation should be required is still open.

Belsif has expressed to take a further development of a minimal norm into consideration.

Brussels, December 2011.