What’s the Real Story? Reading Between the ESG Lines
CHICAGO, December 7, 2015 /3BL Media/ - While the triple bottom line is now an established principle in sustainability circles, moving from the platitudes in CSR reports to the hard data investors seek to understand the ROI of these measures involves a far more rigorous approach to disclosure. In a recent presentation to SRI, JLL’s General Counsel, Mark Ohringer, and Global Treasurer, Bryan Duncan, provided the following practical insights on how to translate ESG impacts to shareholder benefits.
1. A picture in the CSR report may be worth a thousand words, but it may or may not provide an accurate portrayal of the ROI of those efforts. Good-looking CSR reports with pictures of happy volunteers doing community service make for terrific PR, but investors need to dig deeper to make the link to the competitive advantage a company realizes through a correlated rise in employee engagement. Just because a company issues a glamorous CSR report does not mean it won’t suddenly disclose some internal scandal that demonstrates its hypocrisy. Overnight, that CSR report can become a CSI report, corporate social irresponsibility. Word to the wise – look for the company to connect the dots between its good deeds and value creation, and check to see if the organization is utilizing some type of audit function to verify its claims.
2. Ask the tough questions on analyst/quarterly earnings calls. Most investors are fixated on traditional financial metrics. The silence definitely speaks volumes when it comes to questions about a company’s sustainability efforts, its enterprise risk management, or its efforts related to climate change.
3. SEC disclosure rules leave much to be desired. What can you do to get the real story on a company’s true sustainability credentials? A company can comply with the letter of the SEC disclosure rules, but those don’t require any discussion about whether its sustainability efforts are actually designed to benefit shareholders. Savvy investors will scour the 10-K report looking for evidence of integrated reporting, a still relatively new approach to disclosure. JLL became an early adopter of the principles that were established by the International Integrated Reporting Council, which provides a useful framework for investors to get a much more nuanced and sophisticated picture of how the company creates value, deploys and develops the resources it needs to do so, and operates within a set of five explicit strategic priorities.
4. Ethics matter. Most companies will tell you they have integrity and good governance, but they do so with generalities and typically don’t give you any proof points. This is a serious challenge for investors since ethics and governance are the backbone of culture and intellectual property, and these in turn are drivers of the intangible value of an organization, which over time has become by far the single most important part of your ownership interest. And there is increasing empirical evidence that companies that are ethical and sustainable simply perform better financially over the long-term. Ethisphere’s research shows that over a seven year period an index of the World’s Most Ethical Companies has significantly outperformed the S&P 500 both the FTSE and Morgan Stanley All World Indices. This data was recently reinforced by three Harvard Business School professors, who said that “firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues. These results speak to the efficiency of firms’ sustainability investments, and also have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions.”
5. Look for outside verification. Most companies do not make it easy for you to evaluate their ethical and governance culture, so what kinds of indicia can you look for or ask management about? Ask about whether they have received any kind of external validation from an independent organization about the quality of their ethics, governance and sustainability programs. This could include, for example, Ethics Inside Certification, which requires a rigorous evaluation of a company’s policies and practices, or a listing on the Dow Jones Sustainability Index, or a review from a panel of professionals from CERES. JLL is unusual in that it publicly discloses its ethics statistics directly on the firm’s website.
The punch line? Sustainability can and should benefit shareholders.
A company may spend a lot on sending their people to Habitat for Humanity, health initiatives like the Heart Walk and funding the Shakespeare Festival, and for other efforts that they say are part of their sustainability or social responsibility agenda, but this is yourmoney they are spending so one way or another it should be for your benefit, which is to say in a way that you would agree is good for the company and ultimately for your investment. There should be some credible connection between CSR efforts and revenue generation that a company can easily explain to you and that make sense to you. But it is not enough just to be “feel-good” efforts unless they clearly have a well-articulated marketing purpose or employee retention angle. These are certainly possible, but the Holy Grail for a company is to be able to engage in sustainability efforts that do good for the world and that also make money. This can mean greening their products in a real way. In the case of JLL, it means finding ways to advise clients on how to operate their real estate in more energy efficient ways, as the result of which we can have a disproportionately beneficial effect on our client’s economics and on climate change more generally, while at the same time make money for our shareholders through a growing service line that is increasingly in demand.
For more information, please contact Mark Ohringer.
