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How Esg Engagement Creates Value for Investors and Companies

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How Esg Engagement Creates Value for Investors and Companies HOW ESG ENGAGEMENT CREATES VALUE FOR INVESTORS AND COMPANIES An investor initiative in partnership with UNEP Finance Initiative and UN Global Compact THE SIX PRINCIPLES PREAMBLE TO THE PRINCIPLES As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following: We will incorporate ESG issues into investment analysis and 1 decision-making processes. We will be active owners and incorporate ESG issues into our 2 ownership policies and practices. We will seek appropriate disclosure on ESG issues by 3 the entities in which we invest. We will promote acceptance and implementation of the Principles 4 within the investment industry. We will work together to enhance our effectiveness in 5 implementing the Principles. We will each report on our activities and progress towards 6 implementing the Principles. PRI's MISSION We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole. The PRI will work to achieve this sustainable global financial system by encouraging adoption of the Principles and collaboration on their implementation; by fostering good governance, integrity and accountability; and by addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation. PRI DISCLAIMER The information contained in this report is meant for the purposes of information only and is not intended to be investment, legal, tax or other advice, nor is it intended to be relied upon in making an investment or other decision. This report is provided with the understanding that the authors and publishers are not providing advice on legal, economic, investment or other professional issues and services. PRI Association is not responsible for the content of websites and information resources that may be referenced in the report. The access provided to these sites or the provision of such information resources does not constitute an endorsement by PRI Association of the information contained therein. Unless expressly stated otherwise, the opinions, recommendations, findings, interpretations and conclusions expressed in this report are those of the various contributors to the report and do not necessarily represent the views of PRI Association or the signatories to the Principles for Responsible Investment. The inclusion of company examples does not in any way constitute an endorsement of these organisations by PRI Association or the signatories to the Principles for Responsible Investment. While we have endeavoured to ensure that the information contained in this report has been obtained from reliable and up-to-date sources, the changing nature of statistics, laws, rules and regulations may result in delays, omissions or inaccuracies in information contained in this report. PRI Association is not responsible for any errors or omissions, or for any decision made or action taken based on information contained in this report or for any loss or damage arising from or caused by such decision or action. All information in this report is provided “as-is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, expressed or implied. 2 HOW ESG ENGAGEMENT CREATES VALUE | 2018 ABOUT THE AUTHORS Dr Jean-Pascal Gond is a Professor of Corporate Social Mikael Homanen is a PhD Candidate in Finance at Cass Responsibility at Cass Business School, City University Business School in London. His research focuses on banking of London where he heads ETHOS – The Centre for and investor ESG (Environmental, Social & Governance) Responsible Enterprise. His research mobilises organisation policies. He previously worked at the World Bank’s theory, sociology and psychology to investigate corporate Development Economics Research Group and has also been social responsibility (CSR) and sustainable finance. He a visiting scholar at the Wharton School in Pennsylvania has published extensively in the fields of corporate and Singapore Management University. He completed his responsibility, organisational behaviour and organisation MPHil in Finance as well as BSc at Tilburg University in the theory in leading academic journals such as Academy of Netherlands. Management Review, Business Ethics Quarterly, Business and Society, Human Relations, and Organization Science. Dr Michael Viehs is an Associate Director at Hermes Investment Management in London. In this position he is Dr Niamh O’Sullivan is an Assistant Professor in sustainable responsible for the integration of ESG information in the business/CSR at ICCSR, Nottingham University Business investment strategies of all public market equity and credit School. Previously, she worked as an Associate Analyst funds. He is leading the ESG research activities, proving the with Sustainalytics, in Amsterdam; following a PhD in value-add from incorporating ESG information in investment the University of Amsterdam Business School; as a decision. He is responsible for corporate engagements on Project Manager with UNEP FI, in Geneva. Her award- the executive and board level on environmental, social, winning research broadly focuses on sustainable finance, governance (ESG), and strategic issues with German ESG engagement processes, and financial sector social DAX corporations. Michael is also an Honorary Research accountability. Her work has been published in Accounting, Associate at the University of Oxford, Smith School of Organizations and Society, and Accounting, Auditing and Enterprise and the Environment, where he was the Research Accountability Journal. Director before his appointment at Hermes. Dr Rieneke Slager is the Rosalind Franklin Assistant Szilvia Mosony is a Doctoral Researcher at Cass Business Professor at University of Groningen, Global Economics School. She holds a Master’s degree in Corporate Social and Management. Her research examines the link between Responsibility from Nottingham University Business Corporate Social Responsibility (CSR) and responsible School, and in Sociology from the Eotvos Lorand University investment, in particular engagement; and the role of indices of Science in Hungary. She has previously worked as a and ratings in CSR. Her research is published in Organization CSR consultant for Deloitte for 7 years in London, where Studies, Policy and Politics, Journal of Management Inquiry she managed and delivered advisory and assurance and Business & Society. engagements with leading multinational companies on a variety of subject areas. Szilvia’s research focuses on the CSR profession: key actors, their interactions, the emergence of the profession, and its institutionalisation. 3 EXECUTIVE SUMMARY ■ There is clear evidence that engagement by investors KEY RECOMMENDATIONS with companies on environmental, social and governance (ESG) issues can create shareholder value. FOR COMPANIES: But, despite the growth in engagement activity by ■ Companies can enhance their communication with investors, exactly how ESG engagement creates value investors by closing the loop between internal ESG is poorly understood. The Principles for Responsible information systems, ESG engagement information Investment (PRI) therefore commissioned this research and ESG reporting practices. This can be enabled by to explore the question. deploying dedicated information systems to manage ■ We carried out 36 interviews with representatives of investor relations. large listed companies to obtain a corporate perspective ■ Learning opportunities can be extended by ‘acting on engagement. We combined this research with two rather than being acted upon’. Corporations can use earlier studies of engagement practices involving 66 engagement proactively and strategically to test ESG institutional investors. policies, identify more efficient ESG targets and KPIs, ■ Our interviews highlight three ESG engagement and build better ESG management systems. dynamics that create distinct types of value for ■ Political benefits can be maximised through enhanced companies and investors: (a) communicative internal coordination between corporate investor dynamics – engagement enables the exchange of relations departments, sustainability departments, and information between corporations and investors, board-level executives before meeting with external creating ‘communicative value’; (b) learning dynamics investors. – engagement helps to produce and diffuse new ESG knowledge amongst companies and investors, creating ‘learning value’; and (c) political dynamics – FOR INVESTORS: engagement facilitates diverse internal and external ■ Investors can enhance the communicative value of relationships for companies and investors, creating engagement by making their engagement objectives, ‘political value’. expectations and desired form of success clear to companies upfront. Communicative value can also ■ Combined with our previous research on investor be increased through improved public transparency
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