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F Financial institutions
The financial community is adopting more rigorous investment and lending
policies, as mentioned under the value drivers section:
Investors: asset managers and stock markets are requiring greater disclosure
on sustainability risks;
Part A “ Overview of Risk Management

Banks: are increasingly applying rules to investment lending decisions; and
Insurers: premiums for sustainability issue cover are increasing as is the
levels of research into future claims of these types.
Some additional trends include:
The continued growth of ethical and socially responsible investments (SRI): the
wide definition of SRI funds within Europe has reached over ‚¬1 trillion (of
which ‚¬781 billion is within the UK) and has grown over 36% in excess of the
general market benchmark. The trend for the stricter category of the ˜core™ SRI
is stable, at only 1% real market growth above base at ‚¬105 billion. These now
represent 10“15% of total European funds under management.
The key drivers of SRI are seen as:
Institutional investors, with pension funds increasingly demanding that their
assets managers incorporate sustainability issues;
The increased credibility of the business case in the financial community;
Business and financial services regulation that requires more transparency
on sustainability issues; and
Increased activism by the financial community, including strategies such as
engagement on these issues and the integration of them into ˜mainstream™
investment decisions.
Increased investor activism: there is mounting evidence to support the view
that fiduciary duty is not compromised by a socially responsible investment
stance which includes sustainability considerations. There are discussions that
are taking sustainability issues into account as part of the fiduciary duty of the
trustees of investment and pension funds. Relevant findings are that:
Seven out of 10 global investors wanted improved disclosure of corporate
governance information identified. (The 2006 ISS Global Investor Survey
There will be an increase in issue-based activism; an example is the Carbon
Disclosure Project (CDP) which has 225 signatory investors controlling tril-
lions of dollars in assets, which has requested information from over 2000
companies on the risks and opportunities relating to climate change and
greenhouse gases. The CDP has managed to raise their company response rate
from 42% in 2005 to 58% in 2006;
71% of global investors in the 2006 ISS Global Investor Survey believe cor-
porate governance has become more important to their firms over the last
three years; and
63% of global investors in the 2006 ISS Global Investor Survey forecast an
increased growth in corporate governance issues in forthcoming years; this
figure is 93% for Chinese investors, 61% for Europe but lower for the US.
Increased attractiveness to investors “ improved financial performance: while
it may be difficult to determine a direct causal relationship between increased
accountability and financial performance, a variety of studies suggest that such
a link exists.
Chapter 3 “ Drivers and trends in sustainability risk management 59

A 1997 study by Wilshire Associates, a financial information and consulting
firm for institutional investors, revealed that the stock prices of financially
underperforming companies improved after implementing corporate govern-
ance reforms;
A growing number of investors are including non-financial metrics in their
analysis of the quality of their investments. Research suggests that investors
may be willing to pay higher prices for the stock of companies considered to
be accountable. A 1996 survey of large institutional investors conducted by
McKinsey & Co. found that stockholders are willing to pay an 11% premium
for the stock of companies deemed well governed;
Other studies have also linked good stakeholder relations with shareholder
value. For example, an analysis of Fortune 500 companies conducted at the
Boston College Carroll School of Management found that financial perform-
ance was linked to good treatment of stakeholders, including employees, cus-
tomers and communities. The researchers also found that companies that
are judged to treat their stakeholders well are also rated by peers as having
superior management. According to UBS Warburg this attracts an average
12% premium;
37% of investors in the 2006 ISS Global Investor Survey identified enhanced
investor returns as the most significant advantage of engaging in corporate
The Emerging Performance of Environmental Funds Relationship between
Environmental Performance and Shareholder Wealth is a report by the
Assabet Group, which studied both academic research and nine different
environmentally focused investment funds around the world. The report
concluded that investing in companies that use environmentally sound busi-
ness strategies could lead to increased shareholder value. Each of the nine
funds examined outpaced their respective benchmarks;
A study comparing the financial returns of portfolios of highly polluting indus-
try with those of low pollution companies undertaken by IRRC suggested that
there was no penalty for investing in a green portfolio. In many cases, such
portfolios achieved higher returns both against the high polluters and the
S&P 500 Index. (Investor Responsibility Research Centre, Environmental and
Financial Performance: Are they Related? 1995); and
During the five years before August 2001 the Dow Jones Sustainability Index
(DJSI) clearly outperformed the Dow Jones Global Index (DJGI). While the
DJSI had an annualised return of 15.8%, the DJGI increased 12.5% in that

Investors “ whether shareholders investing in ˜socially responsible™ funds that
screen companies for social and environmental attributes, or large institutions “
welcome the increased disclosure that comes with corporate accountability.
There is an increasing demand for qualitative analysis in an era of increasingly
marginal competitive differentiations with regards to technology, communica-
tions and access to finance, etc. It is considered that intangibles, such as brand
Part A “ Overview of Risk Management

assets and key personnel, are the new differentiators of long-term value. Key
indicators exist:
The majority of investment banks now publish equity research analysing the
financial performance of the carbon markets including Citigroup, J.P. Morgan
Chase, Merrill Lynch and Morgan Stanley.
Insurers, brokers and pollution coverage experts say the purchase of stand-
alone pollution liability policies is likely to accelerate among multinationals
in and around Europe as the threat of liability increases;
Among the variables furthering this trend in Europe are the explosion in dis-
covered contaminated properties and new liabilities related to merging
European Union (EU) laws that hold polluters and property owners liable for
the remediation of contaminated sites; and
Flood cover for UK properties is under threat as predictions that global
warming will cause sea levels to rise are leading insurers to fret over the ris-
ing risk of claims.

G Governmental organisations
Examples of governmental, political and legislative actions are covered in more
depth in the ˜Environmental Scan™ section above (p. 38) and in Chapter 9. There
will be an increase in government action to address risks.
A current example is:
The Spanish government has sought ways to curb water use after two years of
drought, now acknowledging this is not a temporary risk, it requires them to
penalise heavy water users.
Governments are also using their vast purchasing power to encourage the
˜greening™ of society:
China™s central and provincial governments will prioritise their purchasing
systems to favour environmentally friendly products and services from 2007,
according to the Ministry of Finance and the State Environmental Protection
Administration (SEPA).

H Local and regional governmental organisations
Examples of local governments™ actions are covered in more depth in the
˜Environmental Scan™ section above and in Chapter 9. There will be an increase
in local and regional government action to address risks. For example:
The California Air Resources Board approved the Pavley law in 2004 requir-
ing passenger vehicles to reduce emissions by 30%. Two auto industry organ-
isations filed a federal lawsuit against the Pavley law, contending that the
federal government regulates fuel economy, not states. In addition, in 2006
Chapter 3 “ Drivers and trends in sustainability risk management 61

California Attorney General Bill Lockyer filed a lawsuit against the Big Six
holding them liable for the environmental damages caused by their products™
GHG emissions.

I International governmental organisations
Examples of international, political and legislative actions are covered above in
the ˜Environmental Scan™ section and in Chapter 9. The trend is for an increase
in collaborative agreements to meet sustainability issues, particularly of a
proven environmental risk nature. Examples are:
The European Union is currently the most regulatory-intensive environment,
and EU companies are rapidly realising the benefits of environmentally sus-
tainable policies. This means that competitor nations must find ways of mak-
ing their products compliant with these stricter environmental policies;
The European Commission has recently published an outline of how it envis-
ages corporate social responsibility to develop within the EU, encouraging all
firms to adopt the ˜triple bottom line™ of economic, social and environmental
responsibility (ED 19/07/01);
The OECD backs greater corporate responsibility as corporate social respon-
sibility will take on ever greater importance in the coming decades, present-
ing companies with a set of clear challenges. Close attention to environmental
issues is seen as a key element of corporate social responsibility strategies.
According to the report, promoting ˜a culture of integrity™ within firms is the
most efficient method of encouraging corporate social responsibility;
There is a huge increase in calls for more product responsibilities and con-
trols as the European Commission supports moves to tighten vehicle emis-
sions limits further than those foreseen in current proposals after European
Union governments and lawmakers called for tougher standards. The
Commission proposed ˜Euro 5™ vehicle standards, which would slash emis-
sions of particulates from diesel cars by 80% and nitrogen oxides (NOX) by
20%. They would also cut NOX and hydrocarbon emissions from gasoline or
petrol-powered cars by 25%; and
After two decades developing the Declaration on the Rights of Indigenous
Peoples, the UN General Assembly is voting on adopting it.
The internationalisation of legislative reach:
Companies and governments are concerned that the US watchdogs are
extending their powers abroad, post-Enron (see also Chapter 22);
Growing fears of US financial rules are encroaching further into the city and
have led UK companies to remove US customers from their books so they do
not come into the remit of the SEC Investment Advisors Act of 1940 which
calls for companies providing advice to more than 14 US citizens to register
with the SEC and make regular reports; and
Recent interpretations of the US Alien Tort Claims Act have allowed com-
panies to be sued for their actions in foreign countries.
Part A “ Overview of Risk Management

J Journalist and media attention
An organisation™s reputation and good brand names are something that is not
only vital for sustainability, but is increasingly easy to lose:
The reputation of a thousand years may be determined by the conduct of one hour.
(Japanese proverb)

Corporate social responsibility and accountability more broadly have become
topics of increased media attention and scrutiny, both in the business press
and the mainstream media. Examples that have affected reputations and
bottom lines include the overseas labour practices of several footwear and
apparel manufacturers and retailers that have received significant media atten-
tion. The activities of oil companies have also led to high profile consumer
The media have been engaging stakeholders in the corporate social respon-
sibility debate, which often focuses on different categories of responsibilities,
for example economic, legal, ethical and philanthropic. In managerial reality,
however, no natural or distinguishable responsibility categories exist. This has
led to a diverse range of reporting on the sustainability issues, possibly even
creating confusion in the media and public at large. Furthermore:
Corporate social responsibility (CSR) is often criticised for being treated as a
moral substitute to compensate for harmful corporate activities. The media
will view companies more harshly if they find this to be true and if organisa-
tions have used CSR to mask harmful activities; and
The media critics argue for a more comprehensive understanding of corpor-
ate responsibility.

K Key competitors
Companies are developing a wide range of management systems to measure,
apply, assess and report their efforts to integrate CSR into all aspects of their
operations. These systems are designed to build accountability within an
organisation and to help to shape a culture that supports and rewards CSR at all
levels. As part of this effort, many companies are attaching value to gaining
competitive positioning leadership in the field of sustainability.
The corporate competitive landscape:
Huge discrepancies exist between companies concerning their risk manage-
ment capabilities;
As sustainability gains recognition, an increasing number of companies are
competing for sector sustainability leadership and differences between lead-
ing companies in most sectors are becoming smaller;
Leaders quantify the value of their brands. Companies care about their
brands and invest heavily in brand management, but few report that they are
actually able to quantify the values of their brands and the returns on their
brand investments;
Chapter 3 “ Drivers and trends in sustainability risk management 63

The trend towards industry-specific sustainability management continues.
Companies are getting increasingly educated about the specific sustainability
risks and opportunities in their sector and continuously move beyond gen-
eral aspects;
Surveys have found that over a third of companies reviewed lack a formal
programme but conduct regular reviews of sustainability activities;
The majority of the reviewed companies also say they are not active in citi-
zenship and sustainability-related business product developments;
The top three activities that are the focus of current citizenship and sustain-
ability attention are community and stakeholder involvement (64%), cor-
porate giving to worthy causes (55%) and environmental sustainability/
climate change (52%); and
Climate change continues to attract increased attention. More companies
recognise that climate change will have a major impact on their future oper-
ations and product offering.

L Local communities
As mentioned in Chapters 9 and 12 this stakeholder group can directly and


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