Add to the above fact that there is currently about $45 trillion of assets under management by 1,314 United Nations Principles for Responsible Investment (UNPRI) signatories – up from only $4 trillion back in 2006. UNPRI signatories commit to integrate six principals covering environmental, social and governance issues into their investment decision making and ownership practices.

Clearly, responsible investing is growing in importance – not only because it is good for our planet’s long-term prosperity but also because there is mounting evidence that it can lead to superior investment returns. For instance by subjecting equities from the high-carbon sectors in a given index to a performance test, related to normalised greenhouse gas emissions, and removing the ones with a below average performance relative to sector peers, it is possible to obtain a portfolio of securities with a lower carbon footprint while achieving superior total returns compared to the original index.

The low carbon U.S.

In the simulated case below, the “Low Carbon US” achieves a 56.7 per cent reduction in normalized greenhouse gas emissions with the bonus of an extra 7.8 per cent in total returns compared to the original index over the time period January 1, 2008 to August 31 2014.

The increased investor appetite for responsible investing has been made possible in part by the remarkable rise in the availability of sustainability data. Over the past decade, the number of corporate sustainability reports – the most common format for corporations to disclose their periodic environmental social and governance performance – has grown to 7,445 in 2013 from a mere 644 in 1999. A combination of heightened investor demand, activism and mostly regulatory intervention, coupled with a move towards greater transparency initiated by leading corporations, have all combined to drive increased sustainability disclosures.

For instance, on October 17, 2014, the Singapore Stock Exchange announced its intention to adopt a comply-or-explain mechanism for sustainability reporting for all of its listed companies. When implemented, this piece of regulation will add to the inventory of close to 170 policies in force around the world that are meant to encourage or mandate corporate sustainability reporting.

More, not better

While the number of sustainability reports has increased substantially, a closer look reveals some important findings. In its latest analysis of sustainability disclosure trends among the world’s stock exchanges, Corporate Knights Capital found that a sizeable chunk of the world’s large listed companies are failing to disclose their performance on the seven basic sustainability metrics – employee turnover, energy, greenhouse gas emissions (GHGs), injury rate, payroll (total employee compensation), waste and water. These seven basic indicators are objective measures of corporate sustainability performance that are broadly relevant for companies in all industries. Moreover, they are generally accepted as being the most widely tracked core sustainability metrics by various stakeholder groups including investors.

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For instance, only 39 per cent of the world’s 4,609 large listed companies disclosed their GHGs for the year 2012. For water, that percentage is 25 per cent. As for employee turnover rate, it is a paltry 12 per cent. While disclosure rates vary by sector, it means that a majority of the world’s large companies are not still not disclosing these seven basic sustainability metrics – in the case of GHGs, arguably the most universally recognized strategic sustainability issue, it has not been reported by more than 61 per cent of the world’s large listed companies. Even more disconcerting is the finding that only 128 (2.8 per cent) of all of the world’s large listed companies disclosed all the seven basic sustainability metrics for the year 2012.

Essentially, the remarkable rise in the number of sustainability reports has not been accompanied by a similar increase in the reporting of the basic sustainability metrics.

Equally troubling is that disclosure rates on the seven basic sustainability indicators appear to be plateauing. As one illustration, the number of large listed companies that disclosed their energy use increased by 88 per cent from 2008 to 2012 but only by 5 per cent from 2011 to 2012. A similar reporting slowdown is occurring on the other six metrics.

Clearly, a majority of companies are still not transparent enough to allow investors to make well-informed decisions over the long-term horizon by integrating foundational sustainability criteria. A point has been reached where virtually all the large companies that would have engaged in the reporting of the basic sustainability metrics have done so already and the remaining large companies likely have little or no intention of doing so under present circumstances.

Investors demand data

This is in stark contrast to investors’ growing interest in building sustainable investment strategies. Despite the notable progress made in corporate sustainability reporting, as shown above, there is still much room for improvement – not only in terms of quantity, but also in terms of consistency and timeliness. While virtually every company has reported on their financial performance six months after their year-end, only 63 per cent of these companies have disclosed their sustainability performance by then.

It is therefore not a surprise that in October 2014, the UNPRI and Ceres’s Investor Network on Climate Risk (INCR) launched an initiative to convey investors demands for more timely comparable and material disclosure of corporate sustainability information to the International Organization of Securities Commissions (IOSCO) in order to inform their investment decisions.

The IOSCO stands in a critical position in this regard through its direct relationship with member stock exchange regulators. Investors of all descriptions are encouraged to demand swift and decisive action from the IOSCO to provide greater clarity around sustainability reporting requirements, ideally to be integrated as part of existing financial disclosures.

The necessary tools are already available. For instance, IOSCO can take inspiration from UNCTAD’s Best Practice Guidance for Policymakers and Stock Exchanges on Sustainability Reporting Initiatives to facilitate a consistent implementation of corporate sustainability reporting requirements among member exchanges. This guidance is a voluntary technical aid to assist stock exchanges and regulators who have responsibility for corporate reporting practice and are contemplating the introduction of a new imitative – or further development of an existing one – to promote corporate sustainability reporting.

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Johannesburg model

The relative success of the Johannesburg Stock Exchange in spurring sustainability disclosure amongst listed companies through the implementation of the listing requirement incorporating the King III Code of Corporate Governance stands as a benchmark for inspiring investors and stock exchanges around the world. Ceres’ Investor Listing Standards Proposal, Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting, which engages global stock exchanges via the World Federation of Exchanges (WFE) on a possible uniform reporting standard for sustainability reporting by WFE members may also serve as a basis for the implementation of corporate sustainability reporting requirements among member exchanges.

Likewise, governments stand in a pivotal position to influence corporate sustainability reporting and are encouraged to renew their efforts in this direction. Existing policies around the world vary in many respects in terms of whether they are mandatory or voluntary, broad or narrow (i.e., applies to various industries as opposed to only one or a few specific industries) and prescriptive or principles-based (i.e., states which specific items of sustainability performance metrics are to be reported and how).

These wide differences in the type of policies may, in part, explain the differences in disclosure performance by the large listed companies of the seven basic sustainability metrics among the world’s stock exchanges, as shown in Corporate Knights Capital’s latest report on corporate sustainability disclosure trends. However, it was found that there is a strong association between policies that are mandatory, broad and prescriptive and better corporate sustainability disclosure performance. Policy-makers may use this finding as a framework to identify case studies as a framework to identify case studies and benchmarks for implementation in their own jurisdictions.

Disclosure frameworks

The advent of non-governmental standard-setters such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and voluntary disclosure frameworks, such as the CDP and the Climate Change Reporting Framework, have without a doubt, helped to popularize sustainability reporting. However, there exists a proliferation of fragmented and often competing reporting standards and frameworks when it comes to sustainability reporting that may bring confusion to both the reporters and the users.

A rapid and successful conclusion of the work among the participants to the Corporate Reporting Dialogue will bring about much needed clarity and comparability in corporate sustainability reporting, which will encourage more corporations to embrace more coherent and useful disclosures of sustainability performance. The Corporate Reporting Dialogue brings together financial reporting standard-setters and sustainability reporting frameworks to promote greater alignment, consistency and comparability between corporate reporting requirements, standards and frameworks. An endorsement by the major groups of users of corporate disclosures – both financial and non-financial – of the outcome of the work of the Corporate Reporting Dialogue will also help in determining the de facto global standard in corporate reporting.

The explosion in corporate sustainability reporting over the last 10 years or so has certainly helped to fuel the remarkable rise in responsible investing. Responsible investing is a much heralded practice whereby investment decisions consider long-term economic, social and environmental sustainability. However, current corporate sustainability reporting practices are at odds with the needs and level of interest from investors, such that a renewed effort is needed to bring sustainability reporting to the next level. Governments, regulators both public and private, business and non-business organizations, and investors all have an important role to play to make this happen.

The post Empowering responsible investing for long-term prosperity appeared first on Corporate Knights.

It is true that many asset managers have taken steps to integrate ESG data into the way they manage their portfolios, but the vast majority of the world’s $60 trillion in assets under management is not subject to this type of analysis.   

The mainstream’s skepticism about ESG is understandable. On a theoretical level, it is not always obvious that a good ESG performer would be a good portfolio performer. And even for those investors that are keen to explore ESG investment strategies, there are other, more practical challenges. For instance, ESG data has only been around for about a decade – a pittance in an industry that spans more than 140 years.

While this doesn’t mean that ESG analysis isn’t valuable, or that companies with good ESG performance cannot be good financial bets, it does mean that investors can’t conduct the kind of long-term financial backtests that they’re accustomed to building to evaluate new investment theses.

Another challenge is that many of the third-party vehicles that investors have historically used to integrate ESG into their portfolio decision making, including ESG ratings, are often “black boxes” – that is, they’re difficult for outsiders to break down, test and understand.  

To help investors overcome some of these barriers, Corporate Knights Capital built a new application that we call Sustainable Beta – what we believe to be the world’s first interactive sustainable portfolio construction tool. It’s not a panacea, we know, but it can help demystify sustainable investment strategies and, perhaps most importantly, it can transparently show how ESG data can be used to boost – not harm – portfolio performance.

(To test-drive Sustainable Beta, go to corporateknightscapital.com, select “Our Services” and then go to “Portfolios.”)

Users of Sustainable Beta are invited to build their own equity portfolios using five different inputs. First, select your market. Options include Australia, Canada, Europe, Japan and the United States. Next, select the specific ESG factor you would like to test. Five factors can currently be tested: Board Diversity, Carbon, Energy, Water and Tax.

Once these two fundamental decisions are made, you then decide how the portfolio should be normalized (e.g., how the ESG factor should be measured), how it should be weighted (e.g., by market capitalization or equal weight) and how often you would like it to be rebalanced (annually, semi-annually, quarterly or monthly).

After selecting all of the inputs and generating a portfolio, you can see how the portfolio would have performed against the major benchmark in your selected market (e.g., S&P 500 in the United States) from as far back as January 2008 up to the end of June 2014. 

The tool typically builds portfolios by scanning all companies that are available in the chosen market and selecting those that perform favourably on the chosen factor.  

Many of the portfolios that can be built on Sustainable Beta fail to beat their benchmark. For instance, an annually rebalanced market capitalization-weighted portfolio of Canadian carbon leaders (normalized by sales) would have underperformed the S&P/TSX Composite by 9.9 per cent from January 2010 to June 2014.  

But some portfolio permutations significantly outperform their benchmarks. For instance, an annually rebalanced, equally weighted portfolio of U.S. carbon leaders (normalized by number of employees) would have outperformed the S&P 500 by an astonishing 41 per cent from January 2008 to June 2014.

More analysis would be needed to properly attribute this outperformance – the weight scheme, for example, is sometimes a more significant determinant than the sustainability factor – but these and other results certainly call into question the orthodoxy that sustainable investing is doomed to underperform.  

Sustainable Beta is unique because of its transparency and flexibility. We are not aware of any other publicly available portfolio construction tool that lets users explore such a wide range of sustainable investment strategies. If it can play some role in the mainstreaming of ESG investing, it will have been a success.

We encourage you to give it a try.

The post Create a sustainable portfolio appeared first on Corporate Knights.

Mountain Equipment Co-op (MEC), the clothing and sporting equipment retailer, deserves plaudits for achieving the top overall score in this year’s Best 50. Remarkably, MEC came in with top quartile performance on six metrics, including carbon productivity, waste productivity and CEO-average employee pay.

While the Best 50 consists of organizations from many different sectors, companies are only ever scored against their industry peers. It is not until the final step in the process, when companies each have an overall score based on their performance against their global industry peers, that they are amalgamated. This approach lets us consider each company against the best practices, expectations and performance standards that are prevalent in their particular industry group.

The industry-specific nature of the Best 50 means that it can be interpreted in different ways. For instance, BCE, while placing 17th overall, was the top performing telecommunications company considered in this year’s ranking, placing well ahead of industry peers Telus (28th overall) and Rogers Communications (37th overall). This means BCE is at or near the top of its industry in overall sustainability performance, but significantly trails best practice among Best 50 firms in absolute terms.

In another interesting twist, Loblaws inched into this year’s ranking, placing 50th overall. But it was actually the highest ranked company within the consumer staples sector, placing above such peers as La Coop fédérée (63rd position), Sobeys (76th position) and LCBO (84th position). This tells us that the consumer staples sector has a relatively low sustainability performance bar, and that companies in this sector can stand out from their peers with comparatively modest improvements in corporate sustainability performance.

The nine “sector leaders” in this year’s Best 50 were MEC (consumer discretionary), Loblaws (consumer staples), Husky Energy (energy), Vancouver City Savings Credit Union (financials), Bombardier (industrials), Celestica (information technology), Teck Resources (materials), BCE (telecommunication services) and Capital Power (utilities).

If these sector leaders and the rest of their Best 50 brethren stand up as Canada’s “best of the best” in overall sustainability performance, it is worth considering whether the best are getting better.

A quick comparison between this year’s Best 50 and last year’s cohort shows that performance on most indicators is essentially flat, although notable improvements were made on several natural resource-based metrics. Admittedly, a single year-over-year comparison is hardly indicative of long-term trends, but this analysis still serves to show where Canada’s most sustainable companies are veering, and where future weaknesses may lie.

The average Best 50 company last year had a 9.6 per cent employee turnover rate, a CEO-average worker pay ratio of 73:1, executive management diversity of 21 per cent, board diversity of 20 per cent and innovation capacity of 1 per cent.

The typical Best 50 firm this year had a strikingly similar profile, with 10.1 per cent employee turnover, an 88:1 CEO-average worker pay ratio, executive management diversity of 22 per cent and identical figures for board diversity and innovation capacity.

While longitudinal analysis would be needed to identify any long-term trends, this comparison shows that the Best 50 may be approaching performance thresholds on these particular indicators.

Among metrics that are generally more volatile, a notable improvement came with carbon productivity. Compared to the average Best 50 firm last year, the average Best 50 firm from this year’s class generated 21 per cent more revenue for every tonne of CO2-equivalent emissions from their operations. The financials sector led the way, with companies such as HSBC Bank Canada squeezing an additional $54,000 in revenue out of every tonne of emitted carbon, which, in the case of banks, comes largely from the heating and cooling of their buildings.

The Best 50 is the corporate sustainability “ranking of record” in the Canadian market, and has been embraced by the business community because of its objectivity and transparency. We look forward to welcoming next year’s class and monitoring the ongoing performance of this group of recognized sustainability leaders.

Click here to go back to the ranking landing page.

The post Are the best getting better? appeared first on Corporate Knights.

And so it is with corporate sustainability, a topic that Corporate Knights has been thinking about and measuring since 2005, when the first iteration of the Global 100 Most Sustainable Corporations ranking was released.

The Global 100 is not the only analytical framework for measuring corporate sustainability, but few can match its longevity, its commitment to transparency, or the credibility that it holds in both the sustainability and investment worlds.

The notion of measuring corporate sustainability is inherently challenging, but the intellectual and financial importance of carrying out this assignment has never been higher. While forecasts of any sort should be discounted with an appropriate degree of skepticism, one does not have to be a prophet of doom to recognize there are a great number of complex, systemic challenges on the horizon that businesses, governments and communities will have to manage. These include climate change, resource depletion, urbanization, population growth and rising fossil fuel prices.

Projects such as the Global 100, driven by company performance on a series of specialized environmental, social and governance metrics, provide first-level insight into how companies are exposed to these sorts of events.

As has been written about extensively by Corporate Knights, the Global 100 is, above all, an exercise in data. Companies are scored and ranked based on their performance on a suite of 12 metrics, each of which is quantitative in nature. Examples include a company’s revenue divided by its energy use, the total remuneration of a company’s CEO compared to the average salary across its workforce, or a company’s lost-time injury rate.

The Global 100 incentivizes disclosure and transparency; companies that measure their sustainability performance but stop short of publicly disclosing it will be at a disadvantage. Only data that is publicly disclosed – in annual reports, corporate sustainability reports or through other channels – can be used in the Global 100.

As might be expected, the methodology behind the Global 100 has evolved over the last 10 years. The reporting practices of the world’s publicly traded companies have changed dramatically since 2005, and the Global 100 has had to keep pace. For instance, an 11th indicator, Employee Turnover, was added in 2011, and a 12th, Pension Fund Status, in 2012. Other indicators, such as Leadership Diversity, have been refined over the years.

Despite this evolution, the singular objective of the Global 100 has remained constant – to identify the 100 most sustainable corporations on Earth.

Which brings us to the Class of 2014. Based on its strong across-the-board sustainability performance, Westpac Banking came out in top position. Headquartered in Sydney, Australia, Westpac is one of the largest banks in Australasia, with annual revenues of $42 billion and over 36,000 employees.

The Top 5 were rounded out by Biogen Idec, the U.S.-based biotech firm; Outotec, a Finnish mining technology and capital goods company; Norwegian oil giant Statoil; and Dassault Systemes, a French company that specializes in the production of 3D design software. The geographic and sector diversity of the Top 5 is a clear sign that the drive to do business more sustainably is not specific to particular regions or industries. It’s a global, multi-sector response to global challenges with economy-wide impacts.

Still, some countries do stand out. Perhaps the most striking feature of the 2014 Global 100 is the concentration of U.S. and, to a lesser extent, Canadian companies. There are 18 U.S. companies in the 2014 class, up from 10 in 2013. Canadian companies trail slightly with 13, up from 10 a year ago.

What makes this latest distribution interesting is that the U.S. and Canada significantly outperformed – or out-represented – a large number of sustainability heavyweights, including the United Kingdom (8), Germany (7), Sweden (5) and Denmark (1). There’s no indication that U.S. or Canadian companies benefited from any specific government policies, which shows that companies can (and do) push for sustainability excellence in the absence of policy incentives.

Corporate sustainability will always be a challenging concept to measure, and management teams will commit to improving corporate sustainability performance for many different reasons, including hard ones (reduced costs or higher revenues) and soft ones (improved brand and corporate reputation). But we can be sure that over time, with access to more and better data, we will come closer to identifying what it means to operate as a sustainable business.

Click here to go back to the ranking landing page.

The post Global 100 turns 10 appeared first on Corporate Knights.

The topic of sustainability disclosure has been extensively researched in recent years, but we feel our report stands out from previous analyses in three main ways. First, we focused exclusively on the reporting practices of large companies, which we defined as having a market capitalization of $2 billion (U.S.) or higher. Second, we looked only at so-called first-generation sustainability indicators, those that are robustly disclosed by the world’s largest companies: greenhouse gas (GHG) emissions, energy use, water use, waste, lost-time injury rates, employee turnover and payroll data. Finally, we analyzed disclosure trends over the five-year period from 2006 to 2010.

Since our target audience consisted of national policy-makers, we rolled up our findings for each country into a “composite stock exchange,” an aggregation of all stock exchanges in the country. We were primarily interested in determining which countries were leading the pack in disclosing each of the first-generation sustainability indicators, and how disclosure rates had changed over time.

The Netherlands was found to have the world’s most advanced composite stock exchange from an overall sustainability disclosure perspective. The Top 10 were rounded out by the composite exchanges of Denmark, Finland, Spain, South Africa, Sweden, Norway, Italy, Brazil and France. As countries with demonstrably effective sustainability disclosure policies – which could potentially be replicated elsewhere – they merit deep investigation by policy-makers.

In addition to identifying the world’s top-performing composite exchanges, we also analyzed secular trends in reporting practices. On this front, there were a number of surprising findings:

• The global disclosure rate for each of the first-generation indicators is declining. In 2008, over 28 per cent of the world’s large companies disclosed their GHG emissions. By 2010, that figure had dropped to 18 per cent. A similar, though less dramatic pattern exists for the other six indicators. This trend could represent a legitimate signal for policy-makers to move forward on a mandatory reporting framework.

• Certain countries are excelling in disclosure around certain first-generation indicators. Portugal has the world’s highest disclosure rate of water data (73%), Italy has the highest disclosure rate of employee turnover data (42%) and Denmark has the highest disclosure rate of lost-time injury rates (35%). Notably, Finland has the top disclosure rate on the remaining four indicators: payroll data (91%), waste (83%), energy (78%) and emissions (52%).

• Only 52 large companies, with total market capitalization of $2 trillion, disclosed all seven indicators in 2010.

• A great process of “catch up” is taking place on stock exchanges in the world’s emerging markets. Four of five exchanges with the fastest-growing sustainability disclosure rates are emerging markets.

Legendary management consultant Peter Drucker was onto something when he famously observed that, “what gets measured, gets managed.” But in order to measure, we need data. The findings from our report can be used by policy-makers to reinvigorate the practice of corporate sustainability reporting and improve the quantity of sustainability data in the market.

Since data quantity should not be confused with data quality, the next step in the continuum should be to find workable solutions to improve the standardization of sustainability data.

The post Sustainability disclosure appeared first on Corporate Knights.