Ethical/SRIJun 14 2018

How can investors test firms' CSR policies?

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Rathbones
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Supported by
Rathbones
 How can investors test firms' CSR policies?

But there seems to be a mismatch between what a company may say it does in terms of CSR, and what it actually does, meaning investors are right to want to interrogate further.

John Ditchfield, co-owner of Castlefield Advisory Partners, comments: "There is a good amount of cynicism around CSR given many companies with very harmful activities and practices also invest significant sums in social welfare projects.

"This then raises the question of what the 'net' public good or end result of these activities is; some have come to see CSR as little more than part of a company's marketing and public relations spend."

Mr Ditchfield says this is leading to CSR being replaced with an emphasis on ESG analysis, which he describes as "analysing companies to assess their environmental, social and governance (ESG) performance".

Unfortunately, unless you have all your wealth invested in an ethical fund, it’s still very difficult for the individual investor to test a firm’s CSR policies beyond simply collecting what they publish in their CSR reports. Anna Sofat

Building on this, Anna Sofat, founder and managing director of Addidi Wealth, gives examples of how companies might be considered 'bad' by one CSR measure but 'good' by another.

She explains: "For instance, tobacco firms can score very well because of their community and sustainability work, but ethically minded investors would still want to reject them for the negative impact tobacco has on society.

"ESG performance is increasingly being used and this is harder to score well on. For instance, ESG will rate tobacco companies poorly as creating social harm.

"There are efforts to standardise these CSR reporting criteria which would, in turn, help investors make informed decisions."

What to look for

The sort of areas that should be scrutinised, according to Sandra Crowl, member of the investment committee for Carmignac, are corporate management and a company's social activities.

She states: "Corporate management is tested for environmental issues the firm considers, such as treatment of carbon emissions, pollution, waste, and water usage.

"On the social side, all types of employment abuses, staff turnover metrics, diversity, workplace health and safety, income distribution, and product safety are checked."

Jennifer Walmsley, partner for consultancy Arkadiko Partners, says the ways in which investors can find such information is by looking at company reporting to see whether they talk about their management of social and environmental impact in a "meaningful - ie, integrated - way".

She also advises investors and their advisers to: "Ask company management and non-executive board members relevant questions about how they manage these risks."

Key signs the company is on the right track is "evidence of sound risk management structures as well as clear lines of accountability", she adds. 

According to Rose Beale, thematic analyst in the responsible investment team at Columbia Threadneedle Investments, companies could be reporting on strategic or material issues, or non-strategic.

  • Non-strategic CSR issues could include donations to sports charities or special days dedicated to helping in the community.
  • Material ESG issues could include: progress on diversity or environmental incident reduction.

She adds: "In any case, we believe the most relevant issues to test are not isolated CSR activities but holistic ESG performance."

Thierry Bogaty, head of SRI expertise at Amundi, agrees having a holistic analysis of ESG will provide investors with more information than simply scrolling through a company's CSR statements. 

He explains: "Building environmental, social and governance criteria into analyses and investment decisions, in addition to traditional financial criteria, enables [investors] to gain in-depth knowledge of a company and assess its quality. 

"ESG analysis enables investors to better identify risks and opportunities faced by companies. This helps investors to take into account long-term risks - financial, regulatory, operational and reputational risks - and to fully exercise their responsibility."

According to Mr Bogaty, this approach provides a "360-degree perspective of companies", and thereby "consolidates value creation".

Available information

Ms Crowl says: "Investors should always seek to verify the sustainability credentials published on company websites and elsewhere."

Specialist ESG consultants, such as MSCI ESG ratings, provide a plethora of research products comparing companies’ ESG performance within their peer groups, according to Ms Crowl, but nothing can beat "thorough due diligence" when building the investment rationale, she adds.

According to Mr Ditchfield, there is plenty of information available to help investors and their advisers make sense of companies' CSR practices.

He explains: "There are a good many investment companies which seek to analyse CSR activities and identify the extent to which a company or group of companies is genuinely seeking to address a public need or promote social welfare."

Many companies, such as Hermes Investment Management, Columbia Threadneedle Investments and Rathbone Greenbank Investments, collect data on hundreds of companies' CSR policies and performance.

The reason, according to Matt Crossman, engagement manager for Rathbone Greenbank Investments and stewardship director at Rathbones, is to be able to rate a company's efforts in three areas: policy, performance and plans.

He outlines these as follows: 

  • Policy: "Investors can test the strength of CSR policies by grading company efforts against their peers on these core topics. There has to be a policy – evidence of critical thinking regarding a risk," he says.
  • Performance: "There then has to be transparency on how this policy has been executed – what has been done, and what has been achieved.
  • Plans: "And finally, there needs to be an evaluation of that performance and a statement of future intent."

Mr Crossman adds: "Companies score highest on our ratings where they clearly spell out their policies, performance and plans.

"Improvements in, say, energy use or business travel mileage may come because of any number of factors – we award the highest scores to those linked to clear reduction plans and intentional investment."

Still some lack of transparency

Yet it is not always easy to find the right information. Part of the reason for this, as Lisa Beauvilain, head of sustainability and ESG at Impax Asset Management, points out, is that investors are often looking for specific information that cannot be easily found.

"Investors look for materiality-based reporting and hence very general CSR reporting can be less useful and, in some instances, even seem to be simply corporate marketing," she says.

Another problem, as Ms Beale asserts, is that it can be "difficult" to test a CSR approach - as "they are not designed to be tested".

She explains: "They are designed to set out an approach, and to position a firm in a good light to its stakeholders.

"Corporates may set related targets or report related metrics to give an indication of how they have implemented their CSR approach. But these can be unique as well as difficult to benchmark and compare across companies."

Companies score highest on our ratings where they clearly spell out their policies, performance and plans. Matt Crossman

Ms Crowl notes: "While new norms are requiring listed companies to render their sustainability practices transparent, report carbon emissions and put back into communities where their processes degrade social and environmental conditions, these measures aren’t broad based yet."

Ms Beale agrees: "A whole industry has arisen around ESG ratings to facilitate this process. But research shows that different methodologies and the preferences of different rating institutions can lead to fundamentally different outputs."

Ms Sofat also feels there is a lack of in-depth, easily obtainable information for the average investor.

She explains: "Unfortunately, unless you have all your wealth invested in an ethical fund, it’s still very difficult for the individual investor to test a firm’s CSR policies beyond simply collecting what they publish in their CSR reports."

While Ms Sofat agrees with Mr Ditchfield that there are plenty of CSR benchmarking tables available online, she believes these "vary in how they collect data and they have limitations".

However, Ms Beauvilain says the information that is available is getting more detailed, which can help investors. She adds: "Many aspects of CSR reporting can be material and very important, such as how the company manages its labour force or its water resources. The best corporate reporting integrates financial and material non-financial aspects."

simoney.kyriakou@ft.com