ESG reporting - does it make a difference


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Stephen Hine, Head of International Relations - EIRIS - United Kingdom

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  • Proposed EU chemicals legislation REACH reflect these broad concerns over lack of information about most chemicals on the market & growing scientific evidence about the widespread presence of chemicals & the potential consequences for human health and the environment. REACH = Registration, Evaluation & Authorisation of Chemicals Proposes a framework in which all chemicals currently used in significant volumes in Europe will be systematically tested for potential health effects. It will require producers / importers of substances in excess of 1 tonne per year to provide safety information on their products. This will affect approx. 30,000 chemical substances already traded in the EU market. The cost of registration & testing will be borne by manufacturers/importers involved Chemicals of very high concern will undergo further evaluation & authorisation - persistent, bio-accumulative and toxic (PBT), - very persistent and very bio-accumulative (vPvB) or - carcinogens, mutagens and reproductive toxins (CMRs) Those presenting an unacceptable risk to human health & the environment will be restricted and/or substituted where less harmful alternatives exist. The proposal is to be finalised at the end of 2006. A number of Ores, ore concentrates, minerals exempted unless chemically modified (III) Cellulose pulp (II) Council : Cement clinker (III), LPG, crude oil, coke, coal unless chemically modified. Parliament : introduce a number of substance exemptions (e.g. oxygen, a number of oils, iron, noble gases, methane, ethanol)
  • The 12 indicators fall into 3 main areas: Strategy & responsibility – assessing what actions/responsibility are being taken at a strategic level e.g. whether key commitments are in place; and whether the business risks and/or opportunities are being adequately assessed Research & development – whether programmes are in place to mitigate product safety/sustainability risks at the development stage OR to develop new products to meet growing demand for safer/more sustainable chemicals Reporting & dialogue – whether the company is publicly engaging in dialogue on this issue and being transparent to stakeholders (incl investors) on the risks/opportunities involved.
  • Here in more detail the indicators for strategy & responsibility including (pick out key ones – prod. Stew, b2b partnerships, phase-out of chem.).
  • Under R&D we look for:
  • Our grading methodology is based on these 12 indicators. There are 5 grades ranging from No evidence to Advanced with Good representing whether Companies have taken sufficient steps to mitigate risk to an acceptable level. Advanced being best practice that may lead to a competitive advantage.
  • Assessment shows wide range in the quality of management response between best and worst performers Clearly: all companies assessed have taken some initial steps in this area – but some are doing far more than others. LEAVE FOR QUESTIONS Some correlation between market cap and performance - Akzo & ICI are much larger than the others. Respondents appear also to outperform non-respondents. However, lack of response may be indicative of a general lack transparency on this issue rather than an unfair bias. All of the companies reviewed do publicly report in one way or another. In addition, two of the indicators assessed require public disclosure of the information.
  • Taking a closer look we have identified that: EIRIS considers to be essential if a company is to minimise its exposure to chemical safety and sustainability risks. EIRIS considers such disclosure best practice and important to encouraging transparency and dialogue between companies and their stakeholders on the risks associated with chemicals. So while a few industry leaders have taken significant steps to address chemical safety and sustainability concerns, a number of firms are not yet far down this track despite growing regulatory and other pressure in that direction. So how can analysts better understand how companies are addressing these issues? In addition to the indicators we’ve assessed, the following questions can be used when engaging with companies on the impact of chemical safety.
  • ESG reporting - does it make a difference

    1. 1. ESG Risk & Research – what do Companies do and what do investors value? TBLI Paris Stephen Hine November 2006
    2. 2. Content <ul><li>ESG Risk Management by Companies </li></ul><ul><li>Sector specific ESG research </li></ul><ul><li>What do investors value – results of a survey </li></ul>
    3. 3. ESG risk management provides: <ul><li>Interface between ESG issues, corporate governance and a company's financial health </li></ul><ul><li>A bridge between ethics and governance </li></ul><ul><li>An injection of ESG issues into narrower or traditional governance concerns </li></ul><ul><li>Some insight into whether or not top management is exercising sufficient oversight / control and adequately discharging its responsibilities? </li></ul>
    4. 4. ESG Risk Management – Research approach <ul><li>Using ABI Guidelines as starting point </li></ul><ul><li>Board - regular review, training and pay incentives </li></ul><ul><li>Risk management system - policy & procedures, regular assessment, and audit and verification </li></ul><ul><li>Identification of specific SEE risks - actual disclosure </li></ul><ul><li>Quantified potential liabilities / opportunities: provision of specific examples (£) </li></ul><ul><li>- each component equally weighted (4 x4pts = 16) </li></ul>
    5. 5. EIRIS assessment <ul><li>Assessment grades are assigned to each range of scores as follows: </li></ul><ul><ul><li>0 no evidence of </li></ul></ul><ul><ul><li>1-4 limited </li></ul></ul><ul><ul><li>5-8 intermediate </li></ul></ul><ul><ul><li>9-12 good </li></ul></ul><ul><ul><li>13-16 advanced </li></ul></ul>
    6. 6. Data analysis - All World by country
    7. 7. Data analysis - major Euro countries
    8. 8. Data analysis - Asia
    9. 9. Data analysis - Australia, NZ & Canada
    10. 10. Data analysis - All World by sector
    11. 11. Conclusions <ul><li>Evidence of companies in many parts of developed world and in many sectors rising to the challenge </li></ul><ul><li>But overall more poorer performing than higher performing companies – still in its infancy? </li></ul><ul><li>Bigger companies have done more than smaller companies </li></ul><ul><li>UK and European companies showing up well with SEE risk management assessments should be well placed for the implementation of “OFR” and EC Modernisation Directives </li></ul><ul><li>Some evidence suggesting that sectors perceived to have greatest ESG risk exposure (tobacco, mining, utilities) do well, though not uniformly chemicals, health do less well </li></ul>
    12. 12. ESG Sectoral Research <ul><li>What are the salient risks & opportunities? </li></ul><ul><li>Need for detailed research – drilling down </li></ul><ul><li>Need clear comparable framework </li></ul><ul><li>Five assessment grades – no evidence, limited, intermediate, good, advanced </li></ul><ul><li>Absolute assessment grades – is ‘Good’ good enough? </li></ul><ul><li>Engagement with Companies by us and by clients </li></ul>
    13. 13. Chemicals - ESG Risks & Opportunities <ul><li>REACH – Regulation, Evaluation & Authorisation of Chemicals </li></ul><ul><ul><li>Registration of substances ≥ 1 tonne/yr </li></ul></ul><ul><ul><li>Over 30,000 chemical substances </li></ul></ul><ul><ul><li>Chemicals of ‘very high concern’ may face restrictions or require substitution </li></ul></ul><ul><li>Other EU Regulation – WEE, ELV etc </li></ul><ul><li>Greening Company supply chains </li></ul>
    14. 14. Management indicators <ul><li>12 chemicals management indicators examined in three broad areas: </li></ul><ul><ul><li>Strategy & responsibility </li></ul></ul><ul><ul><li>Research & development </li></ul></ul><ul><ul><li>Reporting & dialogue </li></ul></ul>
    15. 15. Management indicators <ul><li>Strategy and responsibility </li></ul><ul><ul><li>Identification of business risks </li></ul></ul><ul><ul><li>Product stewardship principles </li></ul></ul><ul><ul><li>Risk assessments </li></ul></ul><ul><ul><li>Phase-out of chemicals of concern </li></ul></ul><ul><ul><li>Avoiding chemicals of concern in new products </li></ul></ul><ul><ul><li>Business-to-business partnerships </li></ul></ul>
    16. 16. Management indicators <ul><li>Research & development </li></ul><ul><ul><li>R&D linked to ‘green’ chemicals innovation </li></ul></ul><ul><ul><li>Life cycle analysis (LCA) in the design and development of chemical products </li></ul></ul><ul><li>Reporting & dialogue </li></ul><ul><ul><li>Public reporting of chemicals of concern </li></ul></ul><ul><ul><li>Disclosure of business risks in Annual Report </li></ul></ul><ul><ul><li>Stakeholder dialogue on chemicals </li></ul></ul><ul><ul><li>Systems to communicate chemical product risks along the product value chain </li></ul></ul>
    17. 17. Assessment approach <ul><li>No evidence - no evidence from publicly available company literature of policy or management system </li></ul><ul><li>Limited - some evidence of steps taken to address this issue </li></ul><ul><li>Intermediate - evidence of a concerted company response to the risk and 'real' progress </li></ul><ul><li>Good - the company's management system is considered adequate and sufficient to mitigate the risk to 'acceptable' levels </li></ul><ul><li>Advanced - leading practice that may be gaining a competitive advantage (with stakeholders or society in general) </li></ul>
    18. 18. Assessment results NR NR NR NR NR = non-respondent
    19. 19. Key findings <ul><li>4 out of 7 have systems to identify business risks </li></ul><ul><li>5 out of 7 incorporate safety/sustainability into R&D </li></ul><ul><li>5 out of 7 engage with stakeholders </li></ul><ul><li>Only 2 of 7 state a commitment to phase-out chemicals of concern </li></ul><ul><li>Only 1 publicly discloses specific chemicals of concern produced and/or used </li></ul>
    20. 20. Other EIRIS ESG reports <ul><li>Obesity – most food companies not engaged </li></ul><ul><li>Project Finance – Equator Principles are helping to push banks but some way to go </li></ul><ul><li>Pharma & access to medicines – strong commitments but pricing & lobbying problems </li></ul><ul><li>Mobile phones & health – all aware yet lack of targets/KPIs and emission reduction R&D </li></ul><ul><li>Ongoing roll out across all sectors & issues </li></ul>
    21. 21. Valuing ESG issues - survey <ul><li>Cross-section of investors & SRI experts </li></ul><ul><li>Financial impact over next 3-5 years </li></ul><ul><li>Key sectors (15): Automobiles & parts, Banks, Chemicals, Construction & materials, Electricity, Food & drug retailers, Food producers, Forestry & paper, water & multi-utilities, Household goods, Leisure goods, Mining, Oil & gas producers, Pharmaceuticals & biotechnology and Travel & leisure </li></ul><ul><li>Brief preliminary findings only – full report soon </li></ul>
    22. 22. Valuing ESG issues - findings <ul><li>Average impact across all 15 sectors: </li></ul>12.6% Over 25% of value 26.1% 10% to 25% of value 29.5% 5% to 10% of value 26.1% Less than 5% of value 5.7% No impact Percent responses
    23. 23. Sectors where ESG issues have highest impact 51.7% Mining 50.0% Food producers 55.2% Automobiles 57.1% Gas, water & multi-utilities 58.6% Electricity 65.5% Oil & gas producers ESG issues affecting over 10% of value Sector
    24. 24. Sectors where ESG issues have least impact: 50% Food & drug retailers 58.6% Household goods 62.1% Banks 69% Leisure goods ESG issues affecting less than 5% of value Sector
    25. 25. For further information: <ul><li>Stephen Hine </li></ul><ul><li>(Head of International Relations) </li></ul><ul><li>EIRIS </li></ul><ul><li>80-84 Bondway </li></ul><ul><li>London SW8 1SF </li></ul><ul><li> </li></ul><ul><li>[email_address] </li></ul>