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The Shifting Sands of Social Responsibility IR Update May 2011

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Communicating your company's environmental, social and governance priorities is no longer a practice to consider, its a practice to execute.

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The Shifting Sands of Social Responsibility IR Update May 2011

  1. 1. 16 MAY 2011 IR update
  2. 2. Communicating your company's environmental, social, and governance priorities is no longer a practice to consider- it's a practice to execute. By Lisa Ciota M iltonFriedman's statement shown above is often seen as a refutation of corporate socialresponsibility. But the world has changed since 1971. Today,we have a more holisticview of the complex business environment. Todeliver sustainable growth and profits, a company must consider a wide range of environ- mental, social,and governance (ESG)factors. These include the implications of where the company obtains resources and how it uses them, the labor and environmental impact of operations, and the company's relationships with customers, local com- munities, and key stakeholders. How a company addresses these factors provides insight into whether it is attuned to the external environment and how the company handles strategy, operations, and risk. This is why some investors consider ESG an indicator of management quality. The implications for investor relations are great. As more investors look beyond financial metrics and incorporate qualita- tive factors into their investment evalu- ations, an IRO must communicate the company's ESG priorities in the context of its strategies, opportunities, and risks. Niche Strategy No More Traditionally, interest in ESG perfor- mance has been the province of socially "There is only one social responsibility of business: to use its resources and engage in activities deSigned to increase its profits without deception or fraud." responsible investors whose objectives are to align financial activities with social values and beliefs. Because of its size, socially responsible investing has some- times been viewed as a niche investment strategy. Reinforcing this perception is the fact that the majority of portfolio managers and buy-side analysts at mainstream insti- tutions don't ask questions about environ- mental, social, or governance matters. Since 2007, however, total investments in the United States based on ESG cri- teria increased 13 percent to $3.1 tril- lion, representing about 12 percent of the $25 trillion in assets under manage- ment, according to the Social Investment Forum's 2010 report on U.S. socially responsible investing trends. Including Europe-where total socially responsible investments are double the amount in the United States-and the rest of the world, total assets under manage- ment using ESG criteria globally is about $10 trillion, as reported in Eurosif's 2010 European SRIStudy. This represents about $1 of every $12 in total global assets under management, based on the estimate of global assets under management in the United Nations Principles for Responsible Investment (PRI)2010 Report on Progress. This is just one sign that the sands are shifting. Between legislative and regula- -Milton Friedman,1971 tory trends, concerns about the long-term impact of climate change, increased focus on governance, and greater attention to nonfinancial risk, many investors and asset managers see ESG integration as a key element in mitigating risk and driving returns. In more and more cases, these investors and asset managers want to incorporate ESG criteria into their invest- ment decision-making process, both directly and indirectly. Influential Networks The momentum is evident in the number of institutions joining ESG net- works or signing onto major ESG investing initiatives with the PRI, the Carbon Disclosure Project (CDP), the Investor Network on Climate Risk (INCR), and the Institutional Investors Group on Climate Change (IIGCC). The largest of these are the PRI, which has 800 signatories world- wide that collectively manage $22 trillion of assets, and the CDp,with 550 signato- ries managing $70 trillion of assets. This represents approximately 18 percent and 58 percent, respectively, of the estimated total global assets under management. Signatories to these initiatives include major pension plans such as TIM- CREF,CaIPERS,NYCERS,and socially responsible investors such as Calvert IR update MAY 2 0 1 1 17
  3. 3. 18 I MAY 2 0 1 1 IR update and Trillium. Other signatories are main- stream asset management firms including BlackRock, ClearBridge Advisors, Deutsche Asset Management, and JPMorgan Asset Management. Even private equity firms such as Kohlberg Kravisand Roberts have signed onto the PRI. ESG Integration Given the size and significance of PRI signatories, many believe that ESG inte- gration is reaching critical mass. Still, the extent to which ESG criteria are actively applied across PRI signatory portfolios varies. According to the PRI, 46 percent of signatories have extensive internal pro- cesses to implement responsible invest- ment (in listed equities in developed markets). At ClearBridge Advisors, for example, relevant and material ESG factors are already integrated into the fundamental research platform, according to Mary Jane McQuillen, portfolio manager and head of the ESG investment program. "Our ana- lysts have internalized this approach," she says, "given the potentially relevant impact that environmental, social, and governance factors can have on valuation." Other investors and asset managers are taking a different approach, with some implementing ESG overlays and others expanding proxy-voting policies. One of the PRI's key priorities is to support signa- tories' efforts to incorporate ESG into the investment analysis and decision-making process for all asset classes. Growing Demand for ESG Reporting As PRI signatories further embrace this priority, demand for ESG-related perfor- mance data will rise. At the same time, a growing number of regulators around the world are calling for greater sustain- ability reporting. For example, in the United States, the Securities and Exchange Commission provides guidance on cli- mate change disclosure; South Africa and Denmark require integrated financial and corporate responsibility reports annually; and in Sweden, state-owned companies must issue sustainability reports using the Global Reporting Initiative (GRI) frame- work for sustainability reporting. During the past few years, there has been a significant uptick in companies issuing sustainabiliry reports using the GRI framework. Last year, approximately 2,500 companies, including 80 percent of the Global Fortune 250 companies, produced such corporate responsibility reports. To support further adoption of sustainability reporting, in January 2011, GRllaunched Focal Point USA to help U.S. companies strengthen reporting efforts. Benchmark Your Company Investors have ready access to GRI data through the Bloomberg and Thomson Reuters portals, which make it easy for analysts to screen and compare companies across entire sectors. Companies need to realize that they are not being evaluated individually on these nonfinancial factors, but against global peers. Analysts can also find sustainabiliry information on more than 1,500 companies by downloading reports at http://www.globalreporting.orgl GRIReports/GRIReportsList/ and sorting by key criteria. Mike Wallace, director of GRI's Focal Point USA, suggests that IROs download this list and sort it by industry and sector to gain insight into corporate strengths and opportunities as well as informa- tion about competitors. This information may also help build a case for starting or strengthening a company's sustainability reporting.
  4. 4. What's an IRO to Do? Even with a plethora of ESG information available, investors will continue to (Urn to IROs, recognizing the value they bring to the table and their connection to the C-suite. Ingrid Dyott, managing director at Neuberger Berman, notes that ESG inves- tors are increasingly sophisticated and are looking for high-quality, consistent, and transparent communications about corpo- rate strategies and related ESG priorities. Here are steps for the IRO to take: • Know the relevant and material ESG risks for your company and industry. Understand how those risks may impact operations, supply chain, competition, reputation, and other key areas. Build rela- tionships with managers of the following teams: operations; quality control; human resources; corporate responsibility; and environment, health, and safety. Be an advocate for sustainability reponing, and be a reviewer of your company's repon. • Understand the existing level of ESG interest in your company. Compare your top 50 or 100 holders against the list of signatories of the PRI, CDp, and other ESG networks and socially responsible advisory firms. Yourinvestor targeting service may be able to help you with this analysis. You may be surprised by how many of your investors use ESG criteria in their decision-making process somewhere within their organization. Karli Anderson, director of investor relations at Newmont Mining, regularly performs such an anal- ysis. Currently, approximately 50 percent of Newmont's shares outstanding are held by institutions that use ESG criteria. • Target and prioritize your ESG com- Be knowledgeable about your company's strategic ESG priorities and how they can benefit your business model. munication efforts. Anderson says that "environmental and social considerations are essential to having a social license to operate, and our investors know that. At Newmont, these considerations are inte- gral to our operating strategies, and we communicate openly about our environ- mental and social priorities in that con- text." In fact, Anderson sets annual goals ----------------------------------------- , (:':;;;" '~~':~ ,fii "c" 0 ' Leverage your peers with NIRI eGroups Recent hot topics include: > Why Investors Short Stocks > IR Department Structure > Webcasting Investor Day > IRAfter a Buyout Connect online with members at http://community.niri.org IR update MAY 201 1 19 A key member benefit, eGroups connect members through online discussion forums
  5. 5. for incorporating ESG-related content into her U.S. and European investor commu- nications. Newmont exemplifies a best- practice approach: Start with core business strategy and operations, identify links to priority ESG issues, and integrate these messages into your existing communica- tions vehicles, where applicable. • Do your homework, staying abreast of current issues. Ruth Venning, director, investor relations, at Hospira, explains, "When we receive social responsibility sur- veys, we have a process in place to learn about the firm behind the survey, asking: Are they current or potential investors? Are they target holders? Or, if they represent or influence investors, how much assets under management do they have? We also consider how the survey information is likely to be used and the type of exposure it will receive. Together, these factors help us prioritize our efforts." Venning collaborates with her colleagues in environmental, health and safety, public affairs, and human resources to ensure that information is consistent and to streamline the response process. In addition to keeping a set of standard corporate social responsibility/ESG FAQs, Venning suggests monitoring your peers' ESG initiatives and messaging as part of your ongoing competi- tive intelligence efforts. Get Ready for the New Reality During the past several years, the way ESG data is integrated into the investment decision-making process has changed. Long-term investors are taking a holistic view and frequently do not make as much of a distinction between ESG and financial factors in their analysis. This new reality presents opportunities and challenges for investor relations. Dyott and McQuillen have similar advice for IROs: • Be knowledgeable about your company's strategic ESG priorities and how they can benefit your business model (for example, reducing risk or enhancing efficiency). • Communicate thoughtfully and consis- tently about ESG priorities. • Be engaged and inclusive in facilitating discussions on material ESG topics. Taking these steps will help foster stronger relationships with investors and will enhance the credibility of IR and your company. mI!J Lisa Ciota is principal, Strategic & Investor Communications, Downers Grove, Illinois; lisa.ciota@gmail.com. NIRI CAREER CENTER "I recently applied for a position on the N1R1 career site, interviewed, and was offered the job. Inever would have found this opportunity without N1RI." -NIRI Member since 2000 Go to www.niri.org/action/CareerCenter for more information or contact David Meisner at dmeisner@niri.org Members can ... • Search job listings nationwide • Post resumes free of charge • Access the NIRI/Kom Ferry IR Compensation Survey Companies with job openings and recruiters can ... • Post job listings for a fee • Search member resumes 20 MAY 2 0 1 1 IR update

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