Requiring that companies report on their environmental, social and governance (ESG) initiatives leads to broad improvement in socially responsible management practices, according to new academic research.

A working paper based on the research - The Consequences of Mandatory Corporate Sustainability Reporting by Ioannis Ioannou of the London Business School and George Serafeim of the Harvard Business School – concludes “that sustainability reporting not only increases transparency but can also change corporate behavior.”

According to the researchers, “mandatory disclosure of sustainability information leads to a) an increase in the social responsibility of business leaders, b) a prioritization of sustainable development, c) a prioritization of employee training, d) more efficient supervision of managers by boards of directors, e) an increase in the implementation of ethical practices by firms, e) a decrease in bribery and corruption, and f) an improvement of managerial credibility within society.”

The researchers applied an econometric model to data from 58 countries regarding laws and regulations that mandate a minimum level of disclosure on environmental, social, and governance matters. These ranged from the Sarbanes-Oxley Act in the U.S. to the King Code of Governance Principles for South Africa.

The paper notes a widespread increase in reporting of non-financial information, mostly on a voluntary basis, over the last decade.  According to the Global Reporting Initiative (GRI), only 44 firms followed GRI guidelines to report sustainability information in 2000. By 2010, the number of organizations releasing sustainability reports grew to 1,973.

“Disclosure of ESG information forces companies to manage these matters effectively in order to avoid having to disclose bad ESG performance to their multiple stakeholders,” the working paper states.

“To our knowledge, this study is the first to show that mandatory sustainability reporting may effectively promote socially responsible management practices and may improve perceptions of corporate social responsibility by stakeholders,” the researchers write. “These results are potentially economically important because socially responsible managerial practices could enhance the competitiveness of a country by generating higher levels of trust in business and its leaders.”

The working paper concludes: “An implication for regulators is that if they want companies to perform better on ESG metrics then reporting could be a useful means to achieve this objective. An implication for companies is that reporting could change the way they conduct business. If better ESG performance provides a competitive advantage and leads to higher economic value, as it has been argued…then reporting could enhance the economic value produced by a firm.”

This article was first published on April 27, 2011.

Which Fortune 500 companies have the best records for reducing greenhouse gas emissions?  Which have noteworthy policies and practices for preventing human rights abuses in their supply chain?  Which have outstanding records for encouraging employee diversity?   And which companies constitute the 10 best in the world for overall sustainable business practices?

Those types of questions are being asked more frequently these days by a growing number of consumers, investors and regulators. Problem is, depending on which sustainability ratings list you consult for information, answers to the questions can vary dramatically.

Citing the “continued confusion, uneven quality and opacity” of proliferating ratings for corporate sustainability programs, a new non-profit initiative has been launched to develop a generally-accepted “framework” for sustainability ratings worldwide.

Plans for the Global Initiative for Sustainability Ratings (GISR) were announced by Ceres, an investor and environmental organization, and the Tellus Institute, a Boston-based research organization.

“GISR is a global non-profit, mission-driven program aimed at moving markets to the advantage of true sustainability leaders,” the organizations said. “It seeks to achieve for sustainability ratings what the Global Reporting Initiative (GRI) strives to achieve for sustainability reporting, namely, creation and continuous enhancement of a framework that is designed and managed as a public good to advance the global sustainability agenda.”

The initiative seeks to bring some order to the burgeoning industry of corporate sustainability ratings, which includes market indices (such as the Dow Jones Sustainability Indexes and FTSE4Good Index Series), mainstream media listings (Newsweek’s Green Rankings and Fortune’s Most Admired Companies) as well as long-standing social investor rankings (the KLD 400 Social Index) and other sustainability lists.

An October 2010 report by the consultancy SustainAbility examined 108 different ratings systems – of which only 21 existed in 2000.

According to the SustainAbility report, a “growing number of companies are linking executive compensation to performance on ratings. Major mainstream asset managers are examining company sustainability performance as part of their investment decision making. And, slowly but surely, citizens and consumers are starting to wake up to these issues and are turning to ratings for actionable information. While these are all welcome developments, increased attention means ratings must be able to demonstrate that they are fair, accurate and credible.”

In announcing the GISR initiative (PDF), Ceres and Tellus said the potential of sustainability ratings “has been hampered by the proliferation of the field into scores of raters each with its own, usually proprietary, methodology; lack of transparency regarding the structure and implementation of methodologies; uneven coverage of key, material sustainability issues; inefficiencies and survey fatigue on the part of rated organizations; and, in some instances, conflicts of interest whereby raters play multiple roles in their relationship with rated organizations.”

Its organizers said GISR will work "to bring coherence, transparency and coordination to sustainability ratings" by designing a generally-accepted framework that:

• Accelerates the infusion of sustainability content – initially in public equities and later in bonds, real estate and other asset classes – into mainstream financial ratings;
• Moves existing sustainability ratings toward a core set of principles and process/performance content;
• Serves as a stand-alone, dynamic framework for ratings users.

Ceres and the Tellus Institute said they are the “principal conveners” of GISR but will be working with various partner and collaborating organizations.  “In its initial phase spanning approximately 18 months, a multistakeholder Steering Committee will oversee GISR,” they said.

GISR’s schedule calls for a beta version of its sustainability ratings framework about 12 months after launch and a Version 1.0 approximately 18 months after launch.

“GISR’s overarching goal is to bring sustainability ratings into the mainstream,” the organizers said. “This will occur through uptake by pension funds in RFPs, investment managers in portfolio decisions, government agencies in procurement initiatives and NGOs in advocacy and partnership initiatives. Over time, through a process of convergence and integration, we believe all ratings—financial or otherwise— across all asset classes should be infused with sustainability content.”

It’s official: the oil spill that began in the Gulf of Mexico on April 20^th is now the largest in American history, surpassing the Exxon Valdez spill in 1989.  Sen. Lisa Murkowski (R-Alaska) observed that "the recovery from the Exxon Valdez oil spill was long and sad, and it took 20 years for litigation over punitive damages to be resolved....That in and of itself was a tragedy we can't let happen again."

When news of the Exxon Valdez oil spill broke in March of 1989, the slow and inadequate corporate and government response to the disaster ushered in a new wave of leaders in the environmental movement.  One of these new visionary leaders was the late Joan Bavaria, the driving force behind the Boston-based CERES, which was founded in 1989 to advance what was then viewed as a sweeping 10-point code of environmental conduct that became known as the CERES Principles.

In ancient Rome Ceres is the goddess of agriculture, charged with guarding humankind's survival.  In the wake of the Exxon Valdez disaster, Joan Bavaria and the CERES team began to build a movement to do just that by creating a new way to hold companies to higher environmental performance and disclosure standards and to provide market based incentives to spur innovation and environmental leadership.  Joan worked tirelessly to build a first-of-its-kind multi-stakeholder coalition comprising environmental organizations, corporations, faith-based institutions and institutional investors all working to find new collaborative solutions.

It was not an easy task in the early 1990's to bring corporate CEOs and leaders in the environmental movement together.  At the time of the Exxon Valdez spill, a spokesman for Exxon said that the CERES Principles "do not recognize the need to balance environmental protection with the importance of adequate energy resources and a stable, healthy economy."

Five years later another oil company, Sun Oil, had an entirely different view on this when it broke ranks with the Fortune 500 and surprised everyone to become the first large company to join with CERES.  The CEO of Sunoco, Robert Campbell, said at the time that his company and members of CERES developed trust for each other and realized that their goals were similar. "Their goal and our goal did not seem so far apart," Campbell said. "The Sun Company decided that by signing the CERES principles they would be placing themselves at the forefront of business' role in protecting the environment."   Bob Campbell displayed true leadership and willingness to ignore pressure from his CEO counterparts, who at the time were angry at him for joining with environmentalists.

CERES continues to play an important role and is focusing on steering investor assets toward companies demonstrating a commitment to sustainability and improved environmental performance and away from more risky laggards.  The original reporting framework CERES designed in the early 1990's evolved into the Global Reporting Initiative, the de facto standard for corporate disclosure of sustainability information used by 1,500 companies worldwide.

New initiatives are emerging today to tackle the new paradigm and the hard choices associated with our addiction to oil.  Earthster, for example, allows companies to quickly assess the environmental impacts of thousands of household products.  And consumers now have a new resource in Good Guide that rates over 75,000 products on environmental performance.    These innovations and others all mark the beginning of a new era of radical transparency where the power is shifting from producer to consumer, as new information and resources become available to separate companies that are truly green from those that greenwash.

The Future for BP

BP's CEO Tony Hayward has pledged  "to clean up every drop of oil" off the oil-soaked shore and to put the "Gulf coast right as fast as we can."   Since April 20th, BP has spent over $800 million responding to the spill.  BP's stock price has dropped over 25% during this period, eroding nearly $25 billion in market value.

More trouble lies ahead for BP as it may face the specter of EPA fines of $1,100 per gallon or up to $4,300 if gross negligence was found to cause the spill.  The total costs for BP could exceed by some estimates over $25 billion, far eclipsing the $3.8 billion costs for the Exxon Valdez spill.

How BP handles these costs will be a true measure of the company.  BP has come under fire for its early handling of the financial settlements from individuals.  Alabama's Attorney General Troy King  has said he told BP to stop encouraging settlement agreements among coastal residents that he said stripped people of their right to sue in exchange for a $5,000 settlement.  Furthermore, CEO Hayward recently was quoted in The Times of London repeating his commitment to pay all verifiable individual claims but qualified his statement further by saying that because "this is America" many of the claims will likely be "illegitimate." Instead of hedging and dodging, BP would be well served to take the high road on settlement issues and learn from the lessons of Exxon

On the wall of Bavaria's cluttered Boston office was a sign that read:   “Life is a test. It is only a test. If this were your real life, you would have been given better instructions.” She was put to the test in 1990 as she visited Prince William Sound on the first anniversary of the Valdez spill and wrote: ''The extent of the damage is still disputed and probably will be forever.  But one thing was crystal clear: such disasters need not happen, they must not happen, and we must not let time heal this wound so well that we forget the tears, the tragedy, and bet again on luck to pull us through.''  This message rings as true today as it did in 1989. While the tragedy of the Gulf oil spill itself cannot be undone, let’s hope that Mr. Hayward is prepared to follow through on his original commitments and follow Joan's advice of 21 years ago as he deals with the aftermath of clean-up and compensation.

Mark Tulay worked for Joan Bavaria at Boston-based CERES as the organization's first full-time employee beginning in the 1990's.  He has worked in the environmental movement for over 15 years and is the Founder and CEO of Sustainability Risk Advisors, a consulting firm that advises non-profit organizations and institutional investors on sustainability related issues.

CR and CSR sit among those sets of initials – like B2B, CRM, SME – that have simply become assimilated into everyday business speak. CR is a broader term for CSR. To understand what these initials literally stand for is the easy part but, as a casual trawl of the web will reveal, to define what corporate responsibility or the older term corporate social responsibility means has not proved so simple.

There are myriad definitions of corporate social responsibility, with analysts seemingly divided on whether it is the ‘Corporate’, the ‘Social’ or the ‘Responsibility’ that demands the most focus. Along with this confusion of meaning comes a host of bold claims that seemingly position corporate social responsibility as the Holy Grail. Little wonder that businesses of every size are both irresistibly attracted to corporate social responsibility but also somewhat daunted by the prospect of meeting such grand expectations.

It is up to companies then to define for themselves what those expectations should be. As a company, Pitney Bowes has decided to use the term corporate responsibility, extending the concept to caring for the environment and seeing to the proper disposal and recycling of equipment and consumables. It means taking on responsibilities beyond the ‘social’ and committing to having a positive impact on the physical state of the community as well.

It is important to remember that there are no hard and fast rules for corporate responsibility programmes although there are general guidelines emerging such as those from the Global Reporting Initiative, an independent institution that provides a framework for tracking social and environmental activities. Still, there is no precise definition of what a corporate responsibility programme should encompass, but there are definite pitfalls to avoid.

Commitment and Budget

Certainly, there is little point in a corporate responsibility programme for the sake of it. Arguably, businesses that take up a corporate responsibility initiative in a bid to appear forward-thinking and progressive, only to then withdraw once the spotlight moves to the next business trend, will do themselves more harm than good.  Any corporate responsibility policy must represent a long-term commitment – which takes planning, staff commitment and budget.

Equally, businesses should avoid over-committing and making promises that simply aren’t realistic or affordable. Businesses are not charities and there should be no shame in being overt about the commercial advantages that a strong corporate responsibility programme can deliver

When looking at our own programme, a major consideration was that much of the activity should relate back to our core business. We run an annual auction event called ‘Pushing the Envelope’ to raise funds for the National Literacy Trust (NLT). We got involved with the NLT five years ago because, as a company, Pitney Bowes is all about improving communications for our customers. The National Literacy Trust (NLT) is driving to improve standards of literacy across all age groups – and improved literacy obviously means improved communication.

The ‘Pushing the Envelope’ event relates back to our core business activity because we ask celebrities and artists to design envelopes. The fact that these designs are on envelopes makes the event stand out, but also references our core strength of mail and messaging technology.

On the environmental side, Pitney Bowes takes back equipment and either disposes of it responsibly – recycling parts and recovering precious metals – or refurbishes it to sell in other markets. The company is committed to protecting the environment and is an accredited ISO 14001 company.

A Differentiator?

There is clear evidence that customers are beginning to expect the businesses they deal with to be corporate responsibility advocates – taking on social responsibilities and meeting green standards. In the consumer market, businesses are dedicating significant budget to declaring their corporate responsibility colours.

In the business to business arena, corporate responsibility is by no means yet a critical influencer. But, in a competitive market, corporate responsibility can represent a differentiator from competitors and an area of common ground with clients in initial new business discussions.

Equally, corporate responsibility can be important for improving a company’s standing in its own community – which in turn can aid the recruitment process. Similarly, existing employees like to feel part of a company that is seen to be responsible and ‘giving back’ to the wider community.

Of course, as with any new business strategy, corporate responsibility has its detractors. Critics argue that corporate responsibility distracts from the fundamental economic role of businesses while others argue that it is nothing more than superficial window-dressing.

Certainly, our own involvement with the National Literacy Trust has been well received by both staff and customers. But more than this – and a point that’s often overlooked – it’s been enormous fun!  Pitney Bowes has been able to align its brand to such stellar names as Damien Hirst, Sir Ian McKellan, Kate Winslet and hundreds of others, whilst raising much valued funds for an extremely deserving cause.

The message is – don’t simply adopt corporate responsibility for the sake of it. Think long-term, find relationships that make sense for your brand and be creative. Big businesses can often be accused of a myopic, navel-gazing approach but sensible corporate responsibility partnerships suggest a company that is more aware of its wider role.

Corporate responsibility champions argue that there is a strong business case in that corporations benefit in multiple ways by operating with a perspective broader and longer than their own immediate, short-term profits. Whatever one’s personal opinion there is little doubt that corporate responsibility is no flash-in-the-pan and that, increasingly, consumers and organisations are looking to do business with companies that display this broader perspective.

Patrick Jelly is Managing Director of Pitney Bowes UK.

BNY Mellon, a large New York-based asset management  and securities services company, intends to increase the use of data regarding environmental, social and governance (ESG) factors “to help identify companies that will outperform in the future, based on their environmental or social responsibility,” according to the firm’s 2009 corporate social responsibility (CSR) report.

“Historically, fiduciary responsibility such as the role performed by investment committees and trustees has often been defined exclusively in financial terms, such as maximizing returns to provide for retired employees,” the firm said.  “However, there is growing discussion that the way in which those returns are achieved is just as important.”

BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, operating in 34 countries and serving more than 100 markets.  It has $22.3 trillion in assets under custody or administration and $1.1 trillion under management.

The firm said that, historically, it has supported just a handful of common, client-requested ESG “screens” – companies involved in alcohol, tobacco and gambling, for example – “but this has been enhanced in 2009 to include more than 20 controversial business issues,”  with more data to be added in 2010.

In a report that uses guidelines set by the Global Reporting Initiative (GRI), an international organization that promotes reporting standards on ESG issues, BNY Mellon Chairman and Chief Executive Officer Robert P. Kelly said:  “Corporate social responsibility is fundamental to our culture. Our report not only demonstrates how we connect with our employees, communities and the environment globally, but also how we hold ourselves accountable for monitoring and measuring the impact and effectiveness of our CSR initiatives.”

BNY Mellon resulted from the 2007 merger of Bank of New York and Mellon Financial Corporation.  In its list of CSR achievements for 2009, the company cited substantial improvement in “employee engagement” levels since the merger.   It said it also initiated a pilot supply chain review program that involved either self-assessments or reviews of CSR reports by BNY Mellon suppliers that represented about 50 percent of the company’s 2008 spending.

Mr. Kelly said that despite an “extraordinarily challenging” 2009 business environment – in which BNY Mellon reported a loss, with total shareholder return trailing both the company’s peer group and the S&P Financial index – the firm made “good progress” on other priority issues.  In June, BNY Mellon paid off more than $3 billion in loans made to it by the U.S. Treasury under the Troubled Assets Relief Program (TARP).   The repayment represented a 12 percent annualized return to taxpayers, the company said.

With more and more companies now reporting regularly on environmental, social and governance issues – often through the publication of annual “corporate responsibility” or “sustainability” reports – there’s growing and understandable skepticism about corporate motives and outcomes. Critics argue that the documents are too often used by firms to “greenwash” sustainability shortcomings while allowing a host of fundamental weaknesses on other issues to be portrayed as critical future challenges.

That happens, of course.  But it’s fascinating to watch, particularly as some major global enterprises engage, however imperfectly, in the process of reporting on matters that only a few years ago would have been left for legal counsel to explain and defend in courts or regulatory hearings.  If nothing else, the process can sometimes set the board for playing the great “What Would You Do?” game – putting oneself in the shoes of senior management, juggling near-term bottom-line financial imperatives while aiming for long-term corporate sustainability and increased shareholder value.

Case in point is the 2010 Corporate Responsibility report of Kellogg Company, the cereal and convenience food giant.    Without being familiar with Kellogg’s business and operations, it’s impossible to really judge the company’s performance from this report, its second annual.   Yes, Kellogg has been financially successful ($1.2 billion in 2009 net income).  Yes, it’s cutting back on energy consumption, greenhouse gas emissions and water usage.  Yes, it provides data on its operations through the Global Reporting Initiative, which is not true for most U.S.-based companies.   And yes, it has a board of directors with its own Sustainability Committee.

Searching for Salt Substitutes

But how should the food company handle a sticky health problem involving salt? Or a supply chain issue - perhaps the worst in a decade - involving peanuts?

“One of the most challenging nutrition issues for Kellogg and other food manufacturers is finding ways to reduce the sodium in our foods while maintaining great taste,” the Kellogg report explains. “Although there are satisfactory substitutes for sugars and fats, there currently is no acceptable salt replacement for use in the development of commercially viable—and palatable—lower-sodium foods. Potassium chloride is the most frequently used salt substitute, but its inherent bitterness limits the development of appetizing products.”

Consumer preferences on salt also vary widely by region. In India, for example, Kellogg says consumers overwhelmingly rejected cereals in which the company lowered sodium content. But in Southeast Asia and China, consumers preferred the reduced-sodium versions of Corn Flakes, Frosties and Cocoa Frosties cereals.

And for those who recognize the “I-won’t-eat-it-if-you-say-it’s-good-for-me” syndrome in themselves or their children, Kellogg reports: “Historically, the packaged foods industry has found that promoting a sodium reduction on product labels typically leads to a drop in sales because consumers erroneously equate ‘reduced salt’ with ‘reduced taste.’ Yet when we don’t advertise or promote a sodium reduction, most consumers continue to buy the product, never realizing that the sodium content has changed.”

Nonetheless, Kellogg reports, it has successfuly reduced sodium levels in some of its leading brands worldwide and “will continue to aggressively pursue sodium reductions while keeping up to date with new alternatives for sodium and salt substitutes.”

Peanuts have been another challenge for Kellogg.  A January 2009 U.S. recall of peanut products from a supplier, Peanut Products of America, “ranks among the biggest challenges Kellogg has faced in the last decade,” the company reports.  After learning about tainted peanut ingredients from the supplier and “out of an abundance of caution,” the company recalled more than 7 million cases of peanut butter sandwich crackers and other products, at a cost of approximately $65 million to $70 million.

“While we addressed the situation swiftly, we - and the entire food industry - face an ongoing challenge of ensuring a safe and secure supply chain,” Kellogg says.

And so it goes for a giant, global food company with a supply chain involving 1,500 products, manufacturing operations in 18 countries and sales in 180 countries.  While preparing and publishing a corporate responsibility report doesn’t, in itself, solve problems, the process helps to identify issues, highlight appropriate metrics (or the lack thereof) and establish a vocabulary for ongoing discussion and debate.   It’s far better to have a report than not.

Corporate sustainability initiatives frequently – and often deservedly – get criticized for being more talk than action.  Integrating environmental and social challenges into the business process can be a daunting task for even well-intentioned and well-resourced enterprises.

A major new 84-page paper from Ceres, the investor and environmental group, seeks to address that issue by laying out an ambitious and detailed program with 20 expectations for companies to focus on and achieve by 2020.  The 21^st Century Corporation: The Ceres Roadmap for Sustainability “is a guide to companies on their journey to comprehensive sustainability – from the boardroom to the copy room – and throughout the supply chain,” says Mindy S. Lubber, President of Ceres.

The paper says companies must cut greenhouse gas emissions 25 percent below 2005 levels by 2020 in order to meet reductions called for by scientists who warn of catastrophic global warming.  The paper also calls on companies to respond to societal issues. “It has become clear that it is not acceptable anywhere in the world to produce goods in unsafe or exploitative conditions,” Ceres says. “These are real business risks for global companies.”

Four Areas for Focus

To accomplish that, Ceres describes its vision of corporate best practices “that must come to represent the norm, not the exception.”  The paper focuses on four broad areas: governance, stakeholder engagement, disclosure and performance.

In governance, “there is a growing expectation that boards of directors as fiduciaries should be informed leaders on sustainability issues that materially impact corporate performance and plans,” the paper says.  Ceres suggests that a board committee have clear accountability for sustainability strategy and performance; that board nominating committees seek directors with expertise in sustainability; and that directors receive regular training in key sustainability issues.

In stakeholder engagement, the roadmap calls for companies to “regularly engage in robust dialogue with stakeholders across the whole value chain.”  Recommendations include adoption of a “stakeholder mapping” process to identify, understand and track key stakeholder groups and how they are engaged on sustainability issues by key business units.

Companies should report regularly on their sustainability strategy and performance, according to the suggested roadmap.  “Disclosure will include credible, standardized, independently verified metrics encompassing all material stakeholder concerns, and detail goals and plans for future action,” the paper says.

In operations, the Ceres roadmap calls on companies to “invest the necessary resources to achieve environmental neutrality and to demonstrate respect for human rights in their operations.”  Performance should be measured “related to GHG emissions, energy efficiency, facilities and building, water, waste, and human rights.”

Sustainability as Economic Driver

In an introduction to the paper, David Blood, Senior Partner of Generation Investment Management, writes: “The interests of shareholders, over time, will best be served by companies that maximize their financial performance by strategically managing their economic, social, environmental and ethical performance.  Central to this thesis is the explicit recognition that sustainable solutions will be the primary driver of industrial and economic development in the coming decades.”

Ceres has proven effective in the past in turning talk about environmental and social change into substance.   The organization started with the so-called Ceres Principles, a 10-point code of corporate environmental conduct drafted in response to the 1989 Exxon Valdez oil spill.  It launched the Global Reporting Initiative in 1997 and helped GRI organize as an independent organization.

Ceres also directs the Investor Network on Climate Risk, a network of 80 institutional investors with a collective $8 trillion in assets.  The coalition was instrumental in pressuring the U.S. Securities and Exchange Commission to recently announce new guidance on climate risk disclosure for publicly-held companies.

When do you know that ESG (or factoring environmental, social, and governance issues into investment and corporate decisions) has gone mainstream? One clue is this week's announcement that MSCI (Morgan Stanley Capital International) is acquiring ESG research conglomerate RiskMetrics (which gobbled up ESG pioneers KLD, Innovest, and Institutional Shareholder Services over the past three years). Another is the agenda of last week's meeting of the Securities and Exchange Commission's Investor Advisory Committee (IAC), which included items such as "ESG Disclosure Work Plan" and "Proxy Voting Transparency." So what does this mean?

The fact that an Investor Advisory Committee even exists – one of SEC Commissioner Mary Schapiro's first initiatives, to return to the "Commission's traditional role as the investor's advocate" (in the words of Committee sponsor, SEC Commissioner Luis Aguilar) – is testament to the success of the G part of the ESG equation: the SEC is governing itself more democratically. The Committee acts as the SEC's sounding board, rebounding guidance to the Commissioners on their regulatory agenda. The Committee's 18 members each represent a different constituency – with the AFL-CIO's Damon Silvers representing labor, and ProxyDemocracy Director Mark Latham representing individual investors, for example.

"Of course, the Commission doesn't have to act on anything the Committee recommends," IAC member Adam Kanzer of Domini Social Investments, who represents the ESG community of social investors, told me in an interview this week. But the very existence of the Committee establishes a mechanism for expressing the public mind – so the Commission would need a damn good reason to act against its recommendations.

The ESG equation squares the circle, reuniting the bifurcation the ol' Investor Responsibility Research Center (which got eaten up by Institutional Shareholder Services in 2005 established with its separate "social and environmental" and "governance" departments (no more having to track down either Meg Voorhes or Carol Bowie, as ESG creates a both/and.) Also, the ESG formulation has turned on its head the traditional perception of sustainability issues as time-wasting, extraneous concerns that drain on returns to potentially material risks and opportunities that investment trustees and corporate directors must factor into decision-making.

Kanzer and Stephen Davis of Yale's Millstein Center for Corporate Governance, chair of the Investor as Owner Subcommittee, outlined the workplan on ESG disclosure (according to meeting attendee Peter DeSimone of the Social Investment Forum, the socially responsible investing industry organization):

• In April, Subcommittee members will hold a meeting on the benefits of ESG disclosure to investors from a risk management perspective;
• In May, they will look at accounting standards and triggers for disclosure of contingent liabilities in the United States and other markets;
• In June, they will review reporting standards, including the Carbon Disclosure Project (CDP) and the Global Reporting Initiative (GRI), and look at information collected by the European Commission during its six meetings on ESG disclosure over the past year;
• In the summer, the Subcommittee plans to hold a public hearing on ESG disclosure to coincide with another meeting of the entire SEC.

The SEC Staff Interpretation released last month – the Commission Guidance Regarding Disclosure Related to Climate Change – set precedent on the E part of ESG disclosure. The guidance does not introduce new rules, but rather clarifies existing rules requiring companies to disclose material risks related to climate change, such as projected impacts of new legislation and international treaties capping carbon emissions.

Predictably, the move prompted opposition: House Financial Services Committee Ranking Member Spencer Bachus (R-AL) fired a letter to Chairman Schapiro voicing "very serious concerns" that the move represents the SEC trying to "promote a political agenda through regulation" and "will impose potentially significant compliance costs on issuers with little apparent benefit to investors." The preponderance of evidence and opinion debunking his concerns (think Stern Report and CDP) raises serious questions whether Bachus is promoting a political agenda through obstruction. Similarly, Senator John Barrasso (R-WY) introduced the Maintaining Agency Direction on Financial Fraud (or MADOFF) bill explicitly to "block" mandatory climate risk disclosure.

Bachus and Barrasso may be spitting into the wind. The corporate community generally understands and even encourages climate change regulation to create certainty and level the playing field through initiatives such as Business for Innovative Climate and Energy Policy (BICEP) and the US Climate Action Partnership (USCAP). Even recently-departed USCAP members BP, ConocoPhillips, and Caterpillar "have reiterated their belief that climate change is a real and serious issue, and that greenhouse gas emissions must be reduced," according to SustainAbility Vice President Jeff Erikson, who pointed to a ConocoPhillips press release re-stating support for federal climate change legislation. "The disagreement instead seems to be in the details of which industries will be most disadvantaged under legislation that USCAP supports," Erikson continued, before voicing disappointment at the three companies' decisions to leave USCAP.

Finally, the Investor Advisory Committee returned to the question of democracy in the wake of the recent Citizens United v. Federal Election Commission case, which considerably expanded corporate political contribution rights. The Investor as Owner Subcommittee voiced its intention to mirror its ESG disclosure proposal by proposing better disclosure or corporate political contribution limits.

The very existence of the Committee expands democratic mechanisms at the SEC, which allows and encourages the submission of public comments to the Committee - twenty five have come in as of this date.  Given the leverage opportunity the IAC represents, maintaining SEC momentum on ESG and corporate democratization may require more of a groundswell to demonstrate widespread public support for these measures – time to "sharpen your pencils."

Bill Baue is Executive Director of Sea Change Media, and Executive Producer/Host of Sea Change Radio, a nationally syndicated show with a global podcast audience. This article was first published on CSRWire.

Last week's World Economic Forum in Davos, Switzerland, saw a major upgrade in the quantification of corporate sustainability with the unveiling of what I'll call the "second generation" of the Global 100 Most Sustainable Corporations in the World. When the Canadian corporate social responsibility magazine Corporate Knights teamed with the sustainable investing research firm Innovest to launch the list five years ago in Davos, the Global 100 turned heads by asserting the business relevance of sustainability while simultaneously meeting harsh criticism from the likes of sustainability guru Paul Hawken.

"My main point is that the criteria employed have little to do with sustainability as it is understood from a thermodynamic, biological point of view, that the term 'sustainable' is not defined by Corporate Knights or Innovest, and that the methodology is not transparent," Hawken told me. "The list does not advance sustainability because it cannot define, measure, or recognize it."

Now, the Global 100 methodology has finally gotten a major face-lift that addresses these critiques. Perhaps most importantly, the list included what the Global Reporting Initiative (GRI) calls "sustainability context," which frames corporate progress in relation to a defined sustainability goal that needs to be met if our culture is to survive and thrive. The Global 100 chose resource efficiency improvements as its sustainability goal, using a "factor four" yardstick. A self-admittedly "crude" rule of thumb first proposed by Hunter and Amory Lovins in their 1998 book by that name, the notion holds that we need to improve resource productivity by 400 percent (or a factor of four) over the next two decades in order to get back within the earth's carrying capacity - an assertion subsequently supported by Lord Nicholas Stern and McKinsey. Using 2006 as a starting point, the Global 100 assesses whether companies are upping resource efficiency by six percent per year, the rate needed to reach factor four by 2026.

"While the majority of company-reported resource use data is unaudited, it is notable that 71 per cent of the 2010 Global 100 companies who report such information meet the test (six percent per annum resource productivity improvements) of being on a path toward sustainable resource use . . .," the Global 100 blog states.

Bill Baue

This is an important step in improving corporate sustainability ratings, but it falls short of taking a "thermodynamic, biological point of view." Measurements such as resource efficiency often express environmental impacts in financial terms, such as GDP per unit of emission - mixing apples and oranges. In contrast, true sustainability indicators compare apples to apples, measuring company-specific environmental impacts in terms of larger environmental limits, such as corporate emissions compared to global carbon capacity, assessing companies' proportional contribution toward meeting collective targets.

In this regard, the Global 100 represents a first step beyond first-generation sustainability metrics, which bordered on irrelevance, as they were untethered to a specific social or environmental goal that could objectively be defined as sustainable. Such first-wave sustainability claims may even be counter-productive, wooing us into thinking that corporate sustainability initiatives are making a difference, when in fact they may be lulling us into complacency with good intentions that have no chance of meeting social and environmental targets necessary for survival. Whether the Global 100 represents a true second generation effort, with "sustainability context" embedded at its core, is up in the air.

The other important step the Global 100 took this year involves transparency. Previously, the list relied on Innovest data, which is necessarily proprietary so the sustainable investing research firm could make a buck. The Global 100 took a two-step approach to free itself from the black box and "open the kimono." First, it selected the top ten percent of sustainable investment portfolios from the Global Sustainability Research Alliance (comprised of ten top sustainable investing research providers, such as Goldman Sachs GS SUSTAIN, EIRIS, and RiskMetrics, which use proprietary research) to constitute a beginning universe of some 3,000 companies. The Corporate Knights Research Group then applied its own set of 10 key performance indicators (such as carbon, energy, waste, and water productivity, as well as board diversity and CEO-to-worker pay disparity) to whittle down to the final list of 100.

While this innovative solution addresses the research methodology transparency conundrum, it doesn't necessarily solve the corporate transparency problem. To address this, the Global 100 added an equally weighted eleventh indicator, covering corporate disclosure. In a blog post aptly titled "Opaque Transparency," sustainability reporting expert Elaine Cohen noted the irony of zero overlap between the top 10 companies in the Global 100 and the top 10 in the Global 100 for transparency.

"For me, and perhaps I am a little extreme, or obsessive, or passionate, or stupid, transparency is an essential core element in sustainability which serves to leverage and drive performance in many different ways. Where there is low transparency, there is low trust, low dialogue, low openness to innovation, and low attention to stakeholder needs," Cohen said. "Whilst I do not expect such a ranking to be based on transparency alone, I believe that some degree of overlap would make this ranking more credible."

Cohen hit upon what I would call the "Oekom dilemma," so-named after the German sustainability research firm that came into criticism in the mid-2000s for downgrading company ratings for lack of disclosure, risking "inaccurate" assessment of companies with strong sustainability performance but weak transparency. Oekom's reasoning aligned with Cohen's: that sustainability without transparency is not truly sustainable. It will be interesting to see how the Global 100 handles this factor in the future.

Finally, the Global 100 added ranking this year. This seemingly superficial shift, moving away from an amorphous clump of a hundred sustainability leaders to a prioritized listing of best performers, may be the most satisfying change, fulfilling the human compulsion to create order out of chaos. It also sparks the competitive spirit, inspiring companies toward continuous improvement in sustainability performance as they vie for the top spot. Now that the list encourages companies to operate within at least some of the earth's thermodynamic limits, this competition may actually help us attain our salvation.

Bill Baue is Executive Director of Sea Change Media, and Executive Producer/Host of Sea Change Radio, a nationally syndicated show with a global podcast audience.  Disclosure: He has written for Corporate Knights.  This article was first published on CSRWire.

The old business maxim that “what gets measured, matters” is overused but nonetheless powerful, especially when applied to corporate responsibility:  when information and metrics are combined with disclosure and transparency, corporate posturing on issues that affect society can be quickly replaced with fact-based analysis and discussion.

One current example is Nike Inc.’s newly-published Corporate Responsibility (CR) Report for fiscal years 2007 to 2009. It’s a slickly-produced multimedia display of data and information - in fact, Nike says, an independent panel of stakeholder advisers at one point concluded the volume of information contained in the 176-page written report was so “overwhelming” that it required a rewrite.

“This report is published at a tipping point. It’s time for the world to shift,” Nike CEO Mark Parker writes in the report’s introduction. “We see sustainability, both social and environmental, as a powerful path to innovation, and crucial to our growth strategies.”

That’s a huge change from the 1990’s, when Nike was a poster child for corporate villainy stemming from sweatshop labor practices in Southeast Asia factories.  Since then, the company has charted a very different course in corporate citizenship and, in many important respects, has succeeded.

Grappling with Issues

This latest report places a big focus on environmental sustainability, with Nike sharing its vision of “reaching a closed-loop business model where the goal is to achieve zero waste in the supply chain and have products and materials that can be continuously reused  – no pre- or post-consumer waste.”

What’s most interesting about the report, though, is that you can see Nike grappling, in public, with some tough choices.  The narrative demonstrates what can happen when a company begins reporting regularly and in-depth, and with an apparent commitment to intellectual honesty, about core issues.

For Nike, labor and human rights continue as a top priority and corporate worry.   The company’s three main product lines  — footwear, apparel and equipment — are made in approximately 600 contract factories that employ more than 800,000 workers in 46 countries around the world.  Nearly 60 percent of the work force is in North Asia, 31 percent in South Asia.  One major difficulty is that contract apparel factories generally produce for multiple brands, making it a difficult to maintain standards.

To listen to Nike, monitoring those contract factories for working conditions, wages and overtime – and a host of other issues, including possible unionization – is not easy.  “While we can point to many examples of improvements, challenging issues remain for our company and our industry in systemically identifying and tackling how to affect long-term system-wide change,” the company says.

“In evaluating where our targets fell short, we saw a consistent pattern: a focus on auditing against a set of criteria sometimes results in on-the-ground improvements for workers, but it rarely produces systemic change in the area of concern,” Nike says. “On further reflection, we realized that, if we want to make sustainable improvements for workers, we need to significantly change the way we engage and interact with our supply chain as a whole.”

One potential solution, Nike reports, is collaborating with other brands on factory audits and, maybe more importantly, working with competitors on developing remedies for labor problems as well as standardized codes. And then there are improvements that can be made by Nike alone.  Example: “Asking factories to manufacture too many styles is one of the highest contributors to factory overtime in apparel. We have an opportunity to reduce this pressure by reducing the number of apparel styles and partnering with the factories to improve efficiencies through lean production methods.”

Increased Reporting

There’s more detail in the Nike report than most any layman could digest and understand, and Nike critics – such as Oxfam’s Nike Watch, and a new activist initiative, TeamSweat – are likely to find weaknesses. That’s as it should be.  No one should be satisfied simply because the company has issued a report, even one chock-a-block with narrative, charts and bar graphs.

Some critics of corporate responsibility reports believe they can’t help but be self-serving.  And, in fact, more companies are reporting.  Sixty-six of the S&P 100 firms produced a formal sustainability report with performance data in 2008, a 35 percent jump from the 49 reports produced in 2007, according to a report from the Sustainable Investment Research Analyst Network (SIRAN), a working group of the Social Investment Forum (SIF). However, the SIRAN survey found that only six S&P 100 firms publish complete sustainability reports that meet the highest “A” level reporting standard set by the Global Reporting Initiative.

In the end, it’s difficult to see how more reporting can’t help, as long as it’s done well.  Nike’s latest effort is a good example of how the process can lead to data being gathered, metrics developed and performance benchmarks set.  The process grew out of Nike’s public floggings in the 1990s, says CEO Parker, when “we learned to view transparency as an asset, not a risk.”