Alan Willis & Associates – Capital Markets Program Briefing Paper
Suggested themes to explore at the November 19, 2003 NRTEE Scoping Meeting
Flashback: Will financial markets soon be systematically rewarding environmentally successful
companies while penalizing offenders? Some serious people think so.
- Institutional Investor, March 1995 (quoted in Financing Change, WBCSD, 1996)
Purpose of Briefing Paper
This Capital Markets Program (CMP) briefing paper aims to stimulate and focus discussion of how
sustainability issues, principles and practices impact (a) investment decision making and risk analysis in
capital markets, and (b) the business decisions and practices of Canadian companies. The paper identifies
and outlines various topics and themes to inform discussion about and input to the objectives and scope of
the CMP. The CMP is a program of the National Round Table on the Environment and Economy (NRTEE).
In posing questions, offering ideas and suggesting possibilities, the paper in no way attempts to present
answers or make judgments about the issues raised. The paper does, however, aim to highlight linkages or
relationships between many of the topics and issues considered. The role, nature and availability of
suitable indicators and other information about sustainability in decision making by capital markets and
companies is one of several important issues to consider.
Those invited to participate in scoping meetings might reasonably expect the discussions to address
questions such as:
1. What is the CMP, why is this being conducted by the NRTEE, and what are the expected
results/outputs/outcomes of the CMP?
2. How will the CMP add value to the extensive work already carried out and being carried out in this
area in Canada and elsewhere?
3. What is the basic premise or business case underlying the decision to carry out the CMP? Has this
already been validated or are there gaps in this analysis and validation that the CMP can usefully
address?
4. What are the main topics and lines of enquiry that the CMP should pursue to achieve its desired
outcomes, add value and make a difference?
5. Should the CMP investigate all or only some sectors of capital markets? What are the key leverage
or intervention points for advancing responsible investment and corporate responsibility?
6. What stakeholders need to be engaged in the CMP? Who needs to be involved for both the
credibility and traction of its findings and recommendations?
7. What should be the parameters for the scope of enquiry in the corporate sector, i.e. what sectors or
types of company should be addressed and engaged in the CMP?
8. What expectations are there concerning publication of progress reports and results from the CMP –
interim and final, and as to intended audiences for such communications?
9. What broader public policy issues are relevant to and/or might be impacted by the conclusions and
outcomes of the CMP?
10. How might one measure the success or impact of the CMP, say five years from now?
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Alan Willis & Associates – Capital Markets Program Briefing Paper
Suggested themes to explore at the November 19, 2003 NRTEE Scoping Meeting
An Underlying Premise
If there is an underlying premise for the CMP, it might be that engaging mainstream capital markets to
enhance the incorporation of sustainability factors in their decision making, more than at present, will
serve as a market force to motivate the integration of sustainability principles into how companies do
business (and improve how they communicate about this). This in turn will create superior value for
shareholders over time but not at the expense of other stakeholders, present and future.
There is a substantial body of literature, studies, reports etc., researching and addressing the above
premise and variations on it. It was extensively examined in Financing Change (WBCSD 1996), though
that book primarily focused on how capital markets might better recognize value created by businesses
through attention to environmental considerations, specifically the concept of eco-efficiency and the
usefulness of eco-efficiency indicators.
A November 2003 report published by CSR Europe, Deloitte and Euronext from a survey of nearly 500
European fund managers, financial analysts and investor relations officers concludes:
As fund managers, analysts and IROs [investor relations officers] recognize strong connections
between the management of non-financial risks and long-term shareholder value, there are
significant indications suggesting the potential for SRI1 to be further integrated into mainstream
financial analysis and investment decisions.
The survey also noted that fund managers and analysts are still dissatisfied with the quality of company
reporting on social and environmental performance, in spite of improvements in the last two years.
Is there validity in this as a premise for undertaking the CMP? Is there another premise to consider?
Structure of Paper
First it is important to acknowledge that in a number of places this paper incorporates or builds on
relevant text from an earlier, similar briefing paper prepared for NRTEE by Michael Jantzi of Michael
Jantzi Research Associates for the September 16, 2003 CMP scoping meeting in Ottawa. This new paper,
for which the author Alan Willis accepts full responsibility, was prepared primarily with investment and
corporate executives in mind, and is structured as follows:
1. About the Capital Markets Program – reasons for undertaking it, objectives and scope; capital
market sectors to address; stakeholders to engage; potential outputs and outcomes;
2. Terminology: RI? CR? – working definitions for “responsible investment” (RI) and “corporate
responsibility” (CR);
3. Corporate Responsibility – a Macro Context, defined by six overarching issues: trust,
accountability, transparency, integrity, sustainability and corporate governance;
4. Specific Scoping Opportunities – further issues and needs that the CMP might address to add
value and make a difference;
5. Communicating about CR to capital markets (and other stakeholders): current practice, rules
and tools, communication gaps and missing metrics, a suggested 8-part reporting framework.
Also, an Appendix provides a brief overview of the international context of RI/CR.
At the end of key sections, suggested scoping positions and questions for participants’ consideration are
posed in bold italics, within boxes. Scoping discussion may raise other questions to be considered.
1
SRI is Socially Responsible Investment, defined by the report as investment that “combines investors’
financial objectives with their concerns about social, environmental and ethical issues”.
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Alan Willis & Associates – Capital Markets Program Briefing Paper
Suggested themes to explore at the November 19, 2003 NRTEE Scoping Meeting
1. About the Capital Markets Program
Reasons for undertaking the CMP include:
a) Although RI/CR is growing in several regions internationally, it remains small when compared to the
size of the capital markets overall, especially when measured on the basis of investment assets under
management or the number of companies that have systematically integrated sustainability principles into
their business decision making. The CMP can identify the obstacles and challenges to growth in RI/CR,
as well as drivers of growth.
b) The growth of RI/CR in Canada on both the investment and corporate side has been slower paced than
in some other countries. The CMP can identify the reasons underlying this gap and provide options to
reverse this trend.
c) There is a gap between how Canada is perceived in the world with respect to sustainability issues and
the reality in terms of the integration of RI/CR into Canada’s capital markets. The CMP can identify why
this gap exists and explore options to close it.
d) The growth of RI/CR has taken place in limited sectors of the capital markets (ie. mainly in investment
management). How can the limited success in this area be expanded into other areas of the capital
markets, such as credit or insurance risk evaluation? The CMP can identify opportunities throughout the
capital market structure and be a catalyst for change.
Are these valid reasons and are there other reasons why the NRTEE should undertake the CMP?
Scope of the CMP
1. Issues/Themes
There has been discussion at different levels within NRTEE with respect to what issue areas or themes the
CMP should encompass. After all, the NRTEE’s very name suggests a focus on relationships between the
environment and the economy, so is there justification for a broader scope of enquiry? There is general
agreement that consideration of environmental issues in investment and business decision making should
be a core area or enquiry for the program. Most stakeholders will agree that the business case is strongest
in this area, in the sense that there is ample research highlighting a positive correlation between the
integration of progressive environmental programs (beyond regulatory compliance) and strong share
performance. On the corporate side, environmental initiatives have been documented as saving money in
a host of business operations, including raw material costs, energy use, and waste disposal.
To ensure greater comprehensiveness and relevance to CR/RI, and recognizing that leading companies
already aim to integrate all three elements of sustainable development (the “triple bottom line”) in how
they do business, it is felt that the CMP needs to encompass additional issues or themes. The question
then becomes: what should those additional issue areas be? Should the CMP include an examination of
how aboriginal relationships, community engagement, corporate governance, diversity issues, employee
relations and human rights enter into or are ignored in investment or business decision making, risk
analysis or due diligence? Is capital market consideration of a company’s impacts on the economy a
relevant area of CMP enquiry? Another theme that underpins discussion regarding sustainability and the
capital markets is the concept of “license to operate – is this a topic for the CMP to explore?” Do
companies have a fundamental right to do business or is this right bestowed upon them by various
stakeholders and how is this recognized in company law?
The tentative view of the CMP is to go beyond just environmental issues and address social issues to
the extent that they underpin the “license to operate”. Is this an appropriate and realistic scoping
parameter?
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Alan Willis & Associates – Capital Markets Program Briefing Paper
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2. Capital market components or sub-sectors
Reference is frequently made to capital markets as if they were a single, homogenous block or sector, but
in fact there are several distinct sub-components or sub-sectors that need closer analysis in order to fully
understand their structure and dynamics. This analysis can also reveal likely points of intervention for
bringing about change of one kind or another. For the sake of assessing how best to focus the CMP - to
treat capital markets as a whole or address only key parts or address all parts but in stages - the following
sub-categories of capital markets are set out for consideration:
1. Equity markets, including buy and sell side analysts, brokerage houses, pension funds and mutual
funds, index providers (DJ, JSI, S&P, etc.), retail investors, securities regulators and stock
exchanges.
2. Bond markets, including analysts and rating agencies (DBSR, S&P), pension and mutual funds,
retail investors, securities regulators.
3. Private and venture capital, including their research analysts and money/portfolio managers
4. Lenders and debt guarantors, such as banks and government agencies
5. Insurance providers and re-insurers (as risk management solutions and as investors)
6. Providers of other financing solutions such as weather derivatives and emissions trading schemes
From the point of view of assessing RI issues and options, it may be more productive for the CMP to
address the components in stages, perhaps determined by those that look most likely to respond to RI
drivers or most advance CR. What will be the most useful approach to take in scoping the CMP?
Participants/Stakeholders
Whatever the reasons for conducting the CMP (and any attendant or potential risks that may exist), and
whatever its scope, it will be important to ensure that the CMP process is sound in order for its
conclusions to be considered credible. A comprehensive, multi- stakeholder approach will be important to
the success of the CMP, partly to ensure multiple perspectives are considered and partly to build a broader
base of commitment to its conclusions. The NRTEE has established a proven track record of engaging a
diverse range of stakeholders in carrying out its projects.
In order to ensure quality outcomes and recommendations, it is proposed that the CMP should engage key
capital market opinion leaders and influencers from the following constituencies (subject to the decision
as to whether the CMP will address all or only certain aspects of capital markets):
a) equity research analysts – sell side
b) investment management firms – fund managers and buy-side analysts
c) brokerage/advisor industry
d) investment banking industry (underwriting, IPOs, private placements, etc.)
e) insurance companies (insurance risk analysis, and also investment managers)
f) banks (credit risk analysis and also lending and investment policy)
g) corporate executives – CEO, CFO and investor relations officers
h) Canadian stock exchanges – primarily the TSX (NB listing requirements)
i) global organizations – United Nations Environment Program, OECD, etc.
j) government – provincial and federal
k) accounting profession
l) securities regulators, and also self-regulating organizations such as the IDA
m) rating agencies - DBRS, S&P, Dow Jones, etc.
n) alternative strategies –derivatives, emissions trading (e.g. IETA, CCX), etc.
o) private equity
p) venture capital
q) investment/pension consulting
r) legal profession
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Alan Willis & Associates – Capital Markets Program Briefing Paper
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s) mutual funds
t) pension funds
u) RI/CR community (e.g. Social Investment Organization, Corporate Knights)
v) academics
w) industry associations
x) financial analysts professional association (AIMR)
y) other, e.g. Canadian Coalition for Good Governance, Canadian Council of Chief Executives
Potential Outputs and Outcomes
Potential outputs, such as recommendations and publications, and outcomes of the CMP that could arise
from CMP activities include the following:
1) The CMP could undertake a comprehensive literature review and cataloguing of RI/CR research –
something which has not been undertaken in Canada. This would help establish the business case for the
benefit of mainstream financial professionals, especially if the data was easily accessible. It should
distinguish between financial/investment research and CR research, which focuses primarily on business
applications. The CMP could identify gaps in RI/CR research, both from the investment industry and
corporate perspective.
2) The CMP could identify a set of key metrics about CR that would be necessary for RI decision making;
NRTEE could then work with companies, industry associations and others to develop and define the
methodologies for such metrics (as was done for eco-efficiency indicators). The CMP could enhance
discounted cash flow methodologies for company valuations that incorporate relevant CR indicators.
3) As a result of the CMP, NRTEE could begin to offer solutions to bridge the communication and
education gaps between RI/CR practitioners and mainstream financial leaders.
4) NRTEE could develop a system for measuring progress towards RI/CR on an ongoing basis and
develop ways to define the success of the CMP.
5) The CMP could identify policy options for federal/provincial governments, regulators, and other
stakeholders in the Canadian financial community, including changes in corporate reporting and
disclosure policies and practices that would promote RI/CR.
6) NRTEE could identify opportunities for leading Canadian players to liaise with cohorts involved in
international initiatives with respect to RI/CR and the capital markets.
The above and other possible CMP outputs and outcomes need to satisfy at least one common test,
namely how will they add value and make a difference or bring about desired change. Are there other
outputs and outcomes that the CMP could reasonably be expected to produce?
2. Terminology: RI? CR?
Before embarking on a program such as the CMP, it will be important that participants are on the same
page when it comes to use of terms and language.
Responsible Investment - RI
The concept of integrating social and environmental criteria into investment decision making is known by
many terms, including ethical investing, socially responsible investing, social investing, responsive
investing, responsible investing, sustainable investing, sustainable development investing, and the like.
Although some industry players have attempted to distinguish between these terms, it’s clear that most
stakeholders, including the public at large, make little distinction between them. What is also certain is
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Alan Willis & Associates – Capital Markets Program Briefing Paper
Suggested themes to explore at the November 19, 2003 NRTEE Scoping Meeting
that this type of investing is little understood in many circles and that even those with some knowledge of
the area are left confused by the terminology.
There is no question that many of the terms are problematic. Some, like ethical investing, come saddled
with elements of “moral judgment,” whether warranted or not. The use of the word “responsible” also
causes problems for some because it suggests that professionals in the mainstream financial community
that do not look at the broader scope of issues are somehow irresponsible or unethical. There have been
attempts to change the terminology in this area, to find a better name, but to this point nothing has caught
the attention nor the imagination of a majority.
In an attempt to avoid any preconceived prejudices, the CMP has therefore been using on a working basis
the term “Responsible Investment”, abbreviated as RI, to capture the essence of environmentally and
socially informed decision making in capital markets. The CMP recognizes however, that while this term
resonates for the socially responsible investment community, it may not have the same resonance or
relevance in the mainstream investment, insurance and lending sectors.
In practice, RI encompasses several different approaches or strategies. One is the inclusion of certain
social and/or environmental indicators/screens to evaluate the investment attractiveness of a certain
security. Most RI analytical frameworks allow analysts to compare a company’s performance to its
industry counterparts. Another manifestation of RI is where investors apply direct pressure as
shareholders to corporations to improve their social and environmental performance. This shareholder
advocacy strategy encompasses various means, including proxy voting and filing shareholder resolutions.
Another RI strategy is referred to as economically-targeted, alternative investment, or community
economic development. No matter what the title, some institutions that practice RI look for investment
opportunities in which their money will have the most significant positive impact on local communities.
The last RI strategy to mention here is private capital and/or venture capital opportunities, whereby social
and environmental criteria are incorporated into the decision-making process.
Corporate Responsibility - CR
Traditionally, CR has been defined as the integration of social and environmental criteria into the business
decision-making process. The principle of sustainable development adds a third dimension, namely the
consideration of wider economic issues and impacts in decision making. This is a broader concept than a
company’s fundamental necessity to create value for shareholders – which itself has an economic impact,
of course. There is an understanding that CR encompasses more than a company’s commitment to
corporate philanthropy, and extends to a systematic analysis to address a variety of environmental and
social issues throughout all aspects of operations.
Although there is a wide literature about sustainable development and corporate adoption and
implementation of sustainable development principles, policies and practices, and a similar literature
about corporate social responsibility, both terms can cause confusion and ambiguity about exactly what
they embrace or exclude.
Similarly, the terms “sustainability” and “triple bottom line”, in common use by many stakeholders
within the business world and civil society, are not yet universally used or commonly understood. Indeed,
phrases commonly encountered such as the “sustainable” corporation or “sustainable” earnings can be
potentially misleading.
The CMP has therefore been using on a working basis the term “Corporate Responsibility”, abbreviated
as CR. CR might be said to characterize those qualities and practices about which evidence is sought in
RI decision making.
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Alan Willis & Associates – Capital Markets Program Briefing Paper
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For the purposes of the CMP, are any difficulties foreseen in using the terms RI and CR? Are there
any better suggestions for succinct, appropriate language that conveys the intended meaning in a
widely understandable way?
3. Corporate Responsibility – a Macro Context
Any discussion of CR and RI in today’s world needs to be framed within the broader context of perhaps
six major global issues that have recently become top of mind for CEOs and boards of directors. These
issues show up repeatedly in business headlines, debates, speeches, studies, articles and initiatives by
world leaders in business, government and civil society.
Together these themes or issues set the broad parameters of corporate responsibility, since they speak to
society’s and stakeholders’ expectations (not least those of shareholders) about corporate behaviour and
license to operate. They point the way to new dimensions in the responsibilities of shareholders and
boards of directors and how these are to be discharged. They pose important challenges and opportunities
for corporate management (and for the accounting profession – an important component of efficient
capital market functioning). What are these six broad contextual issues?
Trust
“Restoring investor confidence in capital markets” has become the watchword of our times, brought on
almost entirely by major corporate debacles that have caused billions of dollars in loss of value to
investors and pension fund members, not to mention human suffering from wrecked careers and loss of
employment. Legislators, regulators, stock exchanges and professional accounting bodies are among the
leaders in rebuilding trust in capital markets and in the companies who need them. Leaders of Canadian
and US securities regulators have given numerous speeches in the last year on this theme. More broadly,
all companies have other stakeholders for whom trust in the company can be a vital intangible asset –
customers, employees, suppliers, communities.
One way in which trust shows up is in terms of reputation – along with brand, a widely recognized but
hard to measure intangible. Earlier in 2003, a survey of CEOs of the Global Fortune 500 companies
forecasted the impact of sustainability on the reputation of large multinational companies. Some 34% of
CEOs provided valid responses. They had ranked seven elements of reputation in order of perceived
future impact on the preservation of a positive corporate reputation. Not surprisingly, the first three
elements were leadership/vision, and, ranked equally, quality and knowledge/skills. The next three were
social credibility, financial credibility and environmental credibility. Last came what was termed
“emotional connections”. These elements were all carefully and clearly defined for the purposes of the
survey.
In his foreword to the survey report2, Sir Mark Moody Stuart (former chair of Royal Dutch/Shell Group)
noted the difficulty of measuring the contribution of sustainability (“commitment to environmental and
social values”) to shareholder value, but acknowledged that CEOs know the fundamental importance of
these intangible value creation contributors
To what extent can it be argued that CR and RI contribute to trust in companies and capital markets?
How does trust contribute to long term value creation for shareholders as well as for other
stakeholders? This is a line of enquiry that may be an important aspect of the CMP and what it can
throw light upon.
A recent (2003) survey of global CEOs by PricewaterhouseCoopers identified three key elements of
public trust: accountability, transparency and integrity.
2
Forecasting the Impact of Sustainability Issues on the Reputation of Large Multinational Corporations,
Brady/Judge Institute of Management, University of Cambridge, UK, April 2003
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Alan Willis & Associates – Capital Markets Program Briefing Paper
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Accountability
Accountability calls for those to whom responsibilities and resources have been entrusted to be
accountable for their actions. This holds true for boards of directors, management, auditors, pension fund
trustees, mutual fund managers and so on. Within a company, accountability extends deeply within the
organization and workforce – it is expected of all, not just the CEO or CFO.
The R in CR is not just a feature of the CEO’s job description. It is pervasive across the organization,
from the boardroom on down – in effect calling for a culture of accountability with respect to social and
environmental responsibilities as well as those directly related to financial resources, assets and
performance.
Accountability to shareholders is recognized under company law and securities regulations, most visibly
through corporate reporting requirements, directors’ duties and responsibilities and shareholders’ rights.
To what extent do capital markets recognize and assess a company’s culture of accountability? Is this
another source of hidden value or strength and sustainability that the CMP might usefully explore?
Transparency
There used to be a perceived wisdom in maintaining the “corporate veil” so that disclosure of information
about financial results and corporate governance was kept to the strict legally required minimum and all
other information was guarded from those not deemed by management or the board to be entitled to it. In
recent years, partly through the emergence of investor relations departments, partly through recognition of
key stakeholder groups whose relationships with the company are seen to be strategically important
intangible assets, partly in response to RI disclosure expectations, we have witnessed a significant shift
towards corporate openness and transparency.
Now it appears to be accepted that transparency is a key factor in building public trust, particularly with
stakeholders affected by the company’s operations and products, as well as with investors whose
analytical methods are becoming more sophisticated. Transparency calls not just for disclosure of relevant
financial and non-financial data, but also for disclosure of meaningful qualitative information about
corporate business principles and related policies, and about strategy, risk and risk management.
Initiatives such as the Global Reporting Initiative’s Sustainability Reporting Guidelines address needs for
greater transparency and improved decision making by stakeholders. Pricewaterhouse Coopers “The
Value Reporting Revolution” and the CICA’s 2002 “MD&A: Guidance on Preparation and Disclosure”
aim to help companies make more useful disclosures to investors (and be rewarded for doing so). A
recently published book “The Naked Corporation: How the Age of Transparency Will Revolutionize
Business” (Tapscott and Ticoll, Viking Canada, 2003) examines this theme at length and with numerous
examples and cases.
What are the implications of these transparency trends for CR and RI? What light might the CMP
throw on this area and what might it recommend?
Integrity
Regardless of any amount of accountability and transparency, actions by people ultimately win or lose
public trust. This is true in all sectors of society, and certainly so in the corporate world, as we have seen
rather too often in recent spectacular and sadly harmful instances of executive greed or boardroom
neglect. Short term gains in shareholder value or returns count for little if they lead to long term erosion
of value caused by actions that lacked integrity. There is a wide body of literature and many noteworthy
institutions and associations devoted to business ethics and integrity. Even company law reinforces the
duty of directors to act in the best interests of the company (though interpretation of that is fertile ground
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for debate, including the legal concept of fiduciary duty). Integrity in capital markets has recently been in
the limelight too, adding a new twist to what RI might be held to mean.
A study reported in April 2003 by the UK’s Institute of Business Ethics found a remarkably positive
correlation between the financial performance (in terms of EVA, MVA and P/E ratios) and companies
who referred to their code ethics in their annual reports as compared with those who did not. The study
regarded the existence (and accessibility) of a code of ethics as a proxy for integrity and commitment to
corporate responsibility.
If integrity is the third pillar of public trust, what then might the CMP add to buttress it?
Sustainability
The CEO survey mentioned above states:
The corporate social responsibility movement continues to gain momentum worldwide. Beyond an
intrinsic desire to do the right thing, CEOs seek standards and measures to define better what constitutes
a sustainable business practice.
A majority of CEOs are now saying things unforeseeable only a few years ago, such as disagreeing with
statements that sustainability (in the CR sense of the term) is just a public relations exercise, agreeing that
sustainability is vital to the profitability of any company and that:
“when implementing a sustainability program in my organization, I would consider sacrificing shortterm profitability, if necessary, in exchange for long-term shareholder value”.
There are some global and sectoral variations in these broad conclusions, but the overall trend is clear:
CEOs are taking these issues seriously and are seeing the positive links to shareholder value creation.
Most seem to prefer a strategy of pro-active, constructive engagement with key stakeholder groups rather
than responding when necessary to external stakeholder pressures. Reporting on sustainability
performance is on the increase, as recent benchmarking worldwide and in Canada by Stratos Inc. reveals,
although the quality and usefulness of such reporting is still somewhat immature and limited worldwide.
The latest (November 12, 2003) federal government announcement about its Corporate Sustainability
Reporting Toolkit adds fuel to the fire of encouraging Canadian companies to embark on this journey.
Bottom line: CEOs are saying that corporate social responsibility/sustainability (CR) is an integral part of
value creation, here to stay, not just an add-on or simple cost item. It’s not surprising then, that
commitment to sustainability/CR shows up more than ever as a boardroom issue when reviewing business
plans for value creation strategy and risk management.
The CMP can surely reveal useful insights into why and how companies are committing themselves (or
not) to CR, and their associated assumptions/analysis about the bottom line implications of this and
likely impacts on capital market assessment of value and future growth prospects.
Corporate Governance
So we see the linked threads among the themes of trust, accountability, transparency, integrity and
sustainability. Where do these converge for translation and adoption in terms of corporate values,
business principles, policies and strategy? Where are the interests and expectations of various stakeholder
groups balanced against the need for shareholder value creation?
“The Power to Change: Mobilizing board leadership to deliver sustainable value to markets and society”
(International Business Leaders Forum and SustainAbility, 2003), focuses on the leadership role of boards
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of directors in a challenging business environment and how boards of leading companies are equipping
themselves to think about and “take on board” the triple bottom line.
To quote:
“The manner in which a company addresses the triple bottom line agenda can either enhance or
undermine its reputation, brand equity, risk profile, innovation, productivity, efficiency, access to
capital, licence to operate, and ability to attract and retain talent. Through these it can have a
material effect on the company’s long-term shareholder value and success. This makes the triple
bottom line an unavoidable issue for the boardroom.”
Now consider all this in the context of TSX-proposed board responsibilities regarding principal business
risks and strategic plans, and proposed CEO/CFO certification that company filings - including the board
approved Management’s Discussion and Analysis (MD&A) -fairly present in all material respects the
company’s financial condition. Triple bottom line related issues that may have a material impact on longterm shareholder value creation will surely catch the attention of boards and CFOs. Indeed, the fiduciary
duty of directors to act in the best interests of the company may necessitate attention to the interests of
stakeholders other than shareholders, if the latter’s long term interests are to be adequately addressed.
Closer to home, Purdy Crawford, addressing a Canadian Club luncheon in February 2003, on the topic of
“Confidence in Canadian Capital Markets: Is Good Governance Important?” said:
“My own approach (to What’s a business for?”) is that the purpose of the corporation is to
enhance shareholder value on a long-term basis. The longer term interests of shareholders will not
be well served if the interests of other stakeholders are not addressed.”
At a meeting of the Excel Partnership in Toronto in June 2003, several CEOs met to discuss the
relationship between corporate governance and sustainable development. OPG President and CEO Ron
Osborne stated: “For OPG, sustainable development is a strategic boardroom issue addressing the longterm global energy demands with the environmental implications of different energy sources.”
At the same meeting, Noranda Chairman David Kerr observed “Sustainable development will remain on
the board room table when it’s framed in the context of risk” – reflecting a typical North American
positioning of sustainability. Boards are increasingly addressing long term risk (e.g. climate change
exposures), risk of missed opportunities (e.g. new markets and products identified through a sustainability
lens), and accessing new perspectives through wider stakeholder engagement.
The first five issues mentioned above, the linkages among them and their collective implications for CR,
value creation and RI are a complex equation to solve for many unknown variables (as a math professor
might say). The board room is ultimately where they meet head on. The board of directors is the key not
only to setting an appropriate tone at the top (which can reinforce a CR culture within the company) but
also to ensuring that corporate policy, business strategy and risk and external reporting factor in whatever
is needed for CR and long term value creation.
The CMP affords a timely and valuable opportunity to enquire into the implications of CR/RI for
corporate governance and ways in which these can be translated into how boards can ensure that
Canadian companies, in doing business, create value for shareholders while respecting the needs of
other stakeholders in terms of human and natural capital.
4. Specific Scoping Opportunities
In view of the extensive amount of work in Canada and worldwide already undertaken and currently in
progress about the business case for sustainability, the relationship between financial and sustainability
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performance and how capital markets address sustainability, there is an extra challenge for the CMP to be
scoped and pointed in directions that will add value to what has been done and is being done elsewhere –
in short, to make a difference. The CMP has the potential to attract a unique blend of thought leaders from
a wide spectrum of relevant stakeholders in carrying out its work.
Following therefore are some more specific questions to be considered in deciding what lines of research
and enquiry the CMP might pursue:
1. Will it be either necessary or valuable to research, document and communicate the business case
for sustainability or CR? Does this need further research or simply clearer, wider articulation
needed to make it compelling enough for CR to become integral to how all companies do
business and for RI to become mainstream in Canada?
2. With environmental, social and broader economic impacts in mind as well as implications for
investors, what are the likely consequences of capital markets rewarding/punishing/ignoring CR
and what does this analysis suggest about strategy regarding RI? (e.g. find ways to increase the
extent to which capital markets reward CR and find ways to increase the extent to which they
punish lack of CR)
3. Is the business case for CR (and for RI?) (a) included appropriately in university courses,
professional education and programs for boards of directors, and (b) covered adequately in the
media? What, if any, are the deficiencies and blockages in these areas and what can be done by
whom to overcome them?
4. Aside from the business case question, what other factors impede RI from becoming more
widespread in equity markets? To what extent do such factors take effect alone or in combination
with each other? What would be the most effective ways to overcome these impediments?
(consider, for example, the fiduciary duty of trustees, short term versus long term investment
horizons, design of appropriate valuation/analytical models, adequacy of relevant information,
design of conventional market indices and ratings, exercise of voting rights, etc.)
5. What is the influence of mechanisms such as the Dow Jones Sustainability Group Index, FTSE
4Good, and Jantzi Social Index on the uptake of (a) CR, and (b) RI? How important is it to
companies to be included in such indices? Are these indices all equally reliable and effective?
What factors affect their usefulness for RI?
6. For there to be significant mainstream uptake of RI, and assuming that a compelling business case
for CR is widely understood, what new information and indicators need to be disclosed to capital
markets by companies? What needs to be done (a) by companies, (b) by securities regulators, (c)
by others in order that these disclosures will occur? Also, what disclosures should be made by
mutual funds and pension funds about their investment policies, exercise of voting rights, etc.?
7. What are the implications for Canada’s international competitiveness of advancing or failing to
advance CR and RI, recognizing the emergence and uptake of international codes, conventions
and initiatives such as from ICGN, OECD Guidelines for MNCs, UN Global Compact, Global
Mining Initiative etc.?
8. Do the CEOs and CFOs of sustainability/CR driven companies consider that capital markets
appropriately value and reward their companies in one or more ways? If so, how is this achieved?
If not, what are capital markets ignoring or undervaluing, and why?
9. Why do companies decide to adopt CR as a way of doing business? Is this an evolutionary,
incremental decision or one that occurs as a major strategic decision at a point in time for one
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reason or another? Is it due to external pressures and stimuli or does it stem from internal
leadership, enterprise and vision?
10. If CR can be described as internalizing and integrating within a company the expectations and
interests of shareholders along with those of other stakeholders, then
(a) in what ways does this occur and become evident within the company?
(b) what metrics and other information are relevant to measuring and managing CR and
reporting on it externally so as to be relevant to capital markets?
(c) what is the responsibility and role of the board of directors regarding CR and its
impact on shareholder value?
(d) are executive compensation policies aligned with CR policies and practices? and
(e) how do existing laws and regulations support or impede CR and related disclosures?
How useful will it be for the CMP to address the above questions or similar ones? Are there others,
perhaps more important, that it should address?
5. Communicating about CR
Currently in Canada, over 100 hundred companies are either providing stand-alone reports or including
several pages in their annual reports, supplemented in many cases by corporate website disclosures, that
provide varying degrees of information about environmental, social and economic performance, policies
and impacts. Such reports are for the main part designed to meet the needs of external stakeholders and
employees, but typically not to meet the needs of mainstream investor decision making (other than
possibly socially responsible investment).
Increasingly, companies issuing such reports are turning to sources such as the Global Reporting
Initiative’s Sustainability Reporting Guidelines (see www.globalreporting.org) for guidance in how to
prepare, structure and present such reports. The 2001 and 2003 benchmarking surveys of sustainability
reporting in Canada, conducted by Stratos Inc. , an Ottawa consultancy, also assist in this regard. Some
companies call for external verification of parts of such reports.
At this time in Canada, there are no statutory requirements or securities regulations that call for
CR/sustainability reporting as such to shareholders or to other stakeholders, other than a minimal Annual
Information Form (AIF) requirement for disclosure regarding the effect of environmental issues on
operating and financial results. Recent (June 2003) Canadian Securities Administrators MD&A and AIF
proposals call for additional disclosures about environmental and social matters, including risks, that may
have a material effect on financial results and future prospects. These are not expected to be finalized and
effective until 2004. In the absence of specific more specific disclosure requirements about social and
environmental matters, reporting companies need to follow the securities regulators’ rule to disclose
information that would be material to the reasonable investor’s decision making.
A report3 by the Canadian Institute of Chartered Accountants (CICA) in 2001, based on the findings of a
1999 survey of corporate practices by CICA and NRTEE regarding environmental performance and
shareholder value creation, found that:
“Even companies that have established effective environmental performance measurement
systems are not necessarily effective in communicating about that performance within their
companies or to external stakeholders.”
Further, the same report identified three key factors that delayed progress in effective communication.
3
Environmental Performance: Measuring and Managing What Matters, Willis and Desjardins
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The first was:
“A communications gap where (a) companies have failed to perceive the strategic business value in
articulating relevant environmental performance information to capital markets, while (b) capital
markets have failed to recognize the relevance of such information and have not asked for it.”
The other two impediments were lack of any generally accepted practices for such reporting, and lack of
internal information systems for measuring, tracking and reporting. Even now, there is a need to
determine what exactly are the types of information, metrics and indicators that capital markets need to
better incorporate relevant CR factors in their analytical and valuation models and methodologies, and
then to provide guidance on the design of such metrics that companies could systematically track and
report. Meanwhile, specialized research houses, stock price index developers, raters and sector analysts
have to rely heavily on questionnaires and other sources for information that should be more readily
available to investors in general.
Interestingly, on November 12, 2003, the Government of Canada announced the release of its new website based Corporate Sustainability Reporting Toolkit, sponsored jointly by the ministers of Environment,
Industry, Foreign Affairs and International Trade. The press release quotes Minister Anderson:
“Sustainability reporting is a powerful tool for decision making that will allow investors, employees,
consumers and regulators to make informed decisions”.
To the extent that it is useful to consider where CR policies and practices show up within the corporate
structure and business processes, and what may be effective points of intervention to advance CR, the
following 8 part model is offered to identify key governance and business processes that affect integration
of CR within the company. A model like this would also be helpful in determining the types of
information, qualitative as well as quantitative, that companies would want to report to capital markets to
reveal the full (otherwise hidden) dimensions of value creation that should accompany CR, and to realize
the power of stakeholder trust.
The eight parts of the suggested model are:
1.
2.
3.
4.
5.
6.
7.
8.
Corporate governance policies, structure and processes
Corporate values, business principles and policies approved by the board of directors
Corporate vision, objectives, strategy, risk assessment and management strategies
Key management systems and processes, including those regarding stakeholder relations
Key performance/value creation drivers and related metrics (e.g. Balanced Scorecard)
Results/outcomes/impacts and related metrics (financial, non-financial)
Information systems underpinning management decisions and external reporting
Internal control frameworks, policies and procedures that support achievement of corporate
objectives and ensure integrity of reported information
Is a model like this useful in considering the topics about which some form of disclosure, quantitative
or qualitative, would be useful to capital markets? Does this also help in considering where CR is
addressed and implemented within a typical company?
The MD&A disclosure framework recommended by the CICA in 2002 presents an opportunity for such
disclosures to be made by companies in a robust fashion as part of a company’s regular reporting
package, voluntarily going beyond what securities regulators currently call for.
While the above model may be an over-simplification of the complexities of running a business today,
especially a large national or multinational corporation, it may nevertheless provide a starting point for
the CMP to consider in exploring how a company addresses and needs to measure and report on CR, and
in recommending practical, targeted further steps.
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Suggested themes to explore at the November 19, 2003 NRTEE Scoping Meeting
Appendix – International Context of RI/CR
(Note: the following, after minor editing changes, is a reproduction of material prepared by Michael Jantzi for the
September 16 scoping meeting, and is included to provide further background information)
In order to better understand the task at hand in Canada, it is important to have an international context
with respect to these issues.
Europe
The European corporate sector has embraced CR to a greater extent than its counterparts in other parts of
the world. This is demonstrated by various actions, not the least of which is the comprehensive reporting
many European companies undertake with respect to their social and environmental performance,
including the publication of sustainability reports.
RI is one of the fastest growing sectors of the European investment market. This level of involvement in
RI has been spurred in part by UK legislation, passed in July 2000, which requires all pension funds in the
UK to report publicly on their RI policies and initiatives. The regulation under the UK’s 1995 Pensions
Act requires trustees to declare in their Statement of Investment Principles: the extent (if at all) to which
social, environmental or ethical considerations are taken into account in the selection, retention and
realisation of investments; and the policy (if any) directing the exercise of the rights (including voting
rights) attaching to investments.
The legislative changes in the UK have had a ripple effect throughout the rest of Europe. RI is an
important component of new legislation reforming Germany’s pension system. As of January 2002,
newly-conceived private pension schemes “must inform the members in writing on whether and in what
form ethical, social, or ecological aspects are taken into consideration when investing the paid-in
contributions,” in order to be certified and qualify for tax deductions. There was broad public support for
such a move, with poll results showing that 84.3% of Germans support ethical, social, and environmental
disclosure regulations for pension schemes.
In France, RI/CR is now reflected in legislation overseeing retirement savings contributions and
retirement fund regulations, as changes to the Code monétaire et financier came into effect in winter
2002. Also, as of May 2001, French firms are required to report on social and environmental issues in
their annual financial reports. The new law states “publicly chartered and regulated companies must take
stock of the social and environmental consequences of these activities.”
The Belgian Parliament thoroughly revised the country’s legislation on supplementary retirement
schemes to give greater transparency and “democracy” to the management of pension funds. As far as
transparency is concerned, the new law, which went into effect in 2002, imposes the obligation of issuing
an annual report containing information on the financing method and the “investment strategies for the
long and the short term and how social, ethic and environmental aspects are being taken into account.”
Asia
Japan is the most developed market in Asia in terms of RI. Also, Japanese companies rate highly
compared to most international counterparts with respect to sustainability reporting. In addition,
institutions such as the Asia Development Bank and the International Finance Corporation are developing
coherent policies on sustainable investment.
Australia
Overall, RI assets in Australia were about (AUS) $14 billion as of June 2002, an increase of 32% over the
previous year. Given recent legislative initiatives in Australia, this impressive growth trend seems likely
to continue. In August 2001, the Australian government passed the Financial Services Reform Act
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(FSRA), a comprehensive piece of legislation that covers issues of delivery, licensing, and disclosure in
the provision of financial products and services. The Act included an amendment that compels providers
of investment products to disclose: “the extent, if any, to which labour standards, environmental, social or
ethical considerations are taken into account in the selection, retention or realisation of the investment.”
Although similar to legislation in France, Germany, and the UK, the Australian law goes further as it
places this requirement on all investment products — not just pension schemes. The FSRA came into
effect as of March 2002.
South Africa
The idea of a stock exchange incorporating RI/CR indicators into its listing requirements is not unheard
of. As of September 1, 2003, all companies listed on the Johannesburg Securities Exchange (JSE) have to
comply with codes created in 2002 by the second King Report on Corporate Governance for South
Africa. These codes not only address core corporate governance issues, such as director independence and
splitting CEO from Chair positions, but also require the use of Global Reporting Initiative (GRI)
guidelines for disclosing social and environmental performance.
United States
By the end of 2001, more than $2.3 trillion was invested in the United States in a socially responsible
manner, according to the Social Investment Forum, accounting for almost 12% of the $19.9 trillion under
professional management (as reported by The 2001 Nelson’s Directory of Investment Managers). The
36% growth rate in RI assets between 1999 and 2001 was more than 1.5 times the growth rate of all assets
under management in the U.S. (including both market appreciation and net cash inflows).
Canada
According to Canadian Social Investment Review 2002, there is just more than $51 billion worth of RI in
Canada, representing about 3% of the retail mutual fund market and the institutional investment market.
According to a report published by Stratos, in 2002 24 of the top 100 largest Canadian companies by
revenue produced sustainability reports, a 2% decrease from the year before.
Canadians overwhelmingly believe that the investment and financial community should be taking
corporate environmental and social performance into account when valuing companies, according to a
January 2003 market research study undertaken by Environics International. When asked if they think
“the investment and financial community should pay more attention to corporate social and
environmental performance when valuing companies than they do today,” the 50% of Canadians who
own shares directly or indirectly responded overwhelmingly in the affirmative. Nine in ten shareholders
(88%) believe that more attention should be paid to the social and environmental performance of
companies by the investment and financial community. Other results included:
• Nine in ten Canadians strongly (55%) or somewhat (35%) support “requiring companies to publicly
report their social and environmental performance;”
• Over eight in ten Canadians strongly (39%) or somewhat (43%) support “requiring pension funds to
publicly report whether or not they take the social and environmental performance of the companies they
invest in into consideration;” and
• Nine in ten Canadians strongly (54%) or somewhat (36%) support “making tougher laws around
corporate environmental and social behaviour.”
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