The Global Compact and Financial Markets
As rising numbers of companies from around the world are embracing corporate citizenship as a management imperative, the mainstream capital markets – including major institutional investors – have begun ground-breaking efforts to recalibrate their investment strategies and models to adjust to new realities.
Indeed, a new term has entered the lexicon of finance: “ESG”, for environmental, social and governance issues. This term and the underlying concept were first proposed by the Global Compact’s “Who Cares Wins” initiative in June 2004 as a way of focusing mainstream investors and analysts on the materiality of and the interplay between these issues – be they related to climate change, human rights or anti-corruption, to name just a few.
Until the time of “Who Cares Wins”, most of the activity in the investment community related to the corporate citizenship movement had focused on socially responsible (or ethical) investing in which investors and fund managers employed a negative-screen methodology – removing from investment consideration companies and industries deemed objectionable for ethical or moral reasons.
However, assisted by such efforts as “Who Cares Wins” and the United Nations Environment Programme’s (UNEP) Finance Initiative, a new paradigm has emerged – investors and analysts evaluating companies and other assets on their ESG performance as a qualitative and quantitative piece of fundamental analysis. The underlying premise is this: companies that proactively manage ESG issues are better placed vis-à-vis their competitors to generate long-term tangible and intangible results – and therefore are better investment bets. And increasingly, research bares this out.
Through “Who Cares Wins”, the Global Compact – in partnership with the International Finance Corporation (IFC) and the Government of Switzerland – has been working with a range of large asset-management companies to improve analysis and investment models on these issues. For example an important meeting was convened in Zurich, Switzerland, focusing on ways to improve communication between companies and investors on these issues. The central insight from the conference is that a new phase is beginning with respect to companies including ESG information – through vehicles such as the Global Reporting Initiative and the Global Compact’s Communication on Progress – in their disclosures to analysts and investors.
The past year also saw the historic launch of the Principles for Responsible Investment, an initiative led by the Global Compact and the UNEP Finance Initiative. Launched in April 2006 at the New York Stock Exchange, the PRI invites large institutional investors – both asset owners (e.g. pension funds, foundations, endowments) and asset managers to commit to a set of six principles designed to put ESG issues into the core of investment decision-making. The initiative has surpassed all expectations – at the one-year anniversary more than 170 institutions representing approximately $8 trillion in assets had committed to the PRI.
Taken together, these efforts – in combination with other important global projects such as the IFC’s Equator Principles, the Carbon Disclosure Project, and the Enhanced Analytics Initiative – are helping to sensitize capital markets to the importance of ESG issues, and should be a major force in driving the corporate citizenship movement to higher levels by rewarding leadership companies through enhanced asset valuations.
(Last update 20 February 2008)
