What do investors want from CSR reporting?

What do investors want from CSR reporting?

Dr Steve Waygood, Head of SRI Engagement

Ethical Corporation, Regent Park Marriot,

London.

14th November 2007

This training material is intended for professional advisers, market counterparty or intermediate customers and pension scheme trustees only. The content is provided for information purposes and should not be viewed as investment, legal, regulatory or tax advice.

Structure

What CSR information do we look for in an annual report?

What do we look for in a CSR report?

How is this integrated into our investment decisions?

How is this integrated into voting at AGMs?


Chairman and CEO’s view considers CSR relevance to strategy

Board has set clear standards and values (principle A1 of combined code)

A clear governance structure for board oversight of CSR

Consideration of CSR within business review analysis

KPIs, with targets and an analysis of trends

Where performance falls short of the objectives, a description of the measures the Board has taken to put it back on track.


Internal control covers relevant CSR risks

Consideration of CSR KPIs included by remuneration committee

Included within the scope independent auditor’s report

Association of British Insurers: “Guidelines on Responsible Investment Disclosure” (updated in 2007) – provides useful guidance on AR&A

Combined Code

A.1 The Board

Main Principle

• Every company should be headed by an effective board, which is collectively responsible for the success of the company.

Supporting Principles

• The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls… The board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.

Morley places particular importance on the board having “set appropriate standards and values” for the company.

Combined Code and ABI RI Guidelines

B.1 The Level and Make-up of Remuneration

Main Principle

• Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.

• Morley’s voting policy is also closely aligned with the ABI Guidelines on Responsible Investment Disclosure.

• Section 3.1 highlights that companies should state in remuneration reports “whether the remuneration committee is able to consider corporate performance on environmental, social and corporate governance (ESG) issues when setting remuneration of executive directors. If the report states that the committee has no such discretion, then a reason should be provided for its absence”.

Companies Act

Section 417 of the new UK Companies Act details the disclosure requirements for listed companies that must produce a business review.

Purpose - to inform members of the company, and help us to assess how the directors have performed their duty to promote the success of the company.

Contains a new requirement for reporting on a range of information: environmental matters, employee issues, as well as social and community issues. It suggests the inclusion of information regarding company policies in relation to those matters and the effectiveness of such policies, with KPIS.

Requires disclosure “to the extent necessary for an understanding of the development, performance or position of the company’s business”.

Expectations of investors

In broad terms, we expect:

A thoughtful and sufficiently forward looking Business Review that

covers the company strategy, objectives and operating environment, and

provides appropriate evidence that the key environmental, social and governance (ESG) risks have been considered and that action has been taken to mitigate these risks.

KPIs

ASB Reporting Statement ‘The Operating and Financial Review’ (OFR RS) provides useful guidance.

What do we look for in a CSR report?

Depending on scale and nature of the company and its ESG risks, further corporate disclosure in stand alone “Sustainability” reports may be appropriate, including:

Data, Performance Measures, Targets, Year on Year performance reporting, and, in certain cases, verification.

Evidence that the company’s “obligations to its shareholders and others are understood and met”.

Assurance that stakeholder relations are well managed.

When primarily aimed to investors, CSR reports should prioritise disclosure of ESG issues that are most relevant to their business, and/or most likely to have an investment impact:

Policy, process and performance – not anecdote, photos and gloss.

Expectations on investors

In return, investors are expected to:

Integrate such forward looking disclosure into their investment decisions.

Be clear about their policy, including sector specific guidance

Be reasonable and realistic in their expectations

Be prepared to enter into discussion with companies

Integrate a considered view of the quality of reporting into AGM voting action

How is this integrated into our investment decisions?

Identifying sustainable & responsible investments

How is this integrated into our voting?

Since 2001, our policy has sought to improve corporate disclosure and narrative reporting on ESG issues. Current policy is:

we expect all FTSE 350 and FTSE EuroFirst 300 Index companies to disclose information on their exposure to and management of key environmental, social and corporate governance risks.

where companies publish insufficient information, Morley may abstain or vote against the resolution to adopt the Report and Accounts.

Has this been effective?

Promoting better disclosure - findings

Votes against or abstained on approving a company’s Reports and Accounts for ESG at 121 companies from January 2002 – December 2006.

The mean average 12 month success rate over the five year period is 58.7% (i.e. we were able to support the management in 58% of cases the year following a vote against or abstention)

Focussing on just the 2002 data, the 24 month success rate is 84%, and the 36 month success rate 97%:

Current engagement – climate change

The Carbon Disclosure Project (CDP) provides a coordinating secretariat for institutional investors with a combined $41 trillion of assets under management (Source: CDP, Sept 2007).

Seeks information on the business risks and opportunities presented by climate change from the world's largest companies.

We targeted 29 companies for direct voting engagement based on their climate change risk

Well over half of the companies responded to the CDP for the first time (15 provided a full answer, 3 provided some information, and 1 further response committed but outstanding.

Any questions… ?

Summary of ESG Voting on Company resolutions

Important Notes – ref: MFM/07/813.

This document is intended for institutional or professional investors and experienced advisers only. Private investors and scheme members should seek professional advice before making an investment decision.The information provided in this document and any appendix is confidential and should only be used for the purposes requested.Except where stated as otherwise, the source of all information is Morley as at 9 November 2007.

Any future returns and opinions expressed are based on our internal forecasts and should not be relied upon as indicating any guarantee of return from an investment with Morley. No part of this document is intended to constitute advice of any nature nor should any part be construed as a recommendation to purchase or sell stocks.Where past performance has been illustrated it is not intended to be a guide to the future.When investing with Morley investors should be aware that the value of an investment and any income from it may go down as well as up. Investors may not get back the original amount invested.Full terms and conditions of Morley’s products and services are available on request.Telephone calls to Morley may be recorded for training or monitoring purposes.

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What do investors want from CSR reporting?

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