Business put under pressure to disclose ethical risks

Source: Financial Times, 27 February 2004

Shareholders may deploy a powerful new weapon against companies that fail to disclose the social, ethical and environmental risks to their business by refusing to endorse the company report and accounts, a leading investor lobby group warned yesterday.
The Association of British Insurers, whose members own a fifth of the London stock market, welcomed an explicit threat by Henderson Global Investors, the fund manager, to consider companies’ "non-financial risk management" when deciding how to vote on a company’s report and accounts.

The decision indicates that shareholder activists are beginning to pay as much attention to issues of corporate social responsibility as they do to executive pay – and piles even more pressure on business.

It also comes ahead of the publication of Department of Trade and Industry guidelines that will require companies to disclose in their annual report any social, environmental and other issues that materially affect the business.

The guidelines, called the Operating and Financial Review (OFR), are expected in the next three weeks.

Controversies over climate change, obesity, access to medicines and labour standards in the clothing and computer supply chains are raising concerns among investors who fear their shareholdings could be damaged by factors such as negative publicity or litigation.

Nick Robins, head of socially responsible investment research at Henderson, said: "Companies with inadequate disclosure on social, ethical and environmental factors are denying their investors the right to make informed investment decisions."

He said Henderson would judge companies according to their adherence to the ABI’s guidelines, which call on boards to detail in their annual report how they manage non-financial risks. Half of the FTSE 250 had still not done so, the ABI revealed, although many were suppliers to larger companies and exposed to similar risks.

"Corporate responsibility is not about creating a feel-good factor," said Peter Montagnon, ABI head of investment affairs. "We’re talking about fundamental risk management. We want companies to have high-quality, sustainable earnings."

The ABI said social and environmental risk management had failed to attract sufficient interest from mainstream equity analysts, in part because of the lack of analytical tools to measure its impact. "Translating this into numerical form remains a challenge," said Mr Montagnon. "We are determined that this is taken seriously as arelevant subject for mainstream analysts."

But it published a report yesterday, Risks, Returns and Responsibility, which attempted to detail how effective management of corporate responsibility could lead to improved business performance.

Pension funds also came under attack, with the ABI saying they had been "slow to translate statements of (social, ethical and environmental) principle into specific mandates for investment managers." UK pension funds were specifically encouraged to address social and environmental issues in the Pensions Act in 2000.

Investor interest in social, environmental and ethical risks has also been gathering pace over the past two years, with socially responsible investment (SRI), once confined to specialist funds, edging into the mainstream.

Professor Alyson Warhurst, director of the corporate citizenship unit at Warwick Business School, said the OFR and the increased use of the ABI’s guidelines marked a sea-change in corporate responsibility. "They make a systematic and thorough approach to social responsibility an imperative rather than a nice-to-have," she said. "It’s going to be necessary for companies to do this as systematically as any other risk process."

Companies taking action now may help stave off calls for tougher regulation from MPs and pressure groups. There have been attempts by individual MPs, so far resisted by the government, to introduce legislation ensuring companies meet environmental and humanitarian responsibilities.