CORPORATE ESG / SUSTAINABILITY REPORTING DOES IT MATTER?

Transcription

1 CORPORATE ESG / SUSTAINABILITY REPORTING DOES IT MATTER? Analysis of Fortune 500 Companies ESG Reporting Trends & Capital Markets Response PUBLISHED BY 215 PARK AVENUE SOUTH 10TH FLOOR NEW YORK, NEW YORK

2 CORPORATE ESG / SUSTAINABILITY / RESPONSIBILITY REPORTING DOES IT MATTER? Analysis of Fortune 500 Companies ESG Reporting Trends & Capital Markets Response, and Possible Associations with Rankings & Ratings Published by Governance & Accountability Institute, Inc. 215 Park Avenue South, 10th Floor New York, New York Primary Researchers & Authors Michelle Thompson (MPA) and Natalia Valencia (MPA) Reviewers, Advisors & Editors Hank Boerner; Louis D. Coppola, MBA; Alfred Modugno, MBA); Daniel P. Doyle, MBA CORPORATE ESG / SUSTAINABILITY REPORTING DOES IT MATTER?

3 Table of Contents Background Information... page 3 Executive Summary... page 4 Preliminary Findings... page 6 Introduction to Global Reporting Initiative (GRI) Framework... page 9 Methodology... page 11 Results of Analysis Between List Inclusion and Use of GRI Reporting... page 12 Indices Analysis Possible Associations... page 17 Ratings Analysis and Possible Associations... page 20 Reputational Rankings & Lists Analysis Possible Associations... page 23 Analysts Conclusions... page 28 Primary Researchers & Authors... page 30 Advisors & Editors... page 31 End Notes... page 36 Appendix... page 39 2

4 Background Information Over the recent five-year period ( ), the number of US corporations reporting according to the framework of the Global Reporting Initiative (GRI) has been steadily increasing. The participation of US companies in GRI reporting is relatively low when compared with peer companies in other industrial nations. The GRI organization reported in May 2011 that 80 percent of the Global Fortune 250 companies and the 100 largest firms based in the United States have produced Sustainability, Corporate Responsibility or ESG-focused public reports in 2008 and The prevalence of reporting among the Forbes Global 2000 is much lower -- just over 30%. The GRI opened a Focal Point office in New York City in 2010 to help US companies tell world audiences about their ESG/sustainability efforts by providing support to those [companies] producing sustainability reports (and to boost the number of US companies producing such reports. The GRI framework provides an excellent global framework for corporate sustainability and ESG reporting (reporting on corporate performance on environmental & energy, social issues and corporate governance). The breadth of issues covered in such reports can include: organization and governance; sustainability strategies; energy consumption and conservation; water use and water waste; greenhouse gas emissions (GhGs); employment, human rights and labor rights issues; corporate diversity; and more. The questions raised by investment managers and corporate executives are often: Does it matter if companies report according to the GRI Framework does it matter if companies report or not on sustainability issues and does reporting have impact in the capital markets (and among investors)? Does reporting matter? We designed a research effort to attempt to analyze what impacts, if any, increased corporate reporting according to GRI Framework may have on share performance, measured against widely-used financial benchmarks; and, to determine whether GRI reporting had influence on the reputation of corporations (positive and negative) as indicated by inclusion or exclusion in the more credible, better-known ratings and/or rankings. Our questions were: Does corporate reporting following the GRI Framework raise the awareness of corporate ESG performance? Does it result in companies being selected for credible and respected rankings & ratings for ESG performance and/or corporate reputation? Do managers of sustainability investment indexes take such reporting into consideration? The preliminary research findings are contained in these pages. The model created for analysis is being expanded and updated and will be used by researchers to further validate or contradict the initial findings herein. 3

5 Executive Summary The purpose of the research and analysis was to examine the effects (if any) of certain corporate sustainability and responsibility reporting practices on stakeholders and to attempt to detect discernable trends involving the Fortune 500 Companies as related to their ESG / Sustainability reporting. The question posed by the researchers: Was there an impact of companies openness, transparency and willingness to report on the enterprises ESG key performance indicators (KPIs) and related data sets on capital market performance? An important infrastructure for corporate ESG / Sustainability reporting is the Global Reporting Initiative (GRI), with a Framework for reporting established through a collaborative process a decade ago. The GRI Framework is increasingly the choice of companies in many countries for their sustainability reporting -- including companies in the United States of America -- that are leading in publicly reporting on their ESG performance and setting the pace for other business enterprises. GRI history is available on the Global Reporting Initiative web site: The questions the researchers considered were: 1.) Does reporting according to the GRI Framework matter to capital market players to institutional asset owners, professional asset managers and financial analysts? 2.) Do these capital market players assign a premium to corporate issuers that report according to the GRI Framework that creates measurable share price outperformance for these companies? 3.) Does GRI reporting influence the creators of leading sustainability/esg equity indexes and related investment management products [for inclusion of reporting companies in the indices]? 4.) Does GRI reporting influence the third-parties that create ranking and ratings relative to ESG corporate performance in credible and respected compilations of leading companies? (Does it make it more likely that reporting companies will be selected for the lists and rankings?) This research focused on two groups of companies with some degree of overlap the constituent companies of the Fortune 500, as compiled annually by the editors of Fortune magazine (published by Time Warner Inc); and, the companies that make up the S&P 500 Equal Weight Index, a licensed intellectual property of Standard & Poor s Company. This index is designed for investment management and measurement, and is a widely-used benchmark for public company financial analysis and for asset management. Note: There are 500 US companies in each set; the overlap is about 300 companies; 200 companies are either in one set of companies or the other -- but not included in both. The Fortune 500 company list is an annual ranking of the largest 500 US companies measured by gross revenues for the previous fiscal year. (Any company for which revenues are publicly-available is eligible for inclusion; the majority is publicly-traded enterprises; a few are private concerns.) 4

6 The S&P 500 Equal Weight Index is widely regarded as the best single gauge of the large-cap US equities market, and includes 500 leading companies in various industries of the US economy, capturing about 75 percent of coverage of all US equities. Some US $4.83 trillion in Assets Under Management (AUM) investments are benchmarked against the Index at the time of the analysis, says Standard & Poor s. Sectors include energy, materials, industrials, construction, healthcare, financials, information technology, telecom, and utilities. 5

7 Preliminary Findings The researchers recognize that there are many factors that determine investor interest in specific companies, and many factors that determine share prices in the capital markets. The analysis was confined to examining corporate sustainability disclosure and reporting using the GRI Framework, and possible effects on corporate reputation and analyst and investor reaction. Our results indicated that there was a positive association in 6 of the 9 of the preliminary metrics that we examined -- the positive associations are: Inclusion in Sustainability Indexes Dow Jones Sustainability World Index This global investable index considers publicly-traded companies sustainability initiatives and evaluates the global performance of the corporate sustainability leaders. Apparent Positive impact for inclusion indicated. The managers seek best in ESG class companies and do not exclude companies based on certain criteria, such as tobacco or weapons manufacture. Dow Jones Sustainability North America Index This investable index considers companies sustainability initiatives and evaluates the performance of North America s publicly-traded sustainability leaders. The US company component was selected for comparisons. The Index generally contains about 600 or fewer US companies. No discernable impact possibly because so few US companies are reporting according to GRI Framework. And sectors or industries are not excluded as they might be in some SRI guidelines. NASDAQ OMX CRD Global Sustainability Global 100 Index This is an equally-weighted equity index that serves as a benchmark for stocks of companies that are taking a leadership role in sustainability performance reporting and that are traded on a major US stock exchange. The Index is comprised of companies leading in such factors as disclosing their carbon footprint, energy usage, water consumption, hazardous and non-hazardous waste, employee safety, workforce diversity, management composition and community investing. Positive impact for inclusion was determined. 6

8 Three Reputational Rankings & Lists Were Selected for Analysis Newsweek s 2010 Greenest American Companies Rankings An annual assessment of the largest companies in the U.S and ranks the companies based on their environmental policies, footprints and reputation. Positive impact for inclusion in the list indicated. The list has been assembled by KLD Research of MSCI, using Trucost environmental data. Trucost has the largest such database in the world. CRO 100 Best Corporate Citizens An annual ranking of the world s top corporate responsibility companies based on publicly-available information as analyzed and ranked by IW Financial for CRO [magazine] selection. Positive impact for inclusion in the list indicated. Ethisphere s World Most Ethical Companies The companies selected for this ranking fit the criteria of Ethisphere s motto: Good. Smart. Business, Profit. No discernible impact for companies included in the list. Corporate Rankings Two Independent Ratings for Analysis Were Examined CRD Analytics SPV Ratings (SPV) A Sustainable Performance Value that represents a company s total sustainability performance. Sustainability performance is defined as the environmental, social, governance and financial performance. According to company performance, CRD assigns an SPV rating to companies from 1 to 100 (highest values for highest performance). The Ratings are developed and managed by CRD Analytics and used by asset managers. Positive impact for higher ratings indicated. Carbon Disclosure Project Score The CDP is an independent not-for-profit organization focused on voluntary disclosure of greenhouse emissions, water management and climate change strategies of the largest corporations (worldwide). This score is based off the amount of data the company has supplied; the more answers completed, the higher the score might be. Positive impact for higher ratings indicated (apparently related to more complete disclosure.) Carbon Disclosure Project Performance Score This score is awarded for actions considered to contribute to climate change mitigation, adaption and transparency. Actions considered to be more fundamental to progress on combating climate change are awarded more points. Little to no association, either positive or negative, was detected. 7

9 From our analysis we concluded that by their reporting according to the GRI Framework, US companies might expect to rank higher in rankings and ratings, and might have more opportunity to be recognized by the third parties identified here. It is generally agreed among investors that there is yet no clear standard for evaluating ESG performance and that much subjectivity comes along with measuring companies ethical and sustainable practices and performance. Reporting according to the GRI framework does not assure or guarantee inclusion or higher rankings, but does improve the chances of being recognized by some third parties such as ratings and rankings providers and equity index managers. The GRI Framework provides comprehensive guidelines for companies to understand the important metrics and narratives of ESG/Sustainability and Corporate Responsibility reporting of interest to investors. Corporate managers have been stating that this Framework serves to help large enterprises to better measure, manage and report on their ESG strategies and performance. There are a number of sector-specific supplements which focus on additional material issues and indicators relative to the industry. (Examples of Sector Supplement guidelines are for Electric Utilities, Financial Services, Food Services, and Mining and Metals.) These are developed collaboratively by stakeholders and members of the sector. To continue our initial findings from this analysis, the researchers will be examining the 500 companies in the Standard and Poor 500 Equal Weighted Index to determine if there are similar trends for companies included in the popular indexes. (Note the S&P 500 is cap-weighted). We recognize that further research is needed to understand better why certain sectors -- automobile & parts, insurance, financial are lagging in reporting to the GRI, as well as what efforts may help to shift the US to the forefront of environmental, social, and governance (ESG) reporting, especially through reporting according to the GRI Framework. 8

10 Introduction to Global Reporting Initiative (GRI) Framework In response to growing societal concerns related to domestic and global environmental issues, including climate change, many multinational corporations have reacted to governmental, political, stakeholder and investor expectations and pressure to anticipate, and evaluate, understand and better manage present and future economic risks (and opportunities) by embracing ESG/Sustainability initiatives. (Companies often explain their initiatives as being part of their overall corporate responsibility.) Expanded reporting on these strategies is now expected (and demanded) by increasing numbers of investors and investor coalitions, and other stakeholders. An important globally-accepted framework for accomplishing this expanded disclosure and reporting is the use of The Global Reporting Initiative (GRI) Framework as a reporting mechanism with broad credibility. The GRI s third generation of reporting framework and guidance the G-3 is used by a growing number of public companies, either as a general guide or for specific reporting of their ESG performance against the Framework Boundaries, Indicators and Disclosure expectations. (The application level system has various requirements and disclosures for each level.) G3.1 is a two-part guideline providing the GRI s Reporting Framework to aid organizations in disclosing their sustainability performance. Part 1 of the G3.1 Guideline consists of principles to define report content, quality and to describe how to set the report boundary. Part 2 outlines the standard disclosure in terms of strategy and profile, management approach, and performance indicators. In the G3.1 guidelines, GRI has updated its guidance in topics such as Human Rights, Local Community Impacts, and Gender. GRI is a global, network-based mechanism -- organized as a foundation and is based in the Netherlands. GRI has pioneered development of the world s most widely-used sustainability-reporting framework. The main goal of GRI is to assist organizations in their disclosure of environmental, social and governance (ESG) performance. A wide range of participants have embraced GRI reporting, including members of the global business community, civil society, the public sector, and labor, academic and professional institutions. Disclosure of ESG performance following the Framework and voluntarily through GRI can be very useful to highlight clearly a company s commitment to sustainable development; to demonstrate compliance with environmental, workplace and other regulatory schemes; and, to serve as a benchmark to compare the organization against peer groups, sectors and industries, and competitors. The objective of this initial analysis was to attempt to determine if there is now a discernible positive association between the Fortune 500 companies that do report to the GRI and the company s capital market performance as measured against the broad S&P 500 Equal Weight Index performance as one important benchmark. We also looked at subjective, reputation-oriented lists, ratings and rankings, to similarly try to detect a benefit for the companies reporting according to the GRI Framework over a five-year period. (Five years analyzed = January 1, 2006 through December 31, 2010, as of our April 2011 analysis.) It is important to note that investors (asset owners and managers) and financial analysts are becoming increasingly aware that corporate financial statements alone are not determining access to capital, cost of capital, share price and other valuations; hence the rising interest in ESG factors. 9

11 Tangible Intangible: The ESG factors once considered non-financial and intangible have become important determinants in the capital markets and tangible in the outcomes regarding valuations. How a company performs in terms of managing environmental and energy issues, how it addresses and resolves societal or civic issues and the state of corporate governance of the enterprise are three important groups of determinants. (Along with the traditional financials, of course.) As investors ask about company performance with respect to the ESG factors, corporations are increasingly responding with corporate responsibility and sustainability strategies, policies, programs and initiatives. The essence of these factors is reported to the public in Sustainability. Responsibility or Citizenship reports. These efforts lead public companies to the Global Reporting Initiative as a widely-recognized and respected global framework for organization of narrative and data (metrics) and reporting on corporate ESG performance. Inclusion on greenest companies and best reputational lists, rankings and some accompanying ratings is increasingly sought by company managements to help to communicate the firm s efforts to be more sustainable and responsible, and therefore help to position the enterprise to be more appealing to investors who care about such efforts (and perceptions). 10

12 Methodology To evaluate companies potential appeal to investors, possible selection for sustainability stock indexes, and possible selection for reputational-oriented lists, we compiled data and analyzed whether the data revealed associations with corporate reporting following the GRI Framework and reporting trends for the years 2006 to The first step was to evaluate the general trend of corporate reporting and reporting according to the GRI Framework, with special attention to the most recent years. In our research we analyzed and reported on how Fortune 500 companies performed against the widely-used S&P500 Equal Weight Index, an important benchmark, and if they did or did not report according to the GRI Framework. (US companies have been increasing their ESG reporting in every year from 2006 to 2010, the base years of our initial analysis.) Our hypothesis was that companies that do voluntarily report according to the GRI Framework in their ESG/Sustainability reporting would have a higher probability to be added to sustainability--focused equity indices and to be selected for inclusion on popular sustainability lists and rankings as compared to nonreporters. In determining the ratings to be included in this initial analysis, we selected three equity indexes, two ratings and four reputational-focused rankings to attempt to determine whether reporting according to the GRI Framework did (or did not) result in measurable benefits for the corporation(s). One example: We examined certain popular and credible corporate reputation and ESG-factored rankings such as Newsweek s [annual] Greenest Companies Rankings to determine if there was an association between a company s selection for this annual ranking (which has US companies ranked #1 to #500) and the instance of the company having used the GRI Framework in any years from 2006 to Our analysis of Newsweek s Greenest Companies Rankings included categorizing companies in two groups consisting of the top 250 company rankings and the bottom 250 rankings, to further examine any association with GRI Reporting. Researchers Note: We concluded (as of end of April 2011, close of initial analysis) that further analysis on the important factors that determine a company s selection for reputation rankings and rankings is needed. That work continues beyond this initial report and will be the subject of a later report. The database constructed for this research effort is being expanded to include additional rankings, ratings and other data points. 11

13 Results of GRI Reporting Analysis Our research indicated that there were positive associations between The instances of being selected for inclusion in Newsweek Greenest Companies Ranking, NASDAQ OMX CRD Sustainability Global 100, and the Dow Jones Sustainability Index - World (DJSI World) and increased corporate sustainability and responsibility disclosure It also indicated that there were positive associations between Achieving better scores in the CRD Sustainable Performance Value (SPV) Ratings, Carbon Disclosure Project (CDP) Score, and inclusion in CRO 100 Best Corporate Citizens. In contrast, the analysis found little discernable associations between Inclusion in the ratings and rankings of Ethisphere s World s Most Ethical Companies, the Carbon Disclosure Project (CDP) Performance score, and for inclusion in the Dow Jones Sustainability Index United States (DJSI US) and more corporate sustainability and responsibility disclosure. Corporations voluntarily reporting according to GRI Framework are of diverse backgrounds. Reporting organizations overall represent global business, civil society, labor, academic and professional institutions. Reporting organizations are encouraged to follow a generally-accepted framework for financial reporting the G3.1. This framework is structured in a way that all types of organizations can use it. The G3.1 offers useful guidelines for determining what to report and how to achieve higher level of disclosure of meaningful data and information. (Note that development of the G-4 Framework is a work-in-progress. Also, there are a number of Sector reporting guidelines already developed in a collaborative process; some are in pilot stage.) In our analysis we observed that companies based outside the United States have a better record of sustainability and responsibility reporting according to the GRI Framework than do many of their US counterparts. Out of the entire universe of global GRI reporters only 12-14% are US, companies; in contrast, 45% currently originate from a European-based corporation. We concluded (as of end of April 2011, close of initial analysis) that further analysis on the important factors that determine company s selection for reputable ratings and rankings is needed. That work continues beyond this report and will be the subject of a later report. The database constructed for this research effort is being expanded to include additional rankings, ratings and other data points. The following pages contain more information and graphic presentation of the analysis. 12

14 GRI Framework - Corporate Reporting - Years Analysis The first analysis consisted of studying the general trend of GRI reporting by US companies from 2006 to We analyzed companies from the Fortune 500 list of 2009 and compared their reporting over time. 20% 15% 10% 5% 0% GRI Reporting Percentage of total F 500 Companies reporting Figure 1. Increase in GRI reporting by Fortune 500 Companies, 2006 to As depicted in the bar graph above there has been a steady increase in the number of Fortune 500 companies reporting according to the GRI Framework. In 2006, only five percent (5%) of F-500 were reporting; in 2007, the percentage rose to 7%. In 2008, 15% of F-500 companies reported; in 2009, 17%; and in 2010, over 19% of the F-500 reported. The sustainability and responsibility (and citizenship ) reports above were issued in the calendar years indicated. Note: Governance & Accountability Institute was appointed the Data Partner of the GRI for the United States of America on June 1, 2011 and now collects and analyzes the sustainability, responsibility and citizenship reports of US companies. The results are databased and made public on the SustainabilityHQ web site. The Data Partner efforts will aid in analyses that continue after these initial findings. At least 23% of all F-500 companies did report at least once during the period It is important to note that companies that reported once in 2006 but did not report after that year were also included in our analysis. Among the F-500, 77% of the companies did not report to GRI at least one time in the reporting years. All Fortune 500 Companies 77% 23% Reporting GRI Not Reporting GRI Figure 2. Percentages of Fortune 500 companies voluntarily reporting according to the GRI Framework all sectors and industries for the reporting year analyzed. 13

15 Sector Leadership In analyzing companies reporting according to the GRI Framework in 2010, we found that the highest number of companies was in the utilities super sector 1, followed by technology and foods and beverage sectors. Sectors such as financial services and insurance were not as well represented. Here is a breakdown of United States corporate sector reporting: Utilities Technology Foods & Beverages Personal & Household Products Health Care Retail Oil & Gas Basic Resources Travel & Leisure Construction & Materials Chemicals Telecommunications Industrial Goods & Services Automobiles & Parts Insurance Financial Services 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Figure 3. Percentage of super sector reporting to GRI 1 GRI organizes companies in 19 super sectors to help classify companies accordingly. These are: automobiles & parts, banks, basic resources, chemicals, construction & materials, financial services, food & beverage, health care, industrial goods & services, insurance, media, oil & gas, personal & household goods, real estate, retail, technology, telecommunications, travel & leisure, and utilities. 14

16 GRI Application Levels C, B, A The GRI Reporting Framework contains three Application Levels to enable a company (or institution) to indicate the extent to which it has used the Framework. A C Level report makes the least use of the Framework; an A Level report makes the most use of it. The Levels are self-declared by the reporter. The Framework also includes an indicator to describe whether External Assurance by a third party has been applied to the report. If it has been, the report can be declared C+, B+ or A+. This chart depicts the GRI application level for US companies from 2006 to Application Level A A B B C C Not Known U Total Companies Figure 4. Numbers of US F-500 companies in each GRI level from 2006 to Note: The application level assigned varies according to the level/scope of the reporting and not to the sustainability performance of the company. A C Level report, for example, is not comparable to a C in the USA s A, B, C levels of typical school grading. 15

17 4-Year Share Price Performance Comparisons In this analysis we created two baskets of stocks which were re-balanced on the 1 st of January each year based on changes in inclusion criteria. At the start of each year we added the companies that report to the portfolio. If a company did not report for two consecutive years, we removed the company from the portfolio. We allowed a one-year gap in reporting, as long as the company reported the following year. (1) The S&P 500 GRI Reporters consists of companies in the S&P 500 as of March 30, 2011 that have reported to GRI at any level. (2) The Fortune 500 GRI Reporters consists of companies in the Fortune list that have reported to GRI at any level. These two baskets were then benchmarked against the S&P 500 EWI (Equal Weighted Index) for comparison. The detailed performance analysis chart can be seen here in baskets of periods of 1 Year, 2 Years, 3 Years, 4 Years, Total, and Year-To-Date 2011 (YTD). GRI [corporate] Reporters from both S&P 500 and Fortune 500 outperformed the S&P Equal Weighted Index in most time periods, and tended to have a higher outperformance the longer the period of time. This seems to further illustrate the value of selecting sustainable and responsibility business enterprises to the long-term sustainable and responsible investor, which public companies increasingly are interested in attracting as sources of long term, patient capital investments. 1 Year Return 2 Year Return 3 Year Return 4 Year Return TOTAL Return YTD Return Indexes S&P 500 GRI Reporters 18.46% 71.29% 4.19% 14.66% 19.85% 4.52% Fortune 500 GRI Reporters 17.60% 82.11% 7.13% 15.54% 20.72% 3.42% S&P 500 EWI 19.81% 71.64% 1.28% 1.34% 6.66% 4.06% 16

18 Indices Analysis Possible Associations Three Sustainability-themed indexes were initially selected to analyze whether there was a positive association between US companies that reported according to the GRI Framework and instance of inclusion in any of the three indexes. Note: The Dow Jones Sustainability Indexes were launched in More than 70 licenses are held by asset managers in 19 countries and are used to manage active and passive funds with more than US$8 billion AUM based on the DJSI. Note that the US companies are part of the North American DJSI (list as of March 31, 2011). Dow Jones Sustainability Index North America The top 20 percent of the 600 largest companies in North America are evaluated for inclusion in the DJSI. The Index is developed in collaboration with Sustainable Asset Management (SAM) Group (Switzerlandbased ESG researchers and asset managers) for Dow Jones & Company, owners of the DJSI. DJSI North America Companies and GRI Reporting (DJSI North America) 30% 70% GRI Reporting No GRI Reporting Figure 5. Percentage of companies reporting to GRI from 2006 to 2010 which were included in the DJSI North America Index. We found that 30% of the companies that are included in the DJSI North America Index were reporting according to the GRI Framework; 70% were not. When compared to the DJSI World analysis (following chart), these findings seem to indicate that European companies that are leading in ESG/Sustainability transparency and more active in GRI Framework reporting are viewed more favorably by the SAM Group index managers. In contrast North American companies are behind their European Union counterparts -- and possibly finding less favor with SRI investors. Note that the DJSI managers do not automatically exclude companies in certain industries tobacco, weapons, alcohol. They seek out companies with best ESG practices in these industries for inclusion in the index family. 17

19 Dow Jones Sustainability Index - World This equity index is based on analysis of the largest 2500 companies in the Dow Jones Global Total Stock Market Index. The top 10% of the global companies in this universe are evaluated in terms of their economic, environmental, and social criteria for possible inclusion in the DJSI World Index. DJSI World Companies and GRI Reporting 30% 70% GRI Reporting No GRI Reporting Figure 6. Percentage of companies reporting according to the GRI Framework from 2006 to 2010 and that were in DJSI World Index. Figure 6 (above) shows that 70% of the companies that did report according to GRI Framework were also included in the DJSI World; only 30% companies that were in the DJSI World did not report to GRI. When compared to the DJSI North America index, it is becoming clear that American companies are behind in voluntarily reporting their sustainability performance according to the GRI Framework and that this may be a factor in being considered, evaluated, and then selected for the many ESG/Sustainability equity indices. 18

20 NASDAQ OMX CRD Global Sustainability Index The Index is an equally-weighted equity index that serves as a benchmark for stocks of companies taking a leadership role in sustainability performance reporting and traded on a major US stock exchange. The Index, approved for trading on the NASDAQ/OMX Exchange in 2010, is comprised of companies that have taken a leadership role in disclosing their carbon footprint, energy usage, water consumption, hazardous and non-hazardous waste, employee safety, workforce diversity, management composition, and community investing. GRI Reporting and Selection for the CRD Top 100 Index 29% 71% GRI No GRI Figure 7. This graphic represents the percentage of companies included in the CRD index and the instance of their reporting according to the GRI Framework. Note that 71% of companies selected for the NASDAQ OMX CRD Global Sustainability Index do report according to the GRI Framework -- 29% do not. 19

21 Ratings Analysis and Possible Associations Three widely-followed Sustainability ratings CRD SPV Ratings, the CDP Score, and the CDP Performance Score -- were examined to determine whether there were positive associations between the assignment of higher ratings and the use of the GRI Framework for disclosure and reporting. CRD SPV Ratings The Sustainable Performance Value (SPV) is a rating developed by CRD Analytics and used by investors for portfolio analysis and decision-making; the main objective of the SPV is to analyze financial, environmental, social and governance disclosure (ESG) and related performance for investment decision-making. SPV Ratings for Non Reporting companies 18% 82% <50 50 Figure 8. Percentage of SPV ratings for companies not using the GRI Reporting Framework The pie chart above (8) illustrates companies that did not use the GRI Reporting Framework in % of Fortune 500 companies that did not use the GRI Framework had a lower score 50 and below and only 18% of non-gri Framework reporters had achieved a 50 and above ranking. 20

22 SPV Ratings for Reporting companies 36% 64% <50 50 Figure 9. Percentage of SPV ratings for companies reporting to GRI This pie chart illustrates companies that did report according to the GRI Framework in year This illustrates that companies reporting to GRI tended to have a higher SPV rating then companies that did not. We found that 64% of the companies that reported to GRI were ranked with an SPV of 50 or above -- and only 36% of the companies scored less than 50. Carbon Disclosure Project Companies reporting to CDP are encouraged to publicly disclose their sustainability performance. Depending on the results, CDP assigns a CDP Score and a CDP Performance Score to every organization. CDP Score AVERAGE NOT REPORTING COMPANIES AVERAGE REPORTING COMPANIES Figure 10. Average of CDP Score from Fortune 500 companies and their relation to GRI reporting. This graph above shows that companies voluntarily reporting according to the GRI Framework achieved a higher average CDP Score. The companies reporting to GRI had an average of a score of while the companies that did not report had an average score of

23 CDP Performance Scores D C B GRI Reporting No GRI Reporting A 0% 10% 20% 30% 40% 50% 60% Figure 11. Percentage of GRI Reporting and Non-GRI Reporting companies assigned each CDP Performance Score. The CDP Performance Scores graph above shows that the most common score for a US GRI Framework reporter was a B -- while the most common score for a US Non-GRI Reporting company is a C. This weak association warrants further research. 22

24 Reputational Rankings & Lists Analysis Possible Associations Three widely-cited corporate reputational lists were analyzed to discern benefits of reporting to GRI Framework. The lists were: Newsweek s Greenest Companies Rankings ; the CRO Best Corporate Citizens Ranking by CR magazine; and Ethisphere s World s Most Ethical Companies. Newsweek s Green Companies Rankings The magazine s annual analysis of the Greenest Companies in the United States has been coordinated by MSCI s KLD (formerly Kinder Lydenberg Domini) ESG research unit, working with Trucost global environmental data (data collected as publicly-reported, and with additional data voluntarily submitted by corporations). This is believed to be the world s largest such environmental database. Newsweek Ranking and GRI Reporting 27% 73% GRI Reporting Not GRI Reporting Figure 12. Percentage of companies included in the 2010 Newsweek Greenest Big Companies in America list and rankings that reported according to the GRI Framework. Figure 12 shows that 73% of companies included on the second year effort of the Newsweek Green Rankings do not report to GRI -- while 27% do report. 23

25 Newsweek Ranking and GRI Below 250 Above 250 0% 20% 40% 60% 80% 100% Report Didn't report Figure 13. Percentage of Newsweek Greenest list companies that achieved rankings above and below 250 (of 500 companies ranked). Figure 13 (above) separates companies into two groups. The first group consists of those that were ranked above 250, and the second ranked below 250. One-third (34%) of companies reporting according to the GRI Framework obtained a ranking above 250, and only one-sixth (14%) of companies that did report were given a score below

26 CRO 100 Best Corporate Citizens This reputational list is created by Corporate Responsibility magazine and ranks America s top performers in corporate responsibility based on publicly-available information as analyzed and ranked by IW Financial, a leading ESG research organization based in the United States. (CR magazine is published by SharedExpertise Media, LLC.) CRO 100 Best Corporate Citizens and GRI Reporting 40% 60% GRI Report GRI didn't report Figure 14. Percentage of 100 Best Corporate Citizens companies and relation to GRI reporting. Approximately 40% of companies included in Best Corporate Citizens companies ranking did not report to the GRI -- 60% did report. 25

27 CRO 100 Best Corporate Citizen vs GRI Below 50 Above 50 0% 20% 40% 60% 80% 100% Didn't report Report Figure 15. Percentage of CRO Best Corporate Citizens companies that achieved rankings below and above 50, split into reporters and non-reporters Figure 15 shows that nearly 82% of the companies that were in the bottom 50 ranking did not report and only 18% of companies that did report were assigned a score in the bottom

28 Ethisphere's Worlds Most Ethical Companies (2010) Unlike other reputational rankings that have a consistent number of companies listed (i.e., 100 or 500), Ethisphere has no set minimum or maximum number of companies for its list. Companies ranked in this list fulfill the essence of Ethisphere s logo: Good. Smart. Business, Profit. Ethisphere's Worlds Most Ethical Companies and GRI 38% 62% GRI No GRI Figure 16. Relationship between GRI reporting and Ethisphere s Worlds Most Ethical companies list. Figure 16 (above) shows that 38% of companies on Ethisphere report according to the GRI Framework; 62% do not report to the GRI. Ethisphere s ranking is not on a numerical basis, as is Newsweek s Green Ranking; instead Ethisphere s is just a yes or no. We were not able to detect a discernable impact for GRI Reporters. 27

29 Analysts Conclusions In our analysis as explained we examined the GRI reporting trends of Fortune 500 Companies from the years 2006 to Overall, there was an increase from five percent (5%) of US companies reporting in 2006 to almost 20% reporting in (Please note that 20% is likely an underestimate of the actual percentage for the complete year 2010 as some companies were in the process of producing their report for 2010 as this analysis was being compiled and completed.) Our findings seemed to indicate that Fortune 500 Companies that voluntarily reported according to the GRI Framework appear to have a stronger chance of being selected and tended to be considered more favorably for inclusion in key sustainability market indices, corporate rankings and ratings, and reputational lists. The key question we had originally posed: Is there a positive association between being selected for, or rated higher in popular reputational lists and rankings, and, Corporate reporting according to the GRI Framework? Our analysis showed that there was a positive association in six out of nine (67%) of the third party recognitions that we examined. Three had no discernible association: Ethisphere, the Carbon Disclosure Project (CDP) Performance Score, and selection for inclusion in the Dow Jones Sustainability Index (DJSI) North America. From this analysis we concluded that by reporting according to the GRI Framework, US companies could tend to rank higher in rankings and ratings, and could have more opportunity to be recognized by independent third party organizations. This may be due to the fact that these companies are generally more transparent and provide more data and information for third party organizations to analyze. It is generally agreed that there is no clear standard and much subjectivity that comes along with measuring companies ethical and sustainable practices and performance. Reporting according to the GRI Framework does not appear to guarantee inclusion or higher rankings, but the results suggest that reporting does improve the chances of being recognized by important stakeholders and independent third parties shaping trading indexes, and corporate reputation rankings and ratings lists. To expand our findings from this initial analysis, continued analysis of the companies in the Standard and Poor 500 Equal Weight Index is a work-in-progress. The objective: to explore if there are positive associations between US companies being selected for sustainability and responsibility-themed indices, rankings and reputational lists and reporting on ESG performance on their part following the GRI Framework. 28

30 Notes on Reporting at the GRI Super Sector Level Recall that GRI organizes companies in 19 Super Sectors. Through our analysis we found that Utilities, technology, and food & beverage sectors were leading in GRI reporting [for all GRI super sectors.] These top three super sectors accounted for a combined 40% of the Fortune 500 that reported according to the GRI Framework in The super sectors that reported least were automobile and parts, insurance, and financial services which accounted for a combined 7% of the Fortune 500 reports in Further analysis is needed to understand why certain sectors are lagging in the use of the GRI Framework for their sustainability, responsibility and citizenship reporting. In closing, we invite your suggestions and questions regarding our analysis. In addition, we invite your suggestions for other comparisons between (additional) indices, rankings, and ratings that are of interest to you. 29

31 Primary Researchers & Authors Michelle Thompson (MPA) Intern, Governance & Accountability Institute Spring 2011 Michelle Thompson, MPA is a May 2011 graduate of the Columbia School of International Public Affairs (specializing in Urban Energy). Her interests in environmental consulting resulted from her undergraduate research in Tahiti, where she developed her own research project. Experience Researcher, United Nations (New York); Climate Change and Development Department; developed recommendations for corporate approaches and public policies to unleash the potential of private sector climate adaptation; understanding the risks and opportunities for business as relates to the impacts of climate change (prepared final report focused on strategic assessment of impact of climate change on development food security, water security, energy security). Field researcher, UCLA; project in Mo orea, French Polynesia; designed experiments; analyzed difference in goatfish species; examined relationship between urchin test size and home range sized; collected data; research commended by UCLA faculty for contributing new findings on island or Mo orea. Research Assistant, Department of Ecology and Evolutionary Biology, UCLA. Research Assistant, Marine Mammal Center, Sausalito, California. Teaching Experience Natural History Museum, Los Angeles, CA Page Museum, Los Angeles, CA Carbrillo Marine Aquarium, San Pedro, CA UCLA Centers for Ocean Science Education Experience Author A Critical Analysis of Sustainability Benchmarking Through a Comparison of HSBC to the Royal Bank of Canada, December China Goes Green, March 2009; Science Curriculum in LAUSD and Beijing (work-inprogress) Education Columbia University School of International & Public Affairs, MPA, Environmental Science & Policy. University of California, Los Angeles, BS, Marine Biology Michelle is currently in Ghana; through support of the US State Department, the University of Ghana, and Duquesne University, she is studying extractive industries in the country. These include mining, gas & oil, energy, timber, and fisheries. In collaboration with local Ghanians and field research team, the 22 US delegates are writing policy briefs which include recommendations; Michelle s work focused on fisheries. 30

32 Natalia Valencia (MPA) Intern, Governance & Accountability Institute Spring-Summer-Fall 2011 Natalia Valencia, MPA earned her Master s in Public Administration, in Environmental Science and Policy at Columbia University in May Her course work combined science training with more typical management classes (economics, finance, management). Environmental Consultant, TrustElement, Inc. Consultant, Coalition for Rainforest Nations; established country-specific strategy for inclusion of Climate Compatible Development Plans; assessed climate change mitigation strategies for developing countries; developed standardized monitoring, reporting and verification(mrvs) strategies and safeguards. Consultant, Carbon Disclosure Project (CDP); designed and produced a project of the CDP Agricultural Supply Chain pilot program (Scope 3); proposed model for further expansion into commodity crops (corn, hay), focusing on downstream seed sales; prepared report defining 3 to 5 new crops based on climate change impacts, existing sustainability initiatives, and cost-benefit analysis from companies and GhG calculators; generated influence map of each crop, identifying stakeholders. Research and development analyst, C.I. Jardines de Los Andes, S.A., one of the largest agricultural companies (floral plantations) in Colombia; produced sustainability metrics to quantify water discharges and solid waste generated by the company to meet environmental requirements; create and developed audit program to assure environmentally-friendly procedures for use of water, fertilizer, pesticides and herbicides; compiled comparisons for standards to align company with international certifications such as FlorVerde, Eurepga, and Rainforest Alliance certification; created environmental education programs for 3,000 employees. Graduate, Columbia University, School of International and Public Affairs. Graduate, Universidad de Los Andes. Natalia is currently at G&A Institute continuing analysis of US corporate responsibility reports that follow the GRI Framework. She reviews US company sustainability and responsibility reports for the GRI Data Partner project work. 31

33 Advisors & Editors Hank Boerner Chairman, Governance & Accountability Institute, Inc. Hank Boerner is Chairman of the Governance & Accountability Institute, a New York-based research, knowledge management and strategies and advisory service provider serving clients in the corporate sector, capital markets organizations and the not-for-profit sector. He has been a business strategist and management consultant and senior level advisor for more than 30 years, assisting clients with issues management services and programs, and developing strategies for response to critical events and crises situations. He was a partner in the former Rowan & Blewitt management consulting organization for almost two decades. (The company was acquired by Interpublic Group of Companies - NYSE:IPG - in 1999; the brand was retired in 2007.) The Institute, founded in 2006, conducts customized ESG research, provides GRI-related advisory services to clients, recommends corporate ESG, Sustainability, and Corporate Responsibility strategies, and is a print and on-line publisher. He leads the Institute team work on Sustainability Auditing and Benchmarking and efforts to identify, profile and benchmark corporate leaders and laggards relative to ESG performance. The Institute s areas of research and focus include: public and institutional governance, shareholder activism, sustainable and responsible investment, disclosure and transparency, corporate social responsibility, and capital markets activities. The organization monitors trends in ESG and Sustainability. Boerner is a Fellow of the G&A Institute. Hank is a long-time member of the National Investor Relations Institute (NIRI) and its New York Chapter, where he served on the board. He is also a member of NIRI s Senior Roundtable and served for three years as editor of the professional association s monthly publication, NIRI IR Update. He is active in The Social Investment Forum; SIRAN; the New York Society of Securities Analysts; and National Association of Corporate Directors. He served as Chair of the global Issue Management Council for several years. He has been a contributing editor and corporate governance commentator of Corporate Finance Review, a Thomson Reuters publication for senior corporate finance executives since In October 2011 Hank was named one of the 100 People to Watch in corporate governance by the National Association of Corporate Directors (NACD). With Mark W. Sickles, Institute Fellow, he is the co-author of Strategic Governance Enabling Financial, Environmental and Social Sustainability, published