- Email: [email protected]
Using Information: A Financial Stakeholders’ Perspective
www.corporate-env-strategy.com
Information and the Financial Stakeholder
Using Information: A Financial Stakeholders’ Perspective Julie B. Frieder
Complete disclosure is fundamental to ensuring proper and efficient financial transactions. The call for greater levels of disclosure has been a central theme in the socially responsible investment community. However, in today’s world, there are differing approaches to the issue of disclosure. On the one hand, there are calls for more disclosure in the wake of debacles such as that illustrated by Enron Corp. On the other hand, there are concerns about security and the possibility that more disclosure might compromise security. What is needed is the identification and exploration of opportunities where the socially responsible investment community collaborates with other stakeholders with the aim of leveraging environmental information to work for positive societal change. In this effort there is a need for new methodologies, new and more sophisticated models with greater predictive power, and increased emphasis on education for the next generation of business leaders. 䊚 2002 Elsevier Science Inc. All rights reserved.
Julie B. Frieder is an Environment Analyst at Calvert Group. She has more than 10 years environmental experience at the local, state, and federal levels, including seven years with the U.S. Environmental Protection Agency. From 1993 to 1995, she coordinated the Eco-Efficiency Task Force of the President’s Council on Sustainable Development. She has master’s degrees in environmental science and public administration. Corresponding author: Environment Analyst, Social Research Dept., Calvert Group, 4550 Montgomery Ave., Bethesda, MD 20814, USA. Tel.: q1-301-961-4753; fax: q1-303-861-2022; E-mail: [email protected].
Perhaps the first law of financial markets is that complete information is essential to ensure proper and efficient transactions. The question of disclosure of corporate information is of great interest to the financial investment community and is central to the current debates on corporate governance, national security and public trust. The socially responsible investment community has long called for greater disclosure and in recent months has renewed these calls with great rigor.
Background The matter of disclosure is broached today in a very difficult context, one marked by competing demands and diverging trends. The need for detailed, accurate and timely corporate information goes hand-in-hand
J.B. Frieder, Corporate Environmental Strategy, Vol. 9, No. 4 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
375
Information and the Financial Stakeholder
with the increasing demand for thorough scrutiny. On the one hand, in light of the Enron debacle, there have been bold calls on corporations, regulatory agencies and investors for corporate accountability and reporting. The Securities and Exchange Commission (SEC) has taken steps to reform guidelines for financial disclosure and auditor independence. In March 2002, the Social Investment Forum, the industry trade organization representing several social investment stakeholders, piggy-backed on that momentum and asked SEC Chairman Harvey Pitt to
«the financial community needs to secure credible and complete sources of environmental information. further improve disclosure of social and environmental liabilities. In August 2002, a group of charitable foundations, led by the Rose Foundation with support from Calvert and other social investors, further petitioned the SEC to improve estimation and disclosure of liabilities stemming from environmental matters such as asbestos litigation, Superfund remediation or fines for violations of environmental regulations. The issue even rose to the level of presidential interest when President George W. Bush demanded in an August 2002 speech that corporations improve their accountability standards. w1x On the other hand, in light of the attacks of September 11, 2001, there is mounting pressure from some lobbies to conceal information and limit access to data believed to expose U.S. vulnerabilities to would-be terrorists. In response to 9-11, the Environmental Protection Agency (EPA) tightened access to chemical and risk data available on its public website. Then, Senator Kit Bond introduced the ‘‘Community Protection from Chemical Terrorism Act’’ (S.2579), a bill that, in the name of chemical security, would have further removed public access to data about
376
chemical hazards thereby undermining the very information infrastructure set up to ensure emergency preparedness. A coalition of environmental watchdogs and social investors mobilized to halt the Bond bill and favored instead more reasoned approaches to promote national security; approaches that seek to reduce risk by among other things, reducing the volume of hazardous materials in storage on site. We certainly appreciate and understand the need for security in light of terrorist activities and we are also mindful that trade-offs may be necessary in light of the post September 11 world in which we live. However, we do not take lightly any encroachment on civil liberties, including right-to-know laws which protect the public’s access to environmental information. In the midst of these conflicting forces, the financial community needs to secure credible and complete sources of environmental information. A 1998 EPA report found gross underreporting of environmental liabilities, with 74% of the companies failing to report in 10-K filings environmental proceedings of cases that could result in legal sanctions of over $100,000. A Financial Times (FT) investigation reported on September 9, 2002, that many companies are underestimating future liabilities associated with asbestos contamination. The FT stated that, ‘‘Actuaries estimate that asbestos-related cases will cost companies and their insurers $200–$275 billion in the United States and between $32 billion and $80 billion in Europe.’’ In May 2002, the European Union supported a call on multinational companies to assess and report on social and environmental impact in annual reports, but the scheme is for voluntary rather than mandatory action. The Global Reporting Initiative (GRI) is another voluntary framework for reporting on social and environmental impacts. While these efforts are laudable, it is not certain that voluntary reporting has the force to change corporate practices and expose these clearly nontrivial liabilities.
J.B. Frieder, Corporate Environmental Strategy, Vol. 9, No. 4 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
Information and the Financial Stakeholder
For the time being, financial stakeholders will have to rely on existing sources to get the information they need. One valuable source is the burgeoning business niche that extracts government data and repackages it to parties who will pay. These information brokers add value by aggregating data, tracking mergers and acquisitions, conducting surveys, and creating indices that allow swift comparisons among companies. Additional sources of information available to investors include publicly available government data, industry and company reports, reports and databases from nongovernmental organizations and citizen groups, web search engines, SEC filings, and personal interviews or site visits.
How Financial Stakeholders Use Environmental Information The information is used in various ways. Traditional financial analysts, with their narrow construction of financial materiality, use environmental information to assess downside risk of catastrophic events, historic liability and exposure to significant forthcoming environmental regulations. They consider environmental expenditure with regard to capital budgeting where environmental investment is a cost against earnings and often ignore the potential future pay off of environmental investments. Traditional analysis may count the environment as an asset with regard to sector funds or green funds, though these high-risk innovative funds are typically relatively small. Social investors, on the other hand, have a much broader construction of financial materiality, one which counts intangible liabilities and intangible assets of environmental management, performance and investment. The very theory of socially responsible investment holds that understanding a company’s environmental position confers additional information about the long-term value of a firm, information that the market otherwise misses. Therefore, environmental information should be explicitly captured in a company assess-
ment. However, environmental data is often incomplete and firms do not often have the internal control or accounting systems to measure and disclose the intangible liabilities and assets.
«understanding a company’s environmental position confers additional information about the long-term value of a firm« w2x Social investors continually look for reliable sources of information to expand the knowledge base of environmental performance. For example, in December 2001, Calvert petitioned the EPA to gain access to compliance and enforcement data on over one million facilities in the U.S. to help answer the fundamental questions, ‘‘does the firm have a pattern of noncompliance with environmental laws and regulations.’’ It is our contention that such information is material and should be included explicitly in our investment decisions. But the environment is not the only social concern that is undervalued. In its June 20, 2002 report entitled, ‘‘Value at Work,’’ The Conference Board opened with the claim that ‘‘a company’s market value depends less on tangible assets, and more on intangible ones such as brands, technology and people’’ three facets of corporate performance that similarly deliver intangible benefits. Social investors seek to capture this additional information because a company’s record with respect to workplace practices, human rights, indigenous rights, product quality, community relations, animal welfare, corporate governance, and the environment can be a good indicator of business management overall.
Calvert’s Social Screening Calvert develops complete social profiles of U.S. and international companies to augment our financial analysis and investment deci-
J.B. Frieder, Corporate Environmental Strategy, Vol. 9, No. 4 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
377
Information and the Financial Stakeholder
sions. In a full family of 28 funds, Calvert has approximately $8.5 billion in assets under management, one third of which are in socially-screened funds. On behalf of the funds managed by Calvert the social research department undertakes social analysis and corporate shareholder engagements. Calvert’s policies are discussed in length on its website at http:y ywww.calvert.com. The environmental screen requires compliance with federal, state, and local laws and regulations, and demonstration of environmental leadership relative to industry benchmarks. These benchmarks include toxic emissions, waste management, resource utilization, accidents and spills and product life cycle impacts. We search for companies with outstanding policies, programs, and performance and we prefer companies that develop environmentally sound products and services. We examine corporate environmental policies and management and we seek to invest in companies that advance sustainable development through smart growth, sustainable resource management and renewable energy. In addition, we do not invest in nuclear power plant owners, operators or contractors and we carefully research the production and use of genetically modified organisms (GMOs).
company has incorporated environmental matters into core business functions. Disclosure and reporting of environmental performance are also considered because they indicate the extent to which the company is transparent and accountable to stakeholders and communities within which they operate.
Opportunities to Collaborate with the Academic Community In conclusion, there are ample opportunities for the socially responsible investment community to collaborate with other stakeholders who share an interest in leveraging environmental information to work for positive societal change. The academic community is a key player toward this end. There is a need for new tools and methodologies, new models with greater predictive power, and most importantly the need to educate the next generation of business leaders.
Calvert uses a range of environmental indicators – historical and leading, negative and positive, qualitative and quantitative – to develop corporate environmental profiles. Company environmental performance then is assessed with regard to regional and industry contexts and in absolute and relative terms. We consider performance over time and do not penalize companies for growing. We do this by normalizing environmental data to revenue and production measures as appropriate. Measures of corporate environmental policy and management are also considered because they indicate the extent to which the
378
J.B. Frieder, Corporate Environmental Strategy, Vol. 9, No. 4 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
Information and the Financial Stakeholder
Using Information: A Financial Stakeholders’ Perspective Julie B. Frieder
Complete disclosure is fundamental to ensuring proper and efficient financial transactions. The call for greater levels of disclosure has been a central theme in the socially responsible investment community. However, in today’s world, there are differing approaches to the issue of disclosure. On the one hand, there are calls for more disclosure in the wake of debacles such as that illustrated by Enron Corp. On the other hand, there are concerns about security and the possibility that more disclosure might compromise security. What is needed is the identification and exploration of opportunities where the socially responsible investment community collaborates with other stakeholders with the aim of leveraging environmental information to work for positive societal change. In this effort there is a need for new methodologies, new and more sophisticated models with greater predictive power, and increased emphasis on education for the next generation of business leaders. 䊚 2002 Elsevier Science Inc. All rights reserved.
Julie B. Frieder is an Environment Analyst at Calvert Group. She has more than 10 years environmental experience at the local, state, and federal levels, including seven years with the U.S. Environmental Protection Agency. From 1993 to 1995, she coordinated the Eco-Efficiency Task Force of the President’s Council on Sustainable Development. She has master’s degrees in environmental science and public administration. Corresponding author: Environment Analyst, Social Research Dept., Calvert Group, 4550 Montgomery Ave., Bethesda, MD 20814, USA. Tel.: q1-301-961-4753; fax: q1-303-861-2022; E-mail: [email protected].
Perhaps the first law of financial markets is that complete information is essential to ensure proper and efficient transactions. The question of disclosure of corporate information is of great interest to the financial investment community and is central to the current debates on corporate governance, national security and public trust. The socially responsible investment community has long called for greater disclosure and in recent months has renewed these calls with great rigor.
Background The matter of disclosure is broached today in a very difficult context, one marked by competing demands and diverging trends. The need for detailed, accurate and timely corporate information goes hand-in-hand
J.B. Frieder, Corporate Environmental Strategy, Vol. 9, No. 4 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
375
Information and the Financial Stakeholder
with the increasing demand for thorough scrutiny. On the one hand, in light of the Enron debacle, there have been bold calls on corporations, regulatory agencies and investors for corporate accountability and reporting. The Securities and Exchange Commission (SEC) has taken steps to reform guidelines for financial disclosure and auditor independence. In March 2002, the Social Investment Forum, the industry trade organization representing several social investment stakeholders, piggy-backed on that momentum and asked SEC Chairman Harvey Pitt to
«the financial community needs to secure credible and complete sources of environmental information. further improve disclosure of social and environmental liabilities. In August 2002, a group of charitable foundations, led by the Rose Foundation with support from Calvert and other social investors, further petitioned the SEC to improve estimation and disclosure of liabilities stemming from environmental matters such as asbestos litigation, Superfund remediation or fines for violations of environmental regulations. The issue even rose to the level of presidential interest when President George W. Bush demanded in an August 2002 speech that corporations improve their accountability standards. w1x On the other hand, in light of the attacks of September 11, 2001, there is mounting pressure from some lobbies to conceal information and limit access to data believed to expose U.S. vulnerabilities to would-be terrorists. In response to 9-11, the Environmental Protection Agency (EPA) tightened access to chemical and risk data available on its public website. Then, Senator Kit Bond introduced the ‘‘Community Protection from Chemical Terrorism Act’’ (S.2579), a bill that, in the name of chemical security, would have further removed public access to data about
376
chemical hazards thereby undermining the very information infrastructure set up to ensure emergency preparedness. A coalition of environmental watchdogs and social investors mobilized to halt the Bond bill and favored instead more reasoned approaches to promote national security; approaches that seek to reduce risk by among other things, reducing the volume of hazardous materials in storage on site. We certainly appreciate and understand the need for security in light of terrorist activities and we are also mindful that trade-offs may be necessary in light of the post September 11 world in which we live. However, we do not take lightly any encroachment on civil liberties, including right-to-know laws which protect the public’s access to environmental information. In the midst of these conflicting forces, the financial community needs to secure credible and complete sources of environmental information. A 1998 EPA report found gross underreporting of environmental liabilities, with 74% of the companies failing to report in 10-K filings environmental proceedings of cases that could result in legal sanctions of over $100,000. A Financial Times (FT) investigation reported on September 9, 2002, that many companies are underestimating future liabilities associated with asbestos contamination. The FT stated that, ‘‘Actuaries estimate that asbestos-related cases will cost companies and their insurers $200–$275 billion in the United States and between $32 billion and $80 billion in Europe.’’ In May 2002, the European Union supported a call on multinational companies to assess and report on social and environmental impact in annual reports, but the scheme is for voluntary rather than mandatory action. The Global Reporting Initiative (GRI) is another voluntary framework for reporting on social and environmental impacts. While these efforts are laudable, it is not certain that voluntary reporting has the force to change corporate practices and expose these clearly nontrivial liabilities.
J.B. Frieder, Corporate Environmental Strategy, Vol. 9, No. 4 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
Information and the Financial Stakeholder
For the time being, financial stakeholders will have to rely on existing sources to get the information they need. One valuable source is the burgeoning business niche that extracts government data and repackages it to parties who will pay. These information brokers add value by aggregating data, tracking mergers and acquisitions, conducting surveys, and creating indices that allow swift comparisons among companies. Additional sources of information available to investors include publicly available government data, industry and company reports, reports and databases from nongovernmental organizations and citizen groups, web search engines, SEC filings, and personal interviews or site visits.
How Financial Stakeholders Use Environmental Information The information is used in various ways. Traditional financial analysts, with their narrow construction of financial materiality, use environmental information to assess downside risk of catastrophic events, historic liability and exposure to significant forthcoming environmental regulations. They consider environmental expenditure with regard to capital budgeting where environmental investment is a cost against earnings and often ignore the potential future pay off of environmental investments. Traditional analysis may count the environment as an asset with regard to sector funds or green funds, though these high-risk innovative funds are typically relatively small. Social investors, on the other hand, have a much broader construction of financial materiality, one which counts intangible liabilities and intangible assets of environmental management, performance and investment. The very theory of socially responsible investment holds that understanding a company’s environmental position confers additional information about the long-term value of a firm, information that the market otherwise misses. Therefore, environmental information should be explicitly captured in a company assess-
ment. However, environmental data is often incomplete and firms do not often have the internal control or accounting systems to measure and disclose the intangible liabilities and assets.
«understanding a company’s environmental position confers additional information about the long-term value of a firm« w2x Social investors continually look for reliable sources of information to expand the knowledge base of environmental performance. For example, in December 2001, Calvert petitioned the EPA to gain access to compliance and enforcement data on over one million facilities in the U.S. to help answer the fundamental questions, ‘‘does the firm have a pattern of noncompliance with environmental laws and regulations.’’ It is our contention that such information is material and should be included explicitly in our investment decisions. But the environment is not the only social concern that is undervalued. In its June 20, 2002 report entitled, ‘‘Value at Work,’’ The Conference Board opened with the claim that ‘‘a company’s market value depends less on tangible assets, and more on intangible ones such as brands, technology and people’’ three facets of corporate performance that similarly deliver intangible benefits. Social investors seek to capture this additional information because a company’s record with respect to workplace practices, human rights, indigenous rights, product quality, community relations, animal welfare, corporate governance, and the environment can be a good indicator of business management overall.
Calvert’s Social Screening Calvert develops complete social profiles of U.S. and international companies to augment our financial analysis and investment deci-
J.B. Frieder, Corporate Environmental Strategy, Vol. 9, No. 4 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
377
Information and the Financial Stakeholder
sions. In a full family of 28 funds, Calvert has approximately $8.5 billion in assets under management, one third of which are in socially-screened funds. On behalf of the funds managed by Calvert the social research department undertakes social analysis and corporate shareholder engagements. Calvert’s policies are discussed in length on its website at http:y ywww.calvert.com. The environmental screen requires compliance with federal, state, and local laws and regulations, and demonstration of environmental leadership relative to industry benchmarks. These benchmarks include toxic emissions, waste management, resource utilization, accidents and spills and product life cycle impacts. We search for companies with outstanding policies, programs, and performance and we prefer companies that develop environmentally sound products and services. We examine corporate environmental policies and management and we seek to invest in companies that advance sustainable development through smart growth, sustainable resource management and renewable energy. In addition, we do not invest in nuclear power plant owners, operators or contractors and we carefully research the production and use of genetically modified organisms (GMOs).
company has incorporated environmental matters into core business functions. Disclosure and reporting of environmental performance are also considered because they indicate the extent to which the company is transparent and accountable to stakeholders and communities within which they operate.
Opportunities to Collaborate with the Academic Community In conclusion, there are ample opportunities for the socially responsible investment community to collaborate with other stakeholders who share an interest in leveraging environmental information to work for positive societal change. The academic community is a key player toward this end. There is a need for new tools and methodologies, new models with greater predictive power, and most importantly the need to educate the next generation of business leaders.
Calvert uses a range of environmental indicators – historical and leading, negative and positive, qualitative and quantitative – to develop corporate environmental profiles. Company environmental performance then is assessed with regard to regional and industry contexts and in absolute and relative terms. We consider performance over time and do not penalize companies for growing. We do this by normalizing environmental data to revenue and production measures as appropriate. Measures of corporate environmental policy and management are also considered because they indicate the extent to which the
378
J.B. Frieder, Corporate Environmental Strategy, Vol. 9, No. 4 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.