Iceberg ahoy!


At BP’s annual meeting this year the directors had to face shareholder after shareholder complaining about the oil group’s involvement in Tibet and its plans to explore in the Arctic Wildlife refuge.

They held ordinary shares but most were not ordinary shareholders, of course.

They were connected to organisations like Greenpeace which had sponsored a resolution calling on BP to abandon plans for Arctic drilling and to publish a strategy for moving “beyond petroleum” (as the firm’s slogan put it) to exploit renewable energy sources.

Money talk
But when the vote was counted, these campaigners spoke for 920 million BP shares – equivalent to almost £6 billion.

If money talks, that is a shriek that cannot be ignored. BP is just one example.

These figures begin to demonstrate that social and environmental concerns are no longer the prerogative of protesters.

But it must be said that this is just the tip of the iceberg which is now lodged firmly in The City, where previously these issues were of interest only to the small band of ethical investors.

On the other hand socially responsible investment (SRI) is for everyone – businesses as well as investors – concerned with money.

It is becoming the latest strand of the corporate governance revolution as mainstream shareholders latch on to the fact that well-managed companies pay close attention to their impact on society as well as their boardroom procedures and traditional aspects of strategy and performance.

The bottom line
Risks for companies associated with social and environmental issues are rising up the agenda.

Investors and insurers looking at a company’s performance are now acknowledging that the way a company deals with these risks has an impact on shareholder value and competitive edge.

One of the most important areas is corporate social responsibility (CSR) which can give business and brands a competitive edge and deliver value to the bottom line.

CSR has historically been associated solely with business ethics and philanthropy.

However this area has developed and CSR now relates more fundamentally to how a business is run, thus covering issues such as employment, environment, human rights, communities and business relationships; clearly moving into mainstream business issues.

The Association of British Insurers (ABI) is the latest in the number of trade organisations acknowledging the importance of the link between shareholder value and the way a company handles social and environmental issues.

In its recently published guidelines the ABI shows that major investors want to know that companies they are investing in are managing social and environmental issues properly.

Investor relations managers and senior executives must be prepared to answer questions on social and environmental issues during routine meetings with their investors.

No longer is this a specialist interest which can be left to environmental managers or community affairs staff.

The SRI community has adopted a strategy of “engaging” with companies they invest in on key subjects such as labour standards and greenhouse gas emissions. But this means more than a quiet chat and it delivers to the bottom line.

Participation leads to innovation and sustainable business. To release the value and build competitive edge it is essential to create deeper, participative relationships with ‘society’.

The investor/investee, the company/ the staff, the supply chain/the customer.

Dialogue or participation between the many parties is the only way to develop a deep understanding of the needs of each party, the issues and constraints which each face.

By building that understanding a company develops a sense of shared values, trust and transparency which in turn leads to greater flexibility and awareness of end-customer needs and building shareholder value.

The value lies in the potential to identify, manage and innovate risks and opportunities. It is here that Article 13 work with organisations moving beyond cost efficiency to innovation and value creation.

The indicators set up with stakeholders as part of this process then demonstrate the bottom line delivery leading to sustainable business.

For example, CGNU’s fund management arm has adopted corporate governance guidelines which make clear that CGNU will vote against the annual report of any company it invests in which does not include satisfactory environmental performance data.

Other big institutions such as Philips & Drew and Barclays Capital have made tentative moves into SRI. Later this year they will be joined by the entire insurance industry.

The trade body, the Association of British Insurers, is preparing guidelines which make clear to companies that these major investors want to know that the companies they invest in are managing social and environmental issues properly.

The National Association of Pension Funds has also joined in. Its corporate governance advice to members now routinely covers social and environmental issues relevant to a company.

Hard cash
The important thing is that these investors are not passionate campaigners. Nor are they ethical investors. They are hard-headed fund management professionals, aiming to maximise their financial returns.

So why are they worrying about these “soft” issues? That’s simple: these soft issues are increasingly hard – hard to manage but also a matter of hard cash.

Henderson sums it up like this in the introduction to its corporate governance guidelines: “Where companies which have failed to take account of issues such as human rights or sound environmental management, the risk has been manifested in poor share price performance.

"Conversely, companies actively incorporating these issues into policy are often perceived to be better managed than their peers, which can help to support the share price”

Fit for the future
Shareholders want to invest in companies which are “fit for the future”.

Increasingly they are understanding that a key element of that fitness is a company’s ability to keep recruiting top talent, keep customers believing in its brands, and keep a welcome in the communities where it operates. In other words, being responsible.

Investors who do not see the importance of these elements of corporate life are like accountants who notoriously know the cost of everything and the value of nothing.

Those investors are failing to see a significant part of the value of companies, because they are only looking at the most obvious financial elements.

They will see the performance of their investments lag. And if they are fund managers they will see clients going elsewhere.

In the meantime companies will be receiving visits from Socially Responsible investors, who will want answers to their social and environmental questions, just as investors have traditionally sought answers about EBITDA and dividend policy.