Investment as Usual is Broken [Part 3 of 3]: next generation needs

State Street Corp.'s [STT] State Street Global Advisors [SSgA] has been slowly moving into some ESG-applied research for the past few years, because ESG factors are starting to become mainstream according to Bill Page, head of the company's ESG Team in Boston. Bill was my recent guest in the final session of MBA865 Sustainability in Investing Strategies where he was pitched by students’ investment ideas for the new SSGA Global Environmental Opportunities Strategies [GEOS] fund. Bill says his GEOS investment team is using ESG research for accounts of some rich investors and private institutional investors, such as endowments. His new strategy has secured its first mandate, and he is flat out covering demand.

Globally, the Principles for Responsible Investment [PRI] has emerged as an organizing theme for asset owners, investment mangers and their service providers. The PRI is an institutional investor initiative, launched in April 2006 by UNEP FI and the UN Global Compact. The PRI supports the work of UNEP FI in engaging financial sector, environmental responsibility goals of UNEP and the Global Compact’s 10 principles aimed at achieving the Millennium Development Goals by 2015. The PRI appreciates that, at least on paper, the informed end-investor drives all activities in investment value chain. Key factors like climate will be integrated when demanded by the market. Significant risks and opportunities for investment valuation will come with climate changed perceptions; from taxation and regulation, changes in weather patterns, technological innovations, shifts in consumer attitude and demand. There will be winners and losers in the transition to a low carbon economy: investors need information to determine how companies will be affected. Approximately 25% of global emissions were reported through CDP in 2007.

But where is investment practice today? Involved asset owners e.g. pension funds are exploring the boundaries. Pension funds have a business case for reducing negative and increasing positive externalities. CalPERS[i], the biggest U.S. pension fund, has identified the investment case for incorporating corporate governance as firstly, shareholders are willing to pay a premium for well-governed companies, secondly, a “corporate governance premium” can be captured to increase shareholder value, and thirdly, well-governed companies have a competitive advantage in attracting capital. Institutional investors have linked superior investment performance with strong governance according to research by Watson Wyatt and Oxford University. In September, 2007, a powerful group of investors and advocacy groups filed a petition with the US Securities and Exchange Commission asking the SEC to require publicly-traded companies to assess and disclose their financial risks from climate change. "Among the 22 petitioners - which include Environmental Defense, a US non-governmental organisation, and Ceres, a coalition of investors and environmentalists - are a group of major US and European institutional investors that collectively manage more than $1.5-trillion in assets" the FT reported.

UNISA’s Centre for Corporate Citizenship, the UNEP Finance Initiative and Noah Financial Innovation, together with the PRI, have found in their study that while most market participants think integrating ESG factors in investment practice is important and has a material impact on how companies are valued, few financial institutions or advisers are doing much about promoting this kind of investment. The 32 pension funds, 19 asset managers and 11 investment advisers involved (between them controlling more than US$700million) believed that ESG issues were material to a company’s value. But most were either doing nothing about responsible investment or had limited involvement.

Experimentation and development of new tools is progressing. A new biodiversity tool evaluating ecosystem services in the Food & Beverage Sector in the UK and Brazil is being beta tested by European investment managers supported by Flora & Fauna International and UNEP FI. In the past few months, several fund-of-funds -- hedge funds that invest in other hedge funds -- have sprung up to cater to the market for investments adhering to certain environmental, social and corporate-governance standards as WSJ 's Carolyn Ciu reported.

At the cutting edge of the new approach to investment as usual, are efforts being made in emerging and frontier markets. The PRI in Emerging Markets Project is aimed at integrating ESG factors into investment decisions impacting business in 25+ emerging markets and developing countries through December 2008. The logic model makes the compelling case for investors [both within and into emerging markets ] that increasing the visibility of ESG factors along the investment value chain in emerging markets by addressing systemic thinking of investors will reduce barriers to improved ESG performance in country.

Environmental, social, ethical, and governance issues are embedded in any firm's corporate strategy. Anything that affects a firm's business model can also affect the firm's financial performance - therefore its valuation - and these issues are no exception. The question posed is: “If business may be a positive driver for sustainability, and investors own or lend money to these companies across asset classes, can their active voice influence better ESG disclosure and action, thereby driving positive ESG performance?”

In emerging markets, perhaps a leapfrog in thinking will mirror the leapfrog in approach to telephony: many emerging markets – South Africa, Brazil, Thailand - have skipped the full deployment of fixed landlines, and made the leap to embracing mobile phone telephony. On 6 February 2008 in Geneve, Switzerland, an IFC consortium led by Standard & Poor’s Equity Index Services together with KLD and CRISIL, an Indian credit rating agency, will launch the first ever Indian company ESG index, featuring indexes with 50 and 100 companies scored on ESG performance. Carbon analysis firm TruCost together with investment firm CLSA is studying monetizing the environmental impacts of companies in the MSCI Emerging Asia ex-Japan index, as well as investment research, mandating identification of comparable and quantitative key performance indicators relevant for the largest listed sectors in India, Thailand, Malaysia, Vietnam, the Philippines and Indonesia, together with the World Resources Institute [WRI, wri.org].

The next generation of investment analysis must be ready to cover - explicitly or implictly - ESG factors in their investment analysis. Analysts will also be expected to act as investors, engaging firms directly to improve ESG performance, realizing the influence on the investment case may be bi-directional. A version of these comments was edited for the UN Chapel Hill Kenan-Flagler Business School's monthly publication for the Center for Sustainable Enterprise. I conclude this three part thoughtstream in the same way:

A New Approach to Investment Analysis

Environmental, social, and governance issues (ESG) are embedded in any firm's corporate strategy. Anything that affects a firm's business model can also affect the firm's financial performance—and therefore its valuation. ESG issues are no exception. Many bright minds have played with this, and will again - see back to the Cable & Wireless WWF effort To Whose Benefit? in 2003. The next generation of investment analysts must be ready to:

1. understand the industry/sector dynamics of key ESG issues
2. identify the material impacts of ESG factors on a firm’s corporate strategy
3. drive toward clarity on ESG data points delivered with consistency and clarity into the valuation process
4. make investment decisions presented over both short-term and long-term horizons

The next generation of investment analysts may also benefit their investor clients by acting as active investigators, engaging firms directly to improve firm ESG performance, appreciating the articulation and influence on the investment case may be bi-directional: investment analysts may not know all. “Investment as usual” will change as companies adapt their strategies to the realities of a connected, globalized world with creative talent sensitive to ESG issues. So too the next generation of investment analysts must change. And with each passing page of Dan Reingold's confessional "Confessions of a Wall Street Analyst", I become more certain of the need for these changes, and how they must be driven into the incentive structures for analysts. if the title "analyst" is ever to "get some respect" again.

The investment world is fast and pressure-filled. Investment professional mind “other people’s money” [OPM]. It is an awesome responsibility to act as the interpreter and fiduciary for the savings of others. Investment as usual must change with the next generation of investment analysts, integrating sustainability in investing strategies.

---

[i] CalPERS Active Corporate Governance Program, William Sherwood-McGrew, Corporate Governance Officer, November 21, 2003 NYSSA CG Conference NYC.

Investment as Usual is Broken [Part 2 of 3]: who is doing the math?

Further thoughts from comments I prepared for “Investment as Usual,” for the launch of the Survey of Responsible Investment in South Africa, 2 October 2007 at Johannesburg Securities Exchange, Sandown, South Africa.Key components of the investment value chain are addressing the breaks, however slowly and tentatively. Indeed, as far back as 2004, Morgan Stanley equity research stated “understanding corporate governance is critical to investing in telecom”, but evidence of impact on decision-making is scant.

In generating investment ideas, the Enhanced Analytics Initiative [EAI] is designed to use the ordinary business of the brightest investment minds who offer best investment research ideas, but explicitly including ESG factors. EAI is a consortium of buy-side funds [investment managers] allocating commissions to encourage ESG research. EAI, including BNP Paribas, the Universities Superannuation Scheme, Investec and Hermes, have agreed to spend 5% of brokerage fees with firms that focus on ESG indicators. The EAI has over thirty representative investors with just under US$4 trillion asset under management [AUM].

The EAI next meeting is 29 Jan in London, hosted by Investec, the mid-size investment manager that I watched grow during my retirement fund consulting days in Durban and Johannesburg thru the 1990's. In my view their South African roots mean they understand the gritty reality of sustainable development and balancing ESG and investment on any given Monday. The sustainability reporting itself has moved a long way up the lifecycle, to a point where no separate Investec CSR report is issued. The EAI six-monthly cycle is up, and an update to the assessment of the best sell-side research should be forthcoming on the website soon.

A pressing question from the latest iteration of the Carbon Disclosure Project [CDP] is: with all the carbon information disclosed, what are investors doing with it? 2007 saw the fifth iteration of the Carbon Disclosure Project Fifth [CDP5], with information on corporate carbon footprints supported by 284 signatory investors representing $41 trillion of assets under management, demonstrating a significant uplift from 2002 (35 investors representing $4.5 trillion). This largest collaborative investor engagement includes blue-chip institutions across all continents including HSBC, JP Morgan Chase, Bank of America, Merrill Lynch, Goldman Sachs, AIG, State Street, Allianz, Credit Suisse, Munich Re, Mitsubishi UFJ, Mitsui Sumitomo, AMP Capital, Swiss Re, Rabobank, ABP, CalPERS, Hermes.

But a question with seldom a direct answer is: but what are investors doing with the information? My first hand experience with shops in Manhattan, Boston, London, Geneve and elsewhere is: not much. A simple question I put to my MBAs at Kenan-Flagler is - at what price are analysts that cover Southern Company [SO] or Duke Energy [DUK] factoring in carbon emissions in their valuations today? Browse their investors page, and keep the coffee in the travel mug, it'll probably be getting cold.

With electric utilities having huge capital costs for new projects or development necessitating decades long investment horizons, it is unclear currently how investment analysts deal with the material impact of CO2 emissions and costs of green house gas emissions. Are SO or DUK even reporting to their shareholders on their green house gas emissions?

Investment as Usual is Broken [Part 1 of 3]: Valuing ESG factors in equity analysis

Investment as usual is broken. The emergence of environmental, social and governance [ESG] factors in the twenty-first century has challenged the core of business thinking and strategy. Corporations are changing, sustainability has risen to the level of the C-suite, P&G recently appointed their first “Corporate Sustainability Officer”. But the “Chief Sustainability Investment Officer” is much further off. WSJ covers this amongst other "title inflation" items in Dec

Enhancing current investment analysis by integrating material ESG factors will offer better pricing of future risks and opportunities.

Global financial stock now stands at US$140 trillion and growing, according to McKinsey, 2007 based on the latest 2006 data. The value of total global financial assets—including equities, government and corporate debt securities, and bank deposits—expanded to US$140 trillion by the end of 2005, an increase of $7 trillion from a year earlier . But many of the investment decisions are being driven by decision-makers who completed their studies before Google, more influenced by Gordon Gecko of “Wall St” than Al Gore! The sea-change in the way corporations are facing up to our changing world has yet to catch up to the inertia of investment professionals on Wall St, in the City of London and other major investment centers. Investment as usual fails to integrate ESG factors properly. I'm more open for entertainment though - word is there's an update to Wall St, and heck in the past 20 years, cannot say there's no material.

It has become accepted wisdom that “business as usual” will inexorably lead to humans consuming more than the carrying capacity of this one earth’s natural resources, from fossil fuels to potable water to clean air. Investment as usual – the practice of investment management - needs to make a similar adjustment as companies are making in assessing a sustainable future. Matthew J. Kiernan, founder of Innovest Strategic Value Advisors, says traditional financial analysis captures only a quarter of a company's risk and competitive profile. Risk-adjusted returns must reflect a broad and long-term understanding of materiality, within the bounds of fiduciary duty and applied across portfolios and asset classes.

In July, 2007, the United Nations Global Compact annual event keynote address was made by Goldman Sach’s Anthony Ling on behalf of the financial community . It is also true that Hermes has led an engagement on iron and steel companies in the Brazilian supply chain slave labour case. Goldman Sachs presents ten reasons for incorporating ESG factors, three of which were i. experience with risk and return balance, meeting liabilities including identifying global social and environmental challenges, e.g. secure energy supply, climate change, water shortages, BRICs growth, and increasing awareness of ESG issues by analysts and investors. The Goldman Sachs analyst team based in London released a 179-page equity research report titled "GS Sustain" in which it recommended 44 companies based on a combination of companies' ESG performance and fundamentals.

Goldman argued that its picks based on this formulation, both in the U.S. and abroad, outperformed the Morgan Stanley Capital International World Index by 25% over the past two years. A neat approach to selling the quality of your investment ideas. It has been wonderful to watch the London-based team grow from just 2 in 2005, to about 8 now, with more attention from institutional investors than even the GSAM itself. There's an old legend about leaving to find you way, and getting respect in foreign lands, no? Abbey Joseph Cohen will be interviewed by Maria Bartiromo on WSJR next week, maybe it will come up and give the initiative a push...

A recent report by McKinsey indicated investor community ranked only ninth amongst factors leading corporate managers to address societal concerns now and in the next five years. CEOs ranked employees as the stakeholder group that has the greatest impact on the way companies manage their societal expectations. The 391 CEOs surveyed representing 230 organizations in Private/Public, State-owned & NGOs. 90% of company CEOs participating in the United Nations Global Compact said they are doing more than they did 5 years ago to incorporate ESG factors into their strategies. Socially irresponsible business practices might make it harder for companies to attract and retain talented people.

But where is the voice of the investor?

Citi From Leader to Laggard in One Olympic Cycle, keeping the spotlight on

Citi’s [NYSE: C] current saga captured pithily by WSJ on Friday [Citi's Status With Environmental Groups Takes Hit By CLINT RILEY February 9, 2007; Page C3] reminds me of the yawning gulf between being an Olympic or World Cup winner one year, and an also-ran four years later. Rainforest Action Network [www.RAN.org] has majored on Citi’s role as a leading financial institution, potentially tipping the scale from business-as-usual to sustainability, by giving Citi slacker rating despite Citi doing some reasonably good things like ranking on the Environmental Protection Agency's Climate Leaders Program [www.epa.gov/stateply/partners/index.html], although interesting to note neither as a charter member nor with GHG limits. RAN's executive director will meet Mr Prince on Valentine's Day for more.

Either RAN has majored on a minor, or Citi has lost its way even while the awards and recognitions based upon Citi's words and early actions still cast a warm glow. No more easy points from NGOs?

The modern Olympics and most World Cups rotate on four-year cycles. It makes the prize incredibly more meaningful, although at the risk of creating a news gap: Lance Armstrong never won Olympic Gold.

WSJ reports that Citi took three years to move from first to last, at least in the estimation of one active NGO. Rainforest Action Network [RAN] and other environmental groups say they now consider Citigroup a laggard, compared with other big banks, such as Bank of America Corp. and those in Europe. That thinking comes despite the firm's adoption of lending and disclosure policies for environmentally sensitive projects that meet or exceed goals in international agreements such as the Equator Principles, voluntary guidelines based on World Bank and International Finance Corp. policies that are considered a financial-industry benchmark.

RAN is best known in my world for the sharp-witted Victoria’s Dirty Secret campaign [www.victoriasdirtysecret.net/] that a gifted creative friend in Pennsylvania, Libby Kleine Modern, helped to turn to eye-catching graphics [www.half-full.org/ad1.html]. Nothing like juxtaposing some kind of thong with a chainsaw! RAN has a reputation as an outspoken NGO with young talent willing to risk all – even allegedly defecating in the shrubs outside a shareholder meeting [a stunt which crossed them from “stakeholder to engage” to “other”, according to a friend in the SRI community].

I have often used RAN as a reality check for corporates, along the line of my ongoing thesis question - which are you more afraid of: the activist consumer, or the activist shareholder? A simplifying question that clarifies the issue for insulated company types high up on air-conditioned buildings with soft seats is “would you like to engage in dialogue with investors with ESG considerations now, or when RAN comes abseiling past your CEO’s window with a pail of green paint?”.

Backdraft
I never under-estimate the real-life challenges of educating and sensitizing large corporates to how small and seemingly fragmented issues can have major impact when championed by a motivated NGO. As the largest financial services firm in the world by market-cap - depending on where BAC is on the day - Citi will have all the political dynamics of a UN security council resolution, especially when dealing with such "light" issues as climate change. Citi has had some good people on the investments side dealing with ESG, including Mary Jane McQuillen in NYC and Mike Tyrell in London. MJ has been a stalwart for developing SRI competency at Citi and NYSSA, before Citi AM was spun off to Legg Mason in Q1 2006 [she’s now “Director of Social Awareness Investment at ClearBridge Advisors (formerly known as Citigroup Asset Management), a unit of Legg Mason”]. The non-ESG types at Citi In London suddenly found Mike’s team useful when Citi’s utilities analysts were puzzled by gyrating Utilities sector market prices around May 2006 when the ETS mis-pricing played out and the value of carbon credits plummeted from mid-EU20’s to low EU-teens, upending prices factoring in the easy money. Mike and his team have recently updated [January 2007] the seminal “Crossing The River” paper I referenced in 2005 [http://sri-extra.blogspot.com/2005/10/friends-kindness-two-citigroup-sri.html].

One can only wonder what it was to be a fly on the wall at Citi when the TXU issue blew onto the front page of the WSJ last July. [As Emission Restrictions Loom, Texas Utility Bets Big on Coal - Planned TXU Plants Raise Global-Warming Concerns; Rivals Try New Technology, Rebecca Smith, Wall Street Journal 21 Jul 2006 [http://users1.wsj.com/lmda/do/checkLogin?mg=wsj-users1&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB115344549183413209.html].. Probably not a banner day for their PR, IR or ESG teams, never mind the CSR unit.

Another CFA caught in Citi’s backdraft somewhere between leader and laggard is Fred Wellington at WRI [www.wri.org/staff/staff_biosketch.cfm?StaffID=699]. WRI teamed with Citi in June 2006 on a report entitled “Investing in Solutions to Climate Change” that identified twelve companies set to benefit from global warming by offering products and services in four areas of climate change mitigation. I hope to catch up with Fred soon, but I imagine he must be equally disappointed, whatever his opinion of RAN. Fred was quoted by Bill Baue of SocialFunds.com as saying” ‘Citigroup is clearly a leader on a number of environmental issues. This report represents another area where they see competitive advantage in integrating environmental issues into their business while meeting a demand from their clients’.“ [www.socialfunds.com/news/article.cgi/article2033.html]. A good thing Fred couched the endorsement with "on a number". Must be his wily experience both inside and outside large money management firms.

Such is Citi’s challenge of being a large institution. Those to whom much is given, much is expected. With people and capital deployed in different investment teams, across different asset classes, in different time zones, now being made to re-engineer toward a sustainability mindset even while making a dollar within today’s rules of the game. Direction must come from the leadership [as even McKinsey will suggest], and the CIO is critical. Citi has not been a happy place to engineeer change: against the backdrop of a share price that over five years has trailed the S&P500 by over 500 bps [C: +17.39% vs SP500: +23.51%], BAC has topped C for market capitalization, and aided by BAC's acquisitions, blown away five year price appreciation [BAC: +74.87% vs C: +17.39%] - although January was a stunner for C. All-in-all, not a pretty atmosphere to engage in re-engineering the internal plumbing.

My work as ESG architect and SRI strategist is substantially easier when dealing with asset manager boutiques, versus large, conglomerated money management firms. Valerie Cook Smith, Citigroup Vice President, Environmental Affairs acknowledged how difficult it is dealing with a sprawling international firm’s corporate citizenship footprint when we shared a cab ride last October. Valerie was a fellow Net Impact panel member at the annual conference in Chicago [www.netimpact.org/displaycommon.cfm?an=1&subarticlenbr=1046].

One may anticipate the enormous challenge of advising a Wall Street firm with operations on all continents – executing ESG criteria consistently down the investment value chain will require a top-notch effort over a 18-36 month timeframe. Valerie is a Net Impact Board member so she is attuned to NGOs, and especially the San Francisco activist community. Her MBA is from a top 10 B-school [UNC’s Kenan-Flagler] which has a respected Center for Sustainable Enterprise [www.kenan-flagler.unc.edu/KI/cse/index.cfm] [a top 10 Beyondgreypinstripes.org school] where I enjoyed leading a seminar on SRI to 40-odd MBAs last weekend [www.kenan-flagler.unc.edu/KI/cse/newcourses.cfm].

But I wonder how influential Valerie or Mike or MJ were able to be when the corporate finance team floated the TXU deal, the red flag to environmental activists in this instance? Ahhh, to join the Valentine's discussion...


A Pachyderm's Memory
NGOs will keep the Citigroup sustainability investing initiative - and the Citi corporate effort - honest over time. This is something I noticed time and again in the SRI research business: companies being caught in the spotlight when determined research analyst asked the simple but tough questions like "have you executed on your promises?" and then scored the company accordingly. One can argue both directions on why the Exxon Valdez 1989 oil spill should still be captured in a research note. But it is only the company that benefits. A bored reader may always skip over an analyst’s paragraph on what the reader considers historical [XOM of course has helped to keep the disaster more material than necessary: it is still fighting against some of the damages awarded, fully 18 years after the event, and the oil is still causing problems Study says Exxon Valdez oil lingering in Sound [www.petroleumnews.com/pntruncate/795862419.shtml]].

Organizations, especially matured businesses with long and/or loose internal EHS [environmental, health & safety] policies and performance, benefit from short attention spans. Experts and analysts do not. NGOs may be under-resourced, but they develop a truffle-sniffer's nose for spin, and their mission focus generates a fair dose of doggedness. I submit that nothing and no-one is more tenacious than a mission-driven person, with a beef and a laptop. Throw in the Internet, international relationships fostered at college, some rudimentary networking ability, basic research skills, and broadband, and you may or may not have a corporate reputation threat for very little money and a long time.

This is exactly why the one-year anniversary date for the PRI [27 April 2007] is important. I reasonably expect that the PRI [www.unpri.org] will generate some coverage, and I have encouraged James and the PRI team to use that tailwind. Of course, it is unclear whether the NYSE is as interested as April last year, although their engagement with Euronext may suggest sensitivty to Euro-sensitive issues like carbon. I noted with interest that Wall St hosted President Bush a few days back. Aside from graciously attributing the fair economic condition to his policies, President Bush offered the mixed signal of cheering corporate America while indicating the need for trimmed executive compensation. I am not sure how much applause that one got on the street with median $600k bonuses in 2006.

With a PRI anniversary, so too will come a re-examination of the whole issue of ESG in investment, along with the "who's who" that have already signed on [www.unpri.org/signatories]. There has been talk of ejecting more names from the PRI - at least one organization has been "downgraded" to date, and the UNEP is keen to keep the appearance of running a credible program with meaningful standards. Frankly, I am all for dropping the passengers, making sure the cohort stays near the sharp end of the field, stretching for improvement, not just hanging on.

Bottom line for Citi and other majors: with many not-for-profit, for-profit and thought leaders using NGOs as early warning systems, it is important to always maintain the initiative by staying proactive in engagement. Citi must have some substantive internal messaging ready by mid-April, even if it decides not to be external. The authenticity will be available, invaluable if a respected NGO requires some material representation. If the ongoing imbroglio with the Bartiromo and HNW unit, or the shuffle of Ms Krawcheck, proves to be distracting, Citi may at least lean on some hoped-for forthcoming positive commentary on their ESG effort.

Using External Rhythms to Drive Internal Disciplines
In working with money mangers on their ESG architecture, I strongly recommend the ESG project remain clear on the annual anniversaries of stakeholder initiatives and high-profile events by influential NGO's and SRI networks [CERES, INCR, PRI, IGCC, ICCR]. ICCR's annual shareholder advocacy agenda is a particularly useful resource, see [www.iccr.org/shareholder/proxy_book07/07statuschart.php]]. In my experience, NGO’s are willing to offer points for material efforts. A proactive approach for Citi may be to shadow the quarterly information flows around investor conference calls or reporting to SEC. With minimal internal changes, the ESG initiative may map internally to regular investor reporting.

For the money manager and its corporate parent, a regular reporting tempo with a simulated audience helps to generate the internal disciplines from behind the security of an internal process. It also teams the ESG approach with colleagues' regular processes, reducing the peculiarity factor. But if/when Citi needs to adopt a more market-facing, investor- and NGO-friendly approach, the corporate behavior and reporting pattern will already be imbued in the firm's DNA.

The actions and activities of each business unit and each asset class need to map to the overall sustainability and ESG approach. Citi is finding out the hard way. Champion status [in the minds of all NGOs] can slip away effortlessly in the course of an Olympic, four-year cycle.

As a sobering reminder to Citi and their measures of greatness - whatever RAN's opinion - an anecdote from the peleton: while Lance Armstrong is respected for his seven straight Tours de France victories, in his only Olympic podium, Lance shared it grimly with his self-professed arch-rival Jan Ullrich [Sydney 2000] [www.bbc.co.uk/dna/h2g2/A12460303] BUT from one step lower on the Time Trial podium than Jan. Jan had also won the Road Race Gold. No Olympic Gold, together with Lance's lack of victories in Spring Classics cycling races, means he ranks as a great bike rider, but in a cohort with others, and below a consensus all-time legend like Eddy Merckx.


Afterword
Talk of World Cups reminds me: this summer in France I hope to enjoy some fine Rugby Union at the sixth Rugby World Cup. The Springboks may or may not show up [such is the sad state the Boks ended last season, despite the gritty win at Twickenham]. It will also be the fifth iteration of the All Blacks ongoing saga of being the tournament favorites who manage to self-destruct before they can lift the Webb Ellis trophy. A knowing wince by Hamish, a Kiwi at the Boston Sports Club [BSC] South Station Spinning class the other Wednesday, reminded me of the New Zealanders’ national torment each fourth year brings...

UN EP FI Principles for Responsible Investing; Kofi Annan's long farewell, Water

What should the PRI do next?
1. Engage companies & policy makers. Achieving goals, challenges, low-hanging fruit.

The PRI has the most to gain by building strong content and loyal membership over the next six-month period. Developing content articulating the PRI to both private sector and policy makers must be the primary goal. While personal speaking engagements may be best for developing the real relationships in influential networks, written materials have the longer half-life in the marketplace for thought leadership in order to institutionalize and generate a longer tail of activity. From my experience in institutional money management, and the development of SRI, I think intersections of academic, foundations and investment industry life must be pinpointed and exploited to maximize the impact. While the project milestones provide the framework, I also expect that the PRI will benefit where it dynamically seizes situational opportunities, for example the interest in “universal ownership” following the conference at St. Mary’s in California. Engagement is the outcome, but activities and outputs may be measured to determine sufficient flow is being created, and the impact measured against the goal. Beyond the effort, the ultimate metric is the number of policymakers and companies that subscribe to the PRI. In order to harvest the “low-hanging fruit”, I believe the lessons from other network and membership organizations are instructive and should form the basis for action: develop content, and incentivize membership.

1. Develop content
Multi-stakeholder projects face many challenges, including failure where they are perceived as intellectually lightweight. The PRI needs solid content delivered via a compelling virtual home online. As a global project, and with intellectual thinking and ideas as a basis, the PRI must be well represented. Using the resources of the UN and the brand of UNEP FI, I would build the web presence beyond the approach currently at www.unpri.org to leverage all current multi-media approaches, using a style that emphasizes simplicity and ease of navigation. The virtual home needs to serve the multiple audiences for the PRI, thinking strategically about what “influencers” when given the best information, will help push the PRI to the tipping point. The website must deliver multi-media [text, graphics explaining the approach, video and audio of speeches and/or events, possible a podcast]. An investor relations approach delivering media packs is a key component, making available chunks of PRI content to be ripped from the site by time-poor, information-hungry media. Other targets include key constituencies within firms, graduate students and academics. Web-measurement metrics must be included in PRI reporting internally, and if positive, in external profiling.

The PRI should also use the mechanism of an online speaker database as a self-nominating approach to maximizing interest in the subject matter, as well as raising the profile amongst peers. From this database, the PRI can increase the pool of available voices, while reducing risk of dispersion of opinions by maintaining ownership of the message through providing talking points and developed slide decks. Audio and video capture for the resources center on the website will also act as an accountability mechanism.

2. Incentivize membership
Choosing membership in organizations is the sum of a risk/return algorithm for any reputation. In order to build the membership, existing members’ decision should be supported and positively reinforced, creating a loyal base. Adopting the old B2B sales mantra, one satisfied institution makes an introduction to many more. The PRI must work through existing signatories to encourage membership, incentivizing existing members to recruit peers. Incentives include profile and reputation rewards, starting with public attribution and using www.pri.org. Critical questions include: are each of the 10 major brands in institutional money manager or investment consulting in each target market signed up, and if not, how can PRI change that? Are the 10 major GLOBAL financial services brands actively engaged, and acting across all their regions to implement the PRI? By using the powerful clusters as influencers, building from the loyal based, the PRI can maximize sustainable relationships invested in the project over the long term.

2. Measurement of PRI implementation. Challenges.
Measurement for this project may rely on the cross-sector approach to measurement, adopting the philanthropy model of input > activity > output > outcome > goal alignment. Measuring the seeding of ideas is more difficult, but the PRI will have to decide carefully how to measure each of these five components.

The primary challenge is mapping back to members’ expectations, established at signing, and their resource commitment and institutional energy devoted to the project. In signing on to the PRI, the list of “possible actions” has left opportunity for the proactive participants to scope out new areas for action, and ambiguity for the passive members to be inactive. Linking to my recommendation regarding the primary importance of content, I believe encouraging content will act as a real-time and longitudinal gauge of effort and effectiveness. The role of the PRI must be to assert the need for frequent information from members, and to remove barriers to action by smoothing the collection, collation and analysis of activity. Activity levels are easily measured, and suggest self-evaluation. Within each of the principles are many examples that lend themselves to content collection and collation, for example policies and their implementation, or developing collaborative initiatives. The online and international nature of the PRI presents some language and information management challenges, but these have been solved elsewhere and may be adapted for use by PRI.

A meaningful framework for assessment must incorporate elements that private sector actors are familiar with: competition, rewards, and sanctions. Competition – whether implicit or explicit – presents a “race to the top” where companies can stretch to achieve better implementation of the PRI. Obviously, some firms will weigh the calculus for success and temper their efforts accordingly. But focusing on the influential actors, especially those with strong brands, may have a multiplier effect. For example, advocating ESG training internally by industry majors is valuable. The PRI benefits when winners are easily measured. Rewards to members who meet or exceed the defined expectations for the PRI across the six principles and action areas should be firstly at a personal level [the effort relies so heavily on networks and relationships], secondly at the corporate level. Understanding the cultural differences in approach to recognition and rewards, diplomacy must be applied to skillfully deal with managing the personal ambitions and the corporate egos. Profiling members [personal and corporate] is an easy, and uncontroversial, approach, for example, the website in a section highlighting “member profiles” with a monthly calendar rotation. The PRI needs teeth. Sanctions must be applied within the membership to at least one outlier in the first review period. I believe the signaling effect is powerful, and immediately establishes the measurement program as being material, with consequences having impact. The degree of sanction and delivery of messages will depend on the dynamics of the situation and the defined metrics established, but the process is critical. A fine line must be trodden between offending members, and keeping their “feet to the fire” as Warren Buffet would say.

Measurement for members and by members can lean on the project management framework of being specific, measurable, actionable, reasonable and time-specific. With multiple actors with different corporate cultures, revenue bases and geographic challenges, as well as the tiered member structure, the performance review I recommend should be driven by PRI members themselves, with relative accountability to appropriate peer groups. Anticipating some inertia at start-up, I think the measurement needs to offer generous timelines, but the specific targets per time period [for example, requesting X companies to apply ESG factors in Y number of conversations over period X]. With new relationships in this “start-up” network, and looking to empower peer-driven assessments, I strongly encourage maximizing face-to-face interactions of members in the early stages, rolling over to web-based video/audio over time [to reduce costs and maximize ease of capture for the PRI content stored on the platform]. The PRI will succeed where influential, smart and ambitious people are committed to its vision, and lead their organizations and professional peers in the direction of the Global Compact and making ESG issues important in investment decisions.

Three weeks from Kofi Annan’s resignation, it was poignant to hear him field questions at the Truman Library in Missouri today, a slight deference, some defiance in his eyes, and a very clear idea that so much needs to be done. There is not much chance the goals for water will be met, but others have better chances of success. The investment case for water keeps growing, even as the US West Coast girds for a snowless winter in the Sierras, and the prospect of a long dry summer [see http://www.gemi.org/water/module4.htm]. Time to review the water investment opportunities for US investors, beyond the exploration by my friends at Generation IM, Goldman Sachs and the odd hedge fund in NYC. See also post at http://plentymag.com/features/2006/12/liquid_assets.php.

Thanksgiving in VT, sometime home of SRI, voices from the SRI retail sector in Consumer Reports, December 2006

Thanksgiving is the quintessential American holiday. Held the penultimate Thursday in November, it oftentimes ranks as more important to extended families than Christmas/Hannukah celebrations in December. With major highways and airports becoming legendary logjams, K and I were able to scoot north to Vermont midday Wednesday before the lemmings left Boston.

Vermont is a unique state in the American psyche. Renowned for its clean countryside [billboards are banned], rugged New Englander independence, and the eponymous Green Mountains, VT is home to a mix of fierce “red staters” hunting and shooting, including National Guard volunteers, wealthy but outdoorsy city people [flatlanders to the locals] who escape New York, New Jersey or Boston for the lifestyle, and crunchy granola types in Subarus, Saabs and Volvos as far as the eye can see, VT being the last resting place of many of the 1960’s hippie generation. While many VT policies point toward a “green” orientation, including incentivized alternative energy, it is also home to the Yankee Nuclear plant near Brattleboro in the south of the State. Distinctive VT businesses are mostly service sector, with outdoors activities like skiing, kayaking, and hiking being endemic. General tourism includes a solid antiquing industry.

Vermont's long history of farming is threatened by emerging mega-farms and the low product prices, so it supported from Montpelier, and the dairy farms that formed the competitive advantage for Ben & Jerry’s superb ice cream are teetering. The state is also home to the 2006 top-ranked listed company in the Business Ethics 100, Green Mountain Coffee [GMCR], whose practices were so impressive and within the corporate DNA, they actually won the award long before they put out their first CSR report [released in October 2006].

VT has hosted the Green Mountain Summit on Investor Responsibility since inception, an event pitched mostly at institutional SRI niche. I first got acquainted with the conference when I spoke in April 2004 on my B-school study on pension fund trustee attitudes to ESG factors in 2003 I developed with Prof. Jon Doh at Villanova University. The VT state treasurer Jeb Spaulding has remained a positive influence for ESG factors in investment decisions. VT has a variety of tertiary institutions with a sustainability curriculum, with UVM [University of Vermont] B-school, Vermont Law School [a small but strong law school focused on environment] which I enjoy including in my 3.5 hour road cycling route, and the School for International Training [SIT] which has a Net Impact chapter. VT is remarkably sensitive to climate change issues, with agriculture and outdoor industries impacted by weather changes, like the tapping of maple trees for their “liquid gold” and ski areas having to manufacture snow [sign of global warming: ever tried to find someone to buy into a snow ski operation lately?!]. The Septemebr/Octber months sees many tourists for the “Fall foliage” season [when the forests change to beautiful gold, bronze and burgundy colors as the temperature change initiates their change to autumn foliage]. Screwy weather patterns risks even this rite of passage.

My father-in-law is a quintessential socially responsible professional, having dedicated his whole medical career to not-for-profit practice. In my book, anyone investing his own career in a SR practice is making the biggest possible SRI move. The Doctor is also a great personal demographic for understanding the thinking of the average SRI investor. He bikes in the backwoods almost daily, will debate until his veins stand up with his Republican brother-in-law [we have to watch them at parties!], and is a member of AARP and NRDC. The Doctor is fairly financially literate, and a dedicated reader of Consumer Reports for all things, including the Money Adviser publication. While a large chunk of wealth is in the home [typical of the average American], his mutual fund investments are balanced into international portfolios, and a fair portion in TIAA-CREF mutual fund.

Browsing the December 2006 Money Adviser [Consumer Reports], I found a fascinating little window into the SRI retail market. Apparently they surveyed their subscribers, with 25% respondents reporting “yes” and their answers breaking down below. As I was finding my work at the major SRI rating firm in Boston, the largest area of interest is in environmental issues. Of course I would be interested in what the vendor breakout is, and mapping to other consumption patterns, particularly items with easy profiles like energy star appliances, fluorescent bulbs, and hybrid cars. One distinction I valued was the breakout between socially “conservative” vs. “liberal” value sets. I foresee the “socially conservative” market as a latent force in values-based investing, and one which current providers have no clue on how to address, but more about that in another post. Chatting to the Doctor raised another few issues as I tried to map what would have been his answers: firstly, the low response rate reflected in the good Doctor being away saving lives and without time to complete the survey, secondly his vagueness on his current vendor, and thirdly the lack of clarity about exactly which buckets his vendor would cover [we settled on environment, socially liberal and humanitarian]. This reflects the general malaise in investment marketing, where clients lack the fluency with their investment portfolio.

Much to reflect on, but now to raise a glass of fine red from California: it's not even 5 pm and the forests of VT are dark and cold. The snow will be coming soon [hopefully]…
Quickpoll > Money Adviser Consumer Reports December 2006 > Have you invested in socially conscious mutual funds or do you plan to?
Environmental/green
43%
Socially conservative
29%
Socially liberal
20%
Other
16%
Humanitarian/Aid
15%
Donor Assisted
8%
n=514 [25% of subscribers], conducted May 2006. Answers reflect answers only of the 25% of respondents who replied yes to initial poll question. Results do not add to 100% [multiple possible answers]. Responses are representative of subscribers but not of the general public.

2006 Moskowitz Prize

Judges seem to be finding it harder to choose winners. A good sign. The 2006 Moskowitz-prize winning article describes CalPERS' use of shareholder activism and its thoughtful and thorough writing supports the taxonomy for investors incorporating environmental, social and governance [ESG] factors by building a case from CalPERS, one of the foremost proponents of incorporating ESG in their investment strategy. The CalPERS CG mandate remains a differentiated investment theme, with about 11 money managers havuing active CG mandates, accounting for just under 2.5% of total CalPERS AUM. With such size, and seemingly controversial mandates, CalPERS is also one of the most closely watched [as a public instiution should be]. See also their coverage of issues like consultant's conflicts of interest, environment themes, and the oftentimes controversial economically targetted investments.

In a similar way, I am following with interest the situation in South Africa where the largest institutional investor, the Public Investment Commission [the investing arm of the Government Employees Pension Fund [GEPF] has ascribed to the UN Principles for Responsible Investing. Just last Friday on my way to speak at the Net Impact national conference in Chicago my Blackberry picked up this note re. addressing the issue of the wage gap, one of my personal interest issues.

Gap between rich and poor too high - Molefe
The gap between the lowest and highest paid in South Africa needs to be addressed urgently, according to Brian Molefe, the head of the Public Investment Corporation, which oversees the the largest retirement fund in the country, the R600 billion Government Employment Pension Fund.

As would be expected, the page hits and downloads of the winner are outstripping the two "honorable mentions". While I respect the need to cover the tobacco issue, I have little sympathy for the "ethics" of tobacco industry - even the tenuous arguments about poor farmers which I regard as patently paternalistic [ever tried eating tobacco leaves when the commodity price drops through the floor or the manufacturer chooses not to buy your whole crop?]. In another century I remember some philosophical and mercantile arguments were equally persuasive for slavery. The net of the paper matters little, even when I try and stretch to my best Machiavellian or Rand thinking - it is never worth another 100 or 700 basis points [risk-adjusted] even if you are the trustee trying to grow the healthcare institutions endowment to fund doctors to do explicitly good work. It's just not.

Monitoring the Monitor: Evaluating CalPERS' Shareholder Activism
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=890321
BRAD M. BARBER
University of California at Davis March 2006
Abstract:
Many public pension funds engage in institutional activism. These funds use the power of their pooled ownership of publicly traded stocks to affect changes in the corporations they own. Perhaps the most high profile activism has been pursued by CalPERS. In this paper, I review the theory and empirical evidence underlying the motivation for institutional activism. In theory, the merits of institutional activism hinge critically on two agency costs: (1) the conflicts of interest between corporate managers and shareholders, and (2) the conflicts of interest between portfolio managers and investors. While portfolio managers can use their position to monitor conflicts that might arise between managers and shareholders, they can also abuse their position by pursuing actions that advance their own moral values or political interests at the expense of investors. Which of these effects dominates the actions of portfolio managers will determine the value of activism and is an empirical issue. I analyze the gains from CalPERS activism linked to their focus list firms from 1992 to 2005. I document that CalPERS has generally pursued reforms at focus list firms that would increase shareholder rights. My best estimate, based on conservative short-term announcement reactions, indicates CalPERS activism has resulted in total wealth creation of $3.1 billion between 1992 and 2005. In general, I argue that institutional activism should be limited to situations where there is strong theoretical and empirical evidence indicating the proposed reforms will increase shareholder value. At times, institutions will be forced to take positions on sensitive issues (e.g., investment in tobacco firms). In these situations, I argue portfolio managers should pursue the moral values or political interests of their investors rather than themselves.
Paper Stats at 30 Oct 2006 7:22:
Abstract Views: 791
Downloads: 258
Download Rank: 11190

The Price of Sin: The Effects of Social Norms on Markets
http://search.ssrn.com/sol3/papers.cfm?abstract_id=766465
HARRISON G. HONG
Princeton University - Department of Economics
MARCIN T. KACPERCZYK
University of British Columbia - Sauder School of Business March 15, 2006
Sauder School of Business Working Paper
EFA 2006 Zurich Meetings
Paper Stats at 30 Oct 2006 7:20:
Abstract Views: 559
Downloads: 208
Download Rank: 13784

Is Doing Good Good for You? Yes, Charitable Contributions Enhance Revenue Growth
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=920502
BARUCH LEV
New York University - Stern School of Business
CHRISTINE PETROVITS
New York University - Leonard N. Stern School of Business
SURESH RADHAKRISHNAN
University of Texas at Dallas - School of Management
July 2006
Downloads
Paper Stats 10/30/2006 6:41 ET
Abstract Views: 141
Downloads: 68
Download Rank: 34566

ONE > Pictet debating the fewest possible indicators > Job Creation

Having time to catch up on some summer reading, I reached out to Christoph Butz in SUI who shared with me his Pictet paper on Job Creation [Do Stock Markets Reward the Creation of Jobs?, June 2006]. Pictet is a niche Swiss money manager with a sustainability team [Pictet Quants; Sustainable Investment] based in Geneve that previously put out paper citing the reasoning for a single measure of sustainability performance [see 'Less Can Be More…A New Approach to SRI Research" article at Socialfunds.com].

The study looks at 1677 companies of the MSCI World and the period from 1997 to 2005, we investigate whether the creation of jobs has been rewarded or penalised by stock markets. The ESG data comes partly from KLD as an "esteemed research partner through the SiRi company network". Most fascinating is the graphic looking to describe correlation between jobs and CSR, "JOB CREATION VS. STANDARD SOCIAL RATING" graphing a scatter graph plotting our the new job-based social responsibility rating (x-axis) versus a standard multi-criteria social SRI score sourced from SiRi company (y-axis) which concludes: "The scores are virtually uncorrelated."

SRI and sustainability is a notoriously complicated subject, more art than science. So personally I like the elegance of a model that simplifies. Others in SRI rightly point to company performance being multi-faceted and the narrowness of just one indicator. I think the idea deserves some air to breathe [like the air in Montana, fine]. After all, in assessing investment decisions in companies, analysts will default back to their single favourite indicator [EPS or EBITDA or forward P/E] to give their 15 sec. elevator pitch on a buy/sell/hold decision.

Acknowledging the drawbacks of having one factor assess the CSR performance of a company, I find the angle of inquiry by Pictet interesting "job creation eclipses all other labor issues as a key indicator of corporate social responsibility". Of course, cutting jobs may be the sign of a company trimming down to fight competition, or changing its product line-up etc etc. Currently, I understand that few CSR or SRI research shops are tracking job creation, or the switch from high quality to low-quality jobs.

As a quant money manager Pictet is interested in finding the fewest possible metrics to describe CSR/sustainability to fit into their numbers-driven model. The full title is a mouthful but gives you the direction: Do Stock Markets Reward the Creation of Jobs? Job Creation as a straightforward proxy for companies' "Social Responsibility" and its implication for performance.
See related story 6 July 2006 on socialfunds.com
A peer in SRI supported Bill's view, noting "The authors would seem to argue that any problems with [outsourced] jobs would eventually catch up with the companies, but that isn't necessarily the case - so far - for the companies that fall outside the radar screen of labor activists hunting down sweatshop problems, and that describes many companies. Since host country govts want the investment and are reluctant to rock the boat about labor rights abuses, you can't rely on local regulations to iron out the problems anytime soon, either".

The same day Bill's story hit [6 July 2006 WSJ] on my regular mornign T commute through Cambridge to Boston I read of a similar simplification [caveat, caveat] re. customer service: bottom line question - based upon your client service experience, would you recommend the company to your friends? A cutting question for market researchers everywhere!

The forward by Jean Laville,Deputy Director, Ethos Foundation, Geneva outlines the Foundation's interest in the study of job creation:
"We are convinced that the societal cost and the hidden, internal cost for the companies involved could – as a result of raising insecurity in many countries because of job cutbacks in one region and transferring them to an other region - backfire in the long term, eventually completely undoing the purported cost cuts or even turning them into the opposite.
... Ethos will support initiatives to understand more clearly the mechanism of job creation and destruction. Ethos recognises the urgent need for a comprehensive database in this area to provide sustainable investors with presently unavailable employee-specific information in
an appropriate way.
...We are convinced that modern ESG research cannot afford to continue to all but neglect the creation of jobs. Rather, this crucial aspect will be the cornerstone for all future and meaningful assessments of the social responsibility of companies. And it is precisely in this sense that the present paper does indeed make a most valuable and highly welcome contribution."

Mr. Butz concludes: "For some sectors and regions, the creation of jobs appears to play the role of a leading indicator with regard to a company’s future stock-market performance whilst for other sectors and regions, these results could not be confirmed."

I look forward to exploring this elegant idea in future.

Contents:
1. INTRODUCTION 5
2. LEGITIMACY OF USING JOB GROWTH AS A
PROXY FOR SOCIAL RESPONSIBILITY 6
3. SCORING METHODOLOGY: HOW TO MEASURE
JOB CREATION? 11
4. BACKTRACKING AND SIMULATION: TESTING ‘WHAT IF’
SCENARIOS... 14
5. PRESENTATION & DISCUSSION OF RESULTS: FINANCIAL
IMPLICATIONS OF JOB GROWTH 16
6. CONCLUSION: DOES IT PAY TO CREATE JOBS? 23
7. APPENDIX: JOB CREATION BEYOND MERE HEADCOUNT -
EXPLORING SOME MORE IDEAS
Pictet Do Stock Markets Reward the Creation of Jobs?
1