Ethical reporting: Why it pays to be good

If such an approach has not yet become a route to instant riches, there has certainly, over recent years, been a sea change in attitudes towards this sort of investing.

For a start, it is no longer a fringe activity. With many institutions, including Friends Provident and Henderson Investors, actively promoting this sort of investment, the value of ethical funds climbed from £1.7bn in January 1998 to £2.6bn by the beginning of 2000, according to research by the Ethical Investment Research Service. As recently as July 1994, only £700m was invested in such funds.

In addition, the City and the auditing profession, as well as companies, have begun to wake up to the idea that environmental, ethical and other issues that are not purely financial can have significant financial effects. For evidence, look at how the US chemicals and agribusiness Monsanto suffered on the back of the public outcry about genetically modified foods, and at the damage which was suffered by British Nuclear Fuels in the wake of allegations of safety lapses at its Sellafield plant.

The environment was the first area to attract particular corporate attention.

ACCA launched the UK Environmental Reporting Awards in 1991, which attracted more interest and an increased numbers of entries each year. In 1999 it established the UK Social Reporting Awards and, given the increasing business and political significance of sustainability reporting, ACCA introduced a new category for sustainability reporting this year, in order to better reflect the current and future disclosure practices of UK companies and organisations.

FTSE companies get behind green reports
No doubt encouraged by the awards, more than half of the companies in the FTSE 100 now produce separate environmental reports.

The aim of social, environmental and sustainability reporting is to create a dialogue with a selection of interest groups such as employees, local communities, suppliers and local authorities.

Such reports offer detailed analysis of the impact of a company or public agency’s activities on the people and environment in its operating areas. There has been enhanced pressure on organisations to be more open about the effect of their products, services and operations on the regions where they operate. This is a reflection of the greater demands for openness and transparency.

Businesses might be inclined to ask why they should be involved in what is apparently a costly and time-consuming procedure. Organisations earn public esteem and credit – in current thinking – by being open with their employees, suppliers and communities. There are also notable benefits in identifying potential problems which may occur with key interest groups before they actually develop.

For many organisations which are doing some form of environmental reporting already the expansion to include social and sustainability reporting is predominately an issue of scale. The systems will be in place already – they merely need to be extended. In addition, the philosophical approach has been established. Where managers see the benefits of transparency and are committed to environmental reporting, the step forward to social and sustainability reporting is not so large.

Business community encouragedc
The Turnbull Report, which gives listed companies guidance on their reporting responsibilities, has also encouraged the business community to think a lot more about the whole range of risks, on the grounds that today’s potential liability is tomorrow’s real cost.

There is a growing belief that being a good business can be good business. Prudential Portfolio Managers – which manages a total of £150bn – was reported to be taking much greater account of social and environmental factors when picking investments because environmentally sound companies are good investments. Recent events have shown that the converse can also be true.

For all the recent emphasis on corporate governance, many still feel that institutional shareholders do not always do all they can to influence company executives, but consumer power is on the rise – and managers have to be constantly on the look-out for signs of the storms that can wreck their finances overnight.

The furore over third-world labour caught many clothing companies by surprise, while Shell – which had a reputation as not just a socially-responsible company but as a heavy investor in trends spotting – was broadsided by criticisms of its plans for the disposal of the Brent Spar oil platform and its activities in Nigeria. The ability of the internet to publicise such matters quickly and to challenge companies’ control of information makes it even more important that companies do, and are seen to do, the right thing.

This stress on the positive side – as opposed to the negative approach that entails NOT investing in, say, known polluters – is being reflected in the approach of the institutions which operate ethical, environmental or social funds.

As recently as the mid-1990s, many in the City considered environmental issues important if they had an immediately measurable cost to a company. Now there is a growing awareness that a good environmental record may be a sign of long-term financial potential.

And research in the United States suggests that good news, such as winning environmental awards, can lead to a significant increase in a company’s market value, while bad news, such as an oil spill, can reduce it by even more. Such is the increase in public and governmental concern about the environment and other social issues, that the companies and the investors who fail to keep up are likely to be the ones wearing the hair shirts.

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