Fund managers and other institutional investors should be scrutinised for their shareholder voting on social responsibility, says the founder of the Corporate Sustainability Reporting Coalition.
Steve Waygood heads insurance company Aviva Investors’ sustainable and responsible investment and is the founder of the Corporate Sustainability Reporting Coalition. A former chairman and board member of the UK Sustainable Investment Forum, Waygood was part of the expert group that wrote the UN Principles for Responsible Investment and is a lecturer at Cambridge University’s Programme for Sustainability Leadership. He spoke to EurActiv’s Jeremy Fleming.
What do you think of the Commission’s proposed new CSR regime which would require larger companies to report nonfinancial information, such as their diversity and environmental policies and to explain why they have not done so where necessary?
The announcement has been a long time in the waiting and I am very pleased with it. I think the proposal would make a big difference. It is not perfect and would have been better if it had introduced the concept of integrated reporting.
What is integrated reporting?
The International Integrated Reporting Council is a special interest group consisting of industry players. I sit on the working group of the Council, and we believe that introducing sustainability issues throughout the entirety of corporate accounts would help to integrate sustainability into the DNA of the firm, because it would help to create conversations within internal audit, within risk functions, strategy and accounting. It could also impact on the remuneration report – where one exists – to determine how directors should be rewarded, along with other indicators such as customer satisfaction.
So you would like to see a more horizontal approach, with sustainability issues incorporated across all of the elements of the accounts?
The benefits we would expect to get would be more considerable, because we want to know that the cash flows for the company are sustainable for the future. Otherwise the company is only measuring these issues from a compliance perspective and not caring about what it means for their strategy, and how they need to change their business model, how they need to protect their reputation, report on their executives. What if sustainability issues matter to their business, or effects their resources, their employee base? I do not think they will be fully capturing this and implementing it if these things are simply put in an annex to the accounts, they should be across the whole accounts.
How could this work within the context of the remuneration report, by way of example?
There are hundreds of companies that already do this kind of CSR reporting on remuneration, and if you look at the remuneration report of any company, that gives you an immediate idea of the extent to which companies have these reporting mechanisms in place. The current [Commission] proposals talk about key performance indicators, but if they are genuinely ‘key’ they should be embedded into the remuneration report, not by means of a total effect on remuneration, but of a percentage, a modest but material percentage. For example if health and safety issues were a concern with the firm – for example it might be a mining company – then fatalities or lost time injury rates could be reflected in the financial remuneration. Other indicators such as employee engagement figures, customer feedback and regulatory compliance could also play a part.
You and Aviva have played a steering role in the Corporate Sustainability Reporting Coalition what are the aims of this consortium?
We are global investors, but based in the UK, so Europe is a key concern, but we are working through the UN to get a global solution to sustainability reporting. That is why we campaigned hard at the [United Nations's] Rio+20 summit to get commitments on that front.
Is there a danger that this will slow up now that the European Commission has announced its proposal?
Following the Rio+20 conference we have added members, and now have around 100 members. The outcome of that Rio+20 summit document, at paragraph 47, says a lot and nothing. There is no new money, no new commitments or provisions for any difference, except to say that stakeholders should come together to correct this problem, so it recognises that there is a problem. So we were both pleased to have it in there at all, but deeply disappointed that it wasn’t the effective treaty we were pushing for.
What can be hoped for now?
There are two things that have come out of Rio+20: the post 2015 process, and the sustainable development goals. The 2015 process is asking what will replace the UN’s Millennium Development Goals, but sustainable goals are likely to replace them so these two issues are essentially the same discussion. We are pushing for a sustainable development goal that says by 2020 every mid-cap company is publishing an integrated sustainability report.
How could that be enforced?
Either by using ethical coercion or norms, as they are called, which would allow each country to apply pressure. We have no confidence that these types of voluntary mechanisms work, however. The second way is by legislating in company law, and that is what the EU is looking at in its ongoing re-assessment of corporate governance. A third way would be by integrating a “comply or explain” system into each stock exchange throughout the world, so that each company must comply or explain why not. We favour this and would we want that sustainability report published by each company at its annual general meeting, and voted on by investors, that is something that we do at Aviva.
How can you ensure that investors are more engaged when they vote, or indeed that they do vote?
We have recently given evidence on short-termism in corporate strategy for the UK’s review by Oxford University's Professor Kay into the lack of stewardship of investors. The key issue is that he is focusing on the supply of stewardship, saying investors should take control, and he has proposed amongst other things an investor forum where they could pool influence at lower costs. Personally, I am less convinced that is true. I think the demand side was missed and I think we need is an informed demand from the customers of fund managers who should be exercising stewardship to supply that stewardship. That means demand from trustees, from foundations, demand from insurance companies, to ensure that the fund managers that they employ vote at AGMs and that they oversee and assess that voting and they see reports on that. There could be a standardised report that enable a client to see that fund managers meet certain requirements in their voting.
What do you think of the “Comply or Explain” system proposed by the Commission in its reporting proposals?
It is not clear what this will look like because for the penalties, the member states are going to be required to “discourage” companies that fail to comply, but it is not clear what that means.
In the UK it potentially involves losing your listing on the stock exchange and when that is dangled companies deal with the problem. No company has lost its listing but the threat of that sanction has generated good new disclosure. It has also generated noise and some bad disclosure. Which is why we suggest the reports should be put before a vote of the shareholders. Clearly not all votes are taken seriously but I think there are enough investors who do care that means that companies will have to take this seriously.