The ultimate government consortium, the United Nations, is planning to use the power of some of the world’s largest financial institutions to persuade companies to change their financial statements — or face the threat of divestment or ratings downgrades.
Under several initiatives, the world body has reached out to pension funds and research firms representing some $6 trillion in assets to develop environmental, social, and governance (ESG) guidelines that will be better for shareholders, society, and the world, according to the UN, than a free-market system of companies looking out for their own good.
“When these large institutional investors move on ESG issues, the broader markets will listen and react,” promises Klaus Toepfer, executive director of the United Nations Environment Program’s Finance Initiative, which is leading the effort.
The UN intends that companies report “linkages between the environment, sustainability, and financial performance.” These are part of what it’s labeling the Principles for Responsible Investment, which the UN’s Global Compact initiative will begin enforcing this year through its signatories — including Citigroup, Bank of Tokyo, ABN AMRO, and hundreds of other financial institutions.
Companies that ignore environmental and social responsibilities are putting their share price at risk, maintains the UN, which adds that those responsibilities are especially material to companies in certain industries, such as the automotive, chemical, and pharmaceutical sectors. The UN claims that its ESG guidelines provide better insight into these material effects.
The United Nations is also seeking to attach legal liability to organizations that don’t adhere to its guidelines. In the words of a UN-sponsored report released last October by the law firm Freshfields Bruckhaus Deringer, “Institutional investors have a far greater opportunity — and in some cases a legal obligation — to incorporate environmental, social, and governance issues into their investment decision-making.”
The rationale: An organization that doesn’t take into account social or environmental ramifications puts future returns at risk. For example, a pension-fund manager would have the fiduciary duty to divest the fund’s holdings in a mining company that, although profitable, didn’t adhere to appropriate labor or environmental standards. Judging by UN guidelines, the company’s long-term prospects would not be considered sustainable, and therefore holding a position in the company would be considered reckless and a fiduciary breach.
That fiduciary-legal litmus test hasn’t been proved in court; whether lawsuits would transpire is anyone’s guess. Certainly, though, financial-reporting initiatives have gathered a great deal of momentum. Some 800 companies around the world already follow the sustainability reporting guidelines issued in 2002 by the independent Global Reporting Initiative. This month, the GRI put out for comment its new guidelines, which would require companies to report on the economic, environmental, and social dimensions of their activities, products, and services.
The United Nations wants the 2,400 members of its Global Compact to abide by the new GRI guidelines, and it hopes that pension funds and other institutions concerned about corporate reform will further support the cause. Since pension funds own half of the world’s corporate stock — and 60 percent of the outstanding shares of the top 1,000 corporations — their involvement is a big stick.
On the other hand, Henry Miller, a research fellow at Stanford University’s Hoover Institution in California, believes that pension funds should speak more softly, as it were. CalPERS, for one, “is an example of a radical few taking it upon themselves to define what constitutes an ethical investment,” says Miller, who acknowledges that he hasn’t read the UN’s new proposition. Nonetheless, he maintains, pension funds should have no business but the profit business.
And what should be the business of the United Nations? Historically, the countries it comprises often pay it little heed. As for whether public companies will respond more readily, another annual-meeting season is just around the corner.