Business Sustainability Standards
Sustainability has become a key factor in investing and operations of many businesses. Below is a summary of key findings on sustainability standards adopted by investors and operating companies.
Standards for Investors
Environmental, Social and Governance (ESG) Standards
- ESG is a set of criteria of non-financial factors--environmental, social and governance--affecting a company's performance that investors apply to screen potential investments. There is not yet a universally agreed rule, but there are a number of indices used for evaluations (discussed later).
- The standards allow investors to select companies considered to have positive impacts on the three areas as opposed to the process of filtering out companies with negative impacts (see the next standard for distinction).
- Examples of environmental criteria include climate change/carbon emissions, pollution, energy efficiency, etc. Social criteria look at the relationships with people--for example, human rights, labor standards, gender and diversity. Governance criteria cover the governing standards, including board composition, political contributions, audit committee structure, etc.
- Bloomberg has developed ESG indices--each focuses on the subset of ESG factors most likely to materially impact companies in a given industry. Details on each index may be found here.
- A popular index used among investors is Bloomberg Barclays MSCI US Corporate ESG Focus Index, which targets companies (bond issuers) with positive ESG characteristics while maintaining the same risk and return profile of a given industry.
- The CFA Institute is currently developing ESG industry standard to build a framework for investment strategies. Details have not been published yet.
- A paper published by Harvard University finds that investors consider ESG information in their decisions for two sets of reasons: first, it is relevant for the assessment of "a company's reputational, legal and regulatory risk;" and second, ESG performance is considered a proxy for management quality.
- ESG is currently adopted by many investment institutions--for instance, investment giant BlackRock and J.P. Morgan Private Bank.
- BNP Paribas Wealth Management is another example. The firm believes that such sustainable investing outperforms traditional investing, particularly more so in emerging markets.
Socially Responsible Investing (SRI) Standards
- Similar to (and often confused with) ESG, SRI standards factor in the social and environmental impacts of an investment.
- However, a key difference is SRI actively filters out companies that have negative social and environmental impacts. ESG looks at how a set of criteria affect a company's performance (sustainable practices accompanied by attractive bottom line), but SRI focuses on ruling out unsustainable companies. In other words, while ESG selects "good and profitable" companies, SRI filters out the "bad" ones.
- BlackRock's research examines and divides sustainable investing into two categories: Avoid (avoid exposure to companies/sectors that pose certain risks or violate the investor's values) and Advance (advance certain impact outcomes while pursuing financial returns). SRI falls into the former category and ESG the latter.
- SRI (Avoid) methods may include screening out "producers of weapons, fossil fuels and/or tobacco" or using an index such as S&P 500 Fossil Fuel Free Index. More example of this type of indices may be found here.
- In SRI, an investor could provide their investment manager with a list of excluded securities, types of stocks or industries. SRI investment is common among foundations and endowments with specific values as SRI can be more specific based on the investor's values than ECG.
- Betterment is an example of an investment firm that offers SRI portfolios.
Operating Principles for Impact Management (The Principles)
- The Principles is an initiative launched by the International Finance Corporation (IFC) to create a framework for impact investing.
- The framework contains nine principles: 1) define strategic impact objective(s) in consistency with investment strategy; 2) manage strategic impact on a portfolio basis; 3) establish the manager's contribution to the achievement of impact; 4) assess the expected impact of each investment; 5) assess, address, monitor and manage potential negative impacts of each investment; 6) monitor the progress of each investment in achieving impact and respond appropriately; 7) conduct exits considering the effect on sustained impact; 8) review, document and improve decisions and processes; 9) publicly disclose alignment with the Principles and provide independent verification of alignment.
- A number of investment institutions from around the world have signed to adopt the framework. These institutions include BlackRock, Credit Suisse, European Investment Banks and more. A full list of signatories may be found here.
Standards for Operations
The Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard
- The standard provides guidelines for "the accounting and reporting of seven greenhouse gases covered by the Kyoto Protocol–carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PCFs), sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3)."
- It is designed for companies preparing a GHG emission inventory, specifically focusing on the accounting and reporting of emissions.
- Alongside the accounting and reporting standard, a number of calculation tools have been developed to assist companies to calculate their emissions.
- GHG Protocol reported that "at least 92% of Fortune 500 companies responding to CDP used GHG Protocol directly or indirectly through a program based on GHG Protocol." Please note that GHG Protocol provides standards, guidelines and tools, one of which is the GHG Corporate Accounting and Reporting Standard.
- BASF Corporation is an example of a company that follows the GHG Corporate Accounting and Reporting Standard
- Developed by AccountAbility, the AA1000 series is a principles-based framework and guidance for companies and organizations to demonstrate performance in accountability, responsibility and sustainability.
- Among the series is the Stakeholder Engagement Standard (2015), "the most widely applied global stakeholder engagement standard, supporting organizations to assess, design, implement and communicate an integrated approach to stakeholder engagement."
- Also among the series is the Assurance Standard designed for external auditing bodies. More details may be found here.
- While GRI (see the initial research) focuses on sustainability, the AA1000 series of standards look at "credibility and quality of an organization’s social, economic and environmental management, performance and reporting."
- An example of a company that uses the standard is Deutsche Telekom AG.
The ISO 14000 Family
- The ISO 14000 family is a series of standards developed by the International Organization for Standardization for companies and organizations to manage the environmental impacts of their operations and comply with applicable laws and regulations. A full list of standards may be found here.
- The ISO 14001, the most popular among the family, governs the requirements for an environmental management system. The management system includes enhancement of environmental performance, fulfillment of compliance obligations and achievement of environmental objectives. Details for requirements may be found here.
- There are more than 300,000 certifications to ISO 14001 in 171 countries.
- The Eco-Managment and Audit Scheme (EMAS), a management instrument developed by the European Commission, suggests that having obtained ISO 14001 means companies have fulfilled some EMAS requirements and will make registration process simpler.
- Despite its high cost, certification may lead to a reduction in the number of inspections required for obtaining permits by the U.S. Environmental Protection Agency (EPA) and Occupational Health and Safety Administration (OSHA).
- Toyota is an example of a company that has acquired and maintained ISO 14001 certifications.
Other Standards in the Initial Research
- The International Integrated Reporting Council (IIRC) focuses on "the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates."
- Its purpose is to align capital allocation and corporate behavior to financial stability and sustainable development goals. More details may be found here.
- GRI and IIRC can be used together. Both are for operating companies.
- ISO 26000 is a non-certifiable (unlike ISO 14001) guidance for social responsibility, assisting business in translating principles into actions. More details may be found here. This series is also for operating companies.
- The Organization for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises are government-backed recommendations for multinational enterprises operating in or from OECD countries. The guidelines are for multinational enterprise only. Details may be found here.
- UN Global Compact is a voluntary initiative based on CEOs' commitment to implement 10 principles of sustainability: two on human rights, four on labor, three on environment and one on anti-corruption. Details on the 10 principles may be found here.
- UN Global Compact is participated by 10,435 companies in 166 countries. More details may be found here. This is for operating companies.
To carry out this research, the team examined standards for investors and operating firms separately. On the investors' side, we found that standards were more broadly defined. Therefore, we separated them into three categories. The first two categories were more comparable to each other. Within ESG and SRI, we searched for definitions, distinctions and tools used for measurements. Within the two categories, we provided examples of measurements/criteria (typical indices) and also links to more details and full lists of the indices. The third category is an initiative launched by the IFC, the investment arm of the World Bank Group. The initiative provides a set of principles that signatory investment institutions, many of which are large global firms, must follow. As for the operating firms, we searched for alternative guidelines and reporting to what was provided in the initial research. Additionally, we provided more details on the standards and guidelines that were only briefly mentioned in the initial research.