2016

SIPA, COLUMBIA UNIVERSITY

CLIENT: NY LIFE/MAINSTAY INVESTMENTS

Authors:

Mateo Bidoggia, Molly Gordon, Youjia Guo,

Abhishek Rathor, and Hao Rong

Faculty Advisor: Prof. Michelle Greene

SRI ESG INVESTMENTS

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Table of Contents

Executive Summary ........................................................................................................................ 3

Introduction ..................................................................................................................................... 5

Objectives of the Research Paper ................................................................................................ 5

Methodology ............................................................................................................................... 5

MainStay Investments ................................................................................................................. 5

Candriam ..................................................................................................................................... 6

Candriam’s Approach .............................................................................................................. 6

History and Evolution of SRI ......................................................................................................... 7

Sustainable and Responsible Investing ....................................................................................... 7

Sustainable and Responsible Impact Investing ........................................................................... 7

History of SRI ............................................................................................................................. 9

Sustainability Accounting Standards Board (SASB) ................................................................ 10

ESG ........................................................................................................................................... 11

Corporate Social Responsibility (CSR)..................................................................................... 13

CSR Trends ............................................................................................................................... 13

SRI Trends................................................................................................................................. 15

Global Regulatory Environment ................................................................................................... 16

Fiduciary duty ........................................................................................................................... 17

What is it and who has it ....................................................................................................... 17

The changing landscape ......................................................................................................... 17

Benefit Corps and B Corps ........................................................................................................ 19

Benefit Corporations.............................................................................................................. 19

B Corporations ....................................................................................................................... 19

Benefit Corporations vs B Corporations ............................................................................... 20

Corporate Disclosure ................................................................................................................. 21

Europe .................................................................................................................................... 21

Asia ........................................................................................................................................ 21

United States .......................................................................................................................... 22

Regulatory challenges ............................................................................................................... 23

Short or long term? ................................................................................................................ 24

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Economic incentive or control? ............................................................................................. 24

Look forward and possible development ............................................................................... 24

Benefits/Costs of SRI .................................................................................................................... 25

Financial Reasons to Invest in SRI ESG Funds ........................................................................ 25

Economics Academic Literature on diversified investments ................................................ 25

Economics Academic Literature on individual companies ................................................... 26

Finance Industry Research..................................................................................................... 26

Economic Reasons to invest in SRI ESG Funds ....................................................................... 27

Investors’ Satisfaction/Promote ESG Causes/Shareholder Activism .................................... 27

Market Size ................................................................................................................................... 28

Global Market ........................................................................................................................... 30

US Market Size ......................................................................................................................... 31

ESG Incorporation by Money Managers and Financial Institutions ..................................... 32

ESG Incorporation by Institutional Investors ........................................................................ 34

Case Studies (General Electric, StatOil, Unilever) ....................................................................... 35

Introduction ............................................................................................................................... 35

General Electric ......................................................................................................................... 35

Background ............................................................................................................................ 35

Findings ................................................................................................................................. 36

Discussions ............................................................................................................................ 36

Evaluation .............................................................................................................................. 37

Statoil ........................................................................................................................................ 37

Background ............................................................................................................................ 37

Findings ................................................................................................................................. 38

Discussions ............................................................................................................................ 39

Evaluation .............................................................................................................................. 40

Unilever ..................................................................................................................................... 40

Concluding remarks ...................................................................................................................... 43

Bibliography ................................................................................................................................. 44

Appendix: Tables of Meta-studies from Miriam von Wallis and Christian Klein ....................... 52

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Executive Summary

SRI, known under many definitions including: Socially Responsible Investing, Sustainable and

Responsible Investing, and Sustainable and Responsible Impact Investing, has grown in popularity

in recent years. Today, an increasing number of financial institutions, asset managers, corporations,

and individual investors are seeking new ways to invest in companies that promote positive global

and community impact. While firms such as Candriam Investors Group have been at the forefront

of SRI practices, many organizations are attempting to incorporate SRI considerations into

traditional investment tools. This increase is occurring for many reasons, but one important one is

the increase in access to information about ESG (environmental, social, and governance)

performance of corporations. ESG rankings help to better inform investment decisions. Today we

see partnerships among consumers, corporations, individual governments, international

organizations and NGOs in the promotion of ethical and sustainable business practices and

investments. This report explores the history and evolution of SRI, the current and evolving

regulatory environment, the costs and benefits associated with sustainable and responsible

investing practices, the market size of SRI, and finally a discussion of three case studies: General

Electric, Statoil, and Unilever.

The field of SRI has evolved over time to a more selective and systematized approach for investing.

Beginning with the purposeful exclusion of investments in sectors such as weapons, tobacco, and

alcohol known as negative screening, investors have begun to create selection processes that

highlight areas of investment based on positive impact. Organizations like the Sustainability

Accounting Standards Board have been created to reflect a desire to standardize financial reporting

to include SRI. Additionally, more and more companies and technologies have emerged targeting

the collection and reporting of ESG data, as well as rankings and indexes of companies based on

ESG performance. Corporate Social Responsibility (CSR) has become almost universal in large

corporations. As consumers are able to gain more insight into the organization they are supporting,

additional pressure has been put on corporations to act responsibly and adhere to the principles of

ESG.

The relationship between financial markets and policymakers is constantly evolving, and the fast

development of new financial products needs to be properly regulated. In many jurisdictions,

fiduciary duty is widely considered as imposing obligations on trustees or other fiduciaries to

maximize investment returns. The consequence has been that ESG risks have tended to be

neglected in investment practice. This is changing, driven by two factors: the materiality of ESG

issues and the changing expectations of investors.

Different entities are imposing new regulatory requirements around ESG. For example, according

to a survey conducted globally by the World Federation of Exchanges (WFE), 57% of the

exchanges reporting require listed companies to disclose some ESG information beyond corporate

governance. At the same time, national regulatory systems in many countries are developing

progressively to promote integrated reporting covering sustainability issues. This report examines

some of the most important developments in individual regions.

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In terms of the size of the SRI market, as of the latest available data, the global SRI market included

$21.4 trillion in 2014 in assets under management including ESG incorporation and shareholder

resolutions. At that time Europe was the largest regional market, although the US grew faster,

closing the gap during the biennial 2012-2014. The largest investment strategy used in the SRI

space has historically been negative screening, which was also true in 2014. However, ESG

Integration is growing more rapidly and is closing the gap.

The American SRI market was $8.7 trillion in 2016 including ESG incorporation and shareholder

resolutions (ESG at $8.1 trillion, resolutions at $2.6 trillion, with some overlap). SRI in the US has

grown steadily, however, the growth experienced in the first decade of the 2000s averaged only 3%

per year, while since 2010 the average annual growth has been 19%, showing a sharp acceleration

in the uptake of SRI. In terms of types of investors, most of the assets including ESG incorporation

are managed by money managers ($8.1 trillion) while Institutional Investors managed $4.7 trillion

in 2016 (with $4.7 trillion of overlap). While the motivation that drives adoption of ESG

incorporation practices for money managers seems to be client demand, the main reasons driving

adoption by institutional investors are mission and social benefit.

The reasons to invest in the SRI ESG portfolios come primarily from three broad motivations:

financial, economic, and value-driven. Financial reasons include efforts to earn higher, less volatile

returns by seeking stocks of companies that over-perform on ESG metrics. Economic research has

by and large found that SRI ESG peer investments perform better or equally well to their non-SRI

ESG alternatives. Economic academic literature on individual companies has also found positive

relationships between CSR factors and company stock price.

Outside of financial reasons, many investors take into account economic impacts. The traditional

model of investments includes three primary characteristics of a security: Risk, Return and

Liquidity. Some investors now include a fourth characteristic as well: Sustainability, which may

lead investors to factor externalities (e.g. pollution) into their investment analysis.

There are investors for whom ethical reasons may influence or even outweigh purely financial and

economic investment drivers. These investors want investment returns in alignment with their

values, sometimes even if it means earning lower financial returns on their long-term investments.

Finally, the report examines three case studies to provide examples of the return on investment in

ESG initiatives, and discuss why Candriam’s SRI methodology could be an effective way of

analyzing a company’s long-term sustainability and growth.

The first case focuses on Ecomagination, GE’s most well-known and heavily invested sustainable

project that aims at enhancing resource productivity and reducing environmental impact. This

initiative not only fostered new revenue growth from its product innovations for GE, but also had

a significant positive impact on the company’s business reputation. The second case examines

Statoil’s sustainable practices which illustrates how a company from a highly controversial sector

(fossil fuels) could still be seen as a social responsible and environmentally friendly entity. Finally,

the Unilever case illustrates that a company with excellent product-quality control and

environmental-protection mechanism can gain advantage in business reputation and market

performance.

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The discussion of SRI is one at the forefront of the modernization of traditional investing and

increased alignment between individual and corporate values and financial interests. The ability to

invest directly in organizations based on performance metrics that include ESG factors is shaping

how many investors view returns. Investors are getting closer to being able to quantify

environmental and social impacts in traditional return terms. Additionally, corporations that excel

in various ESG areas, such as the three cases discussed, are becoming models. Challenges in the

field include the need for standardization of SRI definitions, reporting, and evaluation of

investment and corporation performance. SRI is a rapidly growing investment sector, and one that

is likely to continue to expand in the US context.

Introduction

Objectives of the Research Paper

The objective of this research is to provide the latest industry information on Sustainable and

Responsible Investments (SRI). This includes the history and evolution of the field, benefits and

costs of sustainable, responsible and ethical investment practices, market size and growth, select

specific company case studies, and a reflection of the future of SRI and the current challenges

facing the field.

This research is being carried out as a Capstone Project to provide the client - Mainstay

Investments/New York Life - with a detailed project report on the state-of-knowledge regarding

the above topics. This is to assist in the marketing and launch of the SRI investments arm of the

company which will execute Candriam’s investment approach in the United States.

In a Capstone Project “students pursue independent research on a question or problem of their

choice, engage with the scholarly debates in the relevant disciplines, and - with the guidance of a

faculty mentor - produce a substantial paper that reflects a deep understanding of the topic.”1 A

Capstone Project is based on the students’ prior academic work, professional experience and future

career utility.

Methodology

The SRI research conducted for this report has been divided into topics allocated to each Capstone

team-member. Each member researched the topics through academic research papers, industry

research reports, and internet sites. The results are presented in this report, which includes a

detailed bibliography. A detailed Project Control Plan was prepared to keep track of an ongoing

timeline, including deliverable deadlines and division of labor.

MainStay Investments

MainStay Investments is a U.S. investment management company based in Jersey City, New

Jersey. Founded in 1986, MainStay Investments’ parent company is New York Life Insurance

Company, the largest mutual life-insurance company in the United States, and one of the largest

life insurers in the world. MainStay Investments offers investors access to institutional money

management through its mutual funds, separately managed accounts, and non-traditional strategies;

1 Capstone definition from http://www.scps.virginia.edu/bachelor-of-interdisciplinary-studies/capstone

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over time MainStay has added several boutique investment advisory firms. MainStay has over

$101 billion USD in assets under management.2

Candriam

Candriam Investors Group is a leading pan-European multi-specialist asset manager with a 20-

year track record and a team of 500 experienced professionals. Managing about €94.5 bn AuM at

the end of March 2016, Candriam has established management centres in Luxembourg, Brussels,

Paris and London, and has experienced client relationship managers covering Continental Europe,

the UK, the Middle East and Australia. Its investment solutions cover five key areas: Fixed Income,

Equities, Alternatives, Sustainable Investments and advanced Asset Allocation. Through

investment solutions driven by strong convictions, Candriam has earned a reputation for delivering

innovation and strong performance to a long-standing, diversified client base in over 20 countries.3

Candriam Investors Group is a New York Life Company. To enhance its presence across the in

North America, Candriam is exporting its SRI expertise to the United States.

Candriam’s Approach

Candriam believes that investment opportunities and risks cannot be fully evaluated using

traditional financial metrics alone. Candriam believes that taking into account environmental,

social and corporate governance (ESG) criteria is a source of long term value that cannot be

captured by traditional financial analysis. By selecting the companies that manage ESG challenges

best in each sector, Candriam’s SRI “Best-In-Class” approach raises best practices standards in all

economic activities and contributes to sustainable economic growth. Candriam’s Best-in-Class

approach combines a stakeholder approach with a unique long-term macro approach,

supplemented by a normative and controversial activities check.4

Source: Candriam Company Presentation, Candriam Firm Overview & SRI Expertise (May 2016)

2 Mainstay Investments

3 Candriam.com

4 Candriam Company Presentation, Candriam Firm Overview & SRI Expertise (May 2016)

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History and Evolution of SRI

Today, a number of different definitions exist in the SRI space that can be problematic in

understanding what SRI is and how it has evolved. Unpacking the nuances in each definition and

focusing on the evolution of the definitions of SRI can actually foster further understanding of how

the field has developed and where it is today. The acronym SRI has been broken down into Socially

Responsible Investing, Sustainable and Responsible Investing, and more recently Sustainable and

Responsible Impact Investing. Yet, even in using the same acronym, firms can have different

understandings of what, for example, sustainability and responsibility actually mean in the context

of investment.

This section highlights intrinsic pieces in the history and evolution of SRI in the United States to

better understand how financial institutions have embraced this investment practice. It explores

trends in SRI, with the overarching trend of increased access to information as the driving factor

in the evolution of sustainable investing practices, in addition to efforts made in SRI evaluation

and reporting standardization. In the discussion of access to information and standardization in the

field of SRI, three concepts will be defined and analyzed: the creation and role of the Sustainability

Accounting Standards Board (SASB), ESG, defined as the Environmental, Social, and Governance

factors used to measure SRI performance, and Corporate Social Responsibility (CSR) and the way

corporations have embraced direct social and environmental impact.

Sustainable and Responsible Investing

Sustainable and Responsible Investing is a term used by MainStay Investments and Candriam

Investors Group, both under the umbrella organization of New York Life. According to the firms,

sustainable and responsible investing is “an investment approach that considers Environmental,

Social, and Governance (ESG) factors in portfolio selection and management.” 5 The firm

distinguishes its definition of SRI from that of Socially Responsible Investing based on screening

practices. Negative screening or the exclusion of investments in areas such as alcohol, tobacco,

gambling, or weapons is associated with Socially Responsible Investing; whereas positive

screening involves investment decisions based on “positive ESG performance relative to industry

peers.”6 In both positive and negative screening ESG factors can be utilized. New York Life does

note that while Socially Responsible Investing is the historical term, “Sustainable, Responsible,

and Impact Investing” is the “new standard.”7

Sustainable and Responsible Impact Investing

The United States Sustainable Investment Forum (US SIF) defines Sustainable and Responsible

Impact Investing as “an investment discipline that considers environmental, social and governance

5 "About." Sustainable and Responsible Investing. Accessed November 29, 2016.

http://www.nylinvestments.com/public_files/SRI/index_sri.html.

6 "Global Sustainable Investment Alliance (GSIA) Definitions." Accessed November 29, 2016.

http://www.nylinvestments.com/public_files/SRI/pdf/Candriam-GSIA-Definitions.pdf.

7 "About." Sustainable and Responsible Investing. Accessed November 29, 2016.

http://www.nylinvestments.com/public_files/SRI/index_sri.html.

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(ESG) criteria to generate long-term competitive financial returns and positive societal impact.”8

US SIF provides a list of examples of types of investors in sustainable and responsible impact

investing as ranging from individuals to foundations, religious organizations, venture capitalists,

and community development banks. It is important to note, however, that under the US SIF

definition of SRI, traditional investors such as asset managers are not mentioned.9While impact

investing is not the focus of this report, it is necessary to understand the distinction between

traditional investing or even sustainable investing and pure impact investing.

According to the Global Impact Investing Network (GIIN), impact investing is investing in

“companies, organizations, and funds with the intention to generate social and environmental

impact alongside a financial return. Impact investments can be made in both emerging and

developed markets, and target a range of returns from below market to market rate, depending

upon the circumstances.”10 Net Impact, an international organization aimed at social good, sees

the distinction between SRI and impact investing in investment strategy. The firm distinguishes

negative screening as being a tool used in SRI, and positive screening in impact investing. Another

important distinction made by Net Impact is in the expectation socially responsible investors and

impact investors seek from an investment. The former prioritizes financial return, while impact

investors vary in willingness to sacrifice financial return for social return.11

In addition to the aforementioned definitions, Forbes describes SRI as being synonymous with

green, mission, socially conscious and ethical investing.12 US SIF too provides additional labels

for sustainable investing practices that include “community investing” or “values-based

investing.”13 These terms, like those provided by Forbes, moves the conversation away from a

universal understanding of SRI, to an individual understanding of SRI. Value-based investments

are traditionally seen in the philanthropy community, but here extend to traditional investing

methods in allowing an individual to define his or her values and invest accordingly. These slight

differences could limit the potential for a true analysis of the history and evolution of the SRI space.

While important to explore, for the purposes of this report the term SRI will be used as an umbrella

term that incorporates all of the terms above. In the market sizing section of this report different

definitions will be explored, only further emphasizing the importance of standardization of SRI

definitions.

8 "SRI Basics." The Forum for Sustainable and Responsible Investment. Accessed November 29, 2016.

http://www.ussif.org/sribasics.

9 "SRI Basics." The Forum for Sustainable and Responsible Investment. Accessed November 29, 2016.

http://www.ussif.org/sribasics.

10 "What You Need to Know About Impact Investing." What You Need to Know About Impact Investing | The

GIIN. Accessed November 29, 2016. https://thegiin.org/impact-investing/need-to-know/.

11 "What Is the Difference between Socially Responsible Investing and Impact Investing?" Accessed November 29,

2016. https://www.netimpact.org/careers/what-is-the-difference-between-socially-responsible-investing-and-impact-

investing.

12“Socially Responsible Investing: What You Need To Know.” Forbes. Accessed November 29, 2016.

http://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-you-need-to-

know/#4ebaec855863.

13 "SRI Basics." The Forum for Sustainable and Responsible Investment. Accessed November 29, 2016.

http://www.ussif.org/sribasics.

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History of SRI

According to the Conference on Sustainable, Responsible, and Impact Investing, SRI origins can

be traced back to biblical times. The organization traces SRI to the Torah and Quran in directing

those of Judaism and Islam on how to invest. The Jewish teachings in particular focus on “investing

ethically” while the Quran teaches to avoid investing in certain industries including alcohol and

gambling.14 In the United States it is the Quakers and Methodists who brought “values-based

investing” to the country, with the Methodist investment evaluation method being closely aligned

with the modern concept of ESG. In the United States, the turning point for modern SRI began in

the 1960s.15

According to the Conference on SRI, a public cry for accountability and social responsibility in

particular swept the nation. The 1960s-1980s saw many mass movements led by university

students and faith-based organization on issues ranging from the Vietnam War and civil and

women’s rights to nuclear weapons, the environment, and apartheid in South Africa. 16 Melissa D.

Berry of Thomas Reuters notes in particular the pressure by university students to screen

investments away from South Africa, leading to $625 billion screened from the country before the

administration of De Klerk worked to end the apartheid system in 1993.17 The genocide in Sudan

became another topic of public pressure in 2006 with the creation of the Sudan Divestment Task

Force leading to the Sudan Accountability and Divestment Act of 2007 by Congress.18

Today, SRI has expanded beyond education and faith-based organizations to include large

corporations, financial institutions, and the general population. To better understand how SRI has

spread globally among financial institutions, one can look to the Principles for Responsible

Investing (PRI) created in 2006 under Kofi Annan, former Secretary General of the United Nations.

Founded on six principles, the PRI works to help its over 1,500 signatories incorporate the use of

ESG factors in investing strategies. 19 The Equator Principles is another network connecting

financial institutions to a framework of risk management “for determining, assessing, and

managing environmental risk in projects”. 20 The number of Equator Principles Financial

Institutions (EFPIs) span 35 countries and 85 Institutions.21 In the United States EFPIs include:

Bank of America Corporation, Citigroup Inc., Ex-Im Bank, J.P. Morgan Chase Bank, and Wells

14 "History of SRI." History of SRI | The SRI Conference. Accessed November 29, 2016.

http://www.sriconference.com/about/what-is-sri/history-of-sri.html.

15 "History of SRI." History of SRI | The SRI Conference. Accessed November 29, 2016.

http://www.sriconference.com/about/what-is-sri/history-of-sri.html.

16 "History of SRI." History of SRI | The SRI Conference. Accessed November 29, 2016.

http://www.sriconference.com/about/what-is-sri/history-of-sri.html.

17 "History of Socially Responsible Investing in the U.S." Sustainability. August 9, 2013. Accessed November 29,

2016. http://sustainability.thomsonreuters.com/2013/08/09/history-of-socially-responsible-investing-in-the-u-s/.

18 "History of Socially Responsible Investing in the U.S." Sustainability. August 9, 2013. Accessed November 29,

2016. http://sustainability.thomsonreuters.com/2013/08/09/history-of-socially-responsible-investing-in-the-u-s/.

19 "ABOUT THE PRI." About the PRI | Principles for Responsible Investment. Accessed November 29, 2016.

https://www.unpri.org/about.

20 Equator Principles. Accessed November 29, 2016. http://www.equator-principles.com/.

21 Equator Principles. Accessed November 29, 2016. http://www.equator-principles.com/.

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Fargo Bank.22 The Market Sizing and Regulatory Environment sections of this report provide data

on the increases of SRI in financial institutions and the changes within the US regulatory systems

that have fostered an increase in SRI.

Sustainability Accounting Standards Board (SASB)

In 2014 Michael Bloomberg and Mary Schapiro wrote an opinion piece in the Financial Times

titled, “Give Investors Access to all the Information they Need.”23 The article reflects on the

standardization challenges that led to the creation of the Sustainability Accounting Standards

Board and provides predictions for the future of sustainability accounting. In the article they

describe one of the main challenges in investment decisions, simply a lack of access to the best

information required to make an informed investment decision and evaluate the overall health of

a firm. Financial statements can only take investors so far in their analysis of a firm, but non-

financial data is often a great influencer on the future of a company’s operations in any field.

Bloomberg and Shapiro noted in particular the lack of standardization that existed in measuring

non-financial information in different sectors. In response to this challenge the Sustainability

Accounting Standards Board (SASB) was created in 2011, with the two authors later appointed as

chair and vice-chair. This Board was created with large asset managers ($17 trillion) and $8 trillion

of market capital-representing companies.

SASB is at the forefront of ensuring that corporate entities disclose sustainability information

according to its materiality standards24 SASB defines its purpose as evaluating “the environmental,

social and governance performance of companies through an account of their management of

various forms of non-financial capital associated with sustainability- environmental, human and

social- and corporate governance issues, which they rely upon for sustained, long-term value

creation.”25 While some non-financial assets do have a place in accounting, SASB has worked to

define indicators and measurements to signal sustainability in financial accounting. Bloomberg

and Schapiro note that “adopting non-financial standards will be an important step forward for

transparency in our capital markets. It will help set our companies on a course for long-term growth.

In the process, it will also make our economy more resilient and competitive, protecting it against

costly risks that – once they are known and properly valued – can be avoided.”26

In addition to understanding SRI, it is also necessary to understand ESG and CSR, two terms

closely related to SRI and the measurements used to determine the ranking of a firm according to

its social and environmental impact as well as the strength of the firm’s leadership.

22 Secretariat, The EP. "EP Association Members." Equator Principles. Accessed November 29, 2016.

http://www.equator-principles.com/index.php/members-reporting.

23 Bloomberg, Michael, and Mary Schapiro. "Give Investors Access to All the Information They Need." May 19,

2014. Accessed November 29, 2016. https://www.ft.com/content/0d9ccea6-db66-11e3-94ad-00144feabdc0.

24 Sustainability Accounting Standards Board. Accessed November 29, 2016. http://www.sasb.org/.

25 "Conceptual Framework of the Sustainability Accounting Standards Board." October 2013, 3, accessed

November 29, 2016. http://www.sasb.org/wp-content/uploads/2013/10/SASB-Conceptual-Framework-Final-

Formatted-10-22-13.pdf.

26 Bloomberg, Michael, and Mary Schapiro. "Give Investors Access to All the Information They Need." May 19,

2014. Accessed November 29, 2016. https://www.ft.com/content/0d9ccea6-db66-11e3-94ad-00144feabdc0.

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ESG

ESG stands for Environmental, Social and Governance factors employed by some investors in

their investment decisions. According to the Principles for Responsible Investment, the

Environmental category can include any act a company engages in to prevent climate change,

deforestation, waste and pollution, greenhouse gas emissions, or the depletion of natural resources.

PRI defines Social in terms of labor conditions including the health and safety of employees and

stringent child labor and slavery policies, workplace diversity, and efforts to engage the local

community. Governance includes board diversity, tax strategy, corruption and bribery, executive

compensation, and political affiliation through donations and lobbying.27 These factors will be

further explored in the case study section where General Electric, Stat Oil, and Unilever will be

used to examine company alignment with ESG factors.

PricewaterhouseCoopers LLP notes a divide that exists between firms and investors on the value

placed on ESG. According to the audit firm, 65% of corporates see ESG factors as being very

important to the very center of their business strategies, while only 31% of investors see the factors

as very important to equity investment decisions. Within these two areas, each segments views

ESG as having a different contribution to risk mitigation and long-term growth. 35% of corporates

use ESG in targeting long-term growth and only 24% use it for risk reduction. On the other hand,

for investors 60% targets risk reduction while only 19% is aimed at long-term growth.28

The International Integrated Reporting Council is one organization that has fostered a great

increase in sustainable reporting. The organization defines itself as “a global coalition of regulatory

investors, companies, standard setters, the accounting profession and NGOs. The coalition is

promoting communication about value creation as the next step in the evolution of corporate

reporting.”29 Now in its Breakthrough Phase, the IIRC is working with partners such as the SASB,

World Business Council for Sustainable Development, and International Federation of

Accountants to provide a framework for integrated reporting.30

In order to actually perform SRI based on ESG factors, the standardization of these factors is

crucial. ESG usage has increased due to regulatory changes and the development of ESG data

providers according to Business for Social Responsibility (BSR).31 Like the creation of SASB,

more and more firms are either being created specifically to define and rate ESG performance, in

addition to traditional ratings agencies who have created new indexes based on sustainability

scores. It is however important to note that as more firms have begun rating ESG performance,

27 "What Is Responsible Investment?" Principles for Responsible Investment. Accessed November 29, 2016.

https://www.unpri.org/about/what-is-responsible-investment.

28 "Investors, Corporates, and ESG: Bridging the Gap." October 2016. Accessed November 29, 2016.

http://www.pwc.com/us/en/governance-insights-center/publications/assets/investors-corporates-and-esg-bridging-

the-gap.pdf.

29 "Integrated Reporting." Accessed November 29, 2016. http://integratedreporting.org/the-iirc-2/.

30 "IIRC Partners." Integrated Reporting. Accessed November 29, 2016. http://integratedreporting.org/the-iirc-

2/iirc-partners/.

31 "Trends in ESG Integration in Investments." August 2012. Accessed November 29, 2016.

https://www.bsr.org/reports/BSR_Trends_in_ESG_Integration.pdf.

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standardization issues have emerged.32 Today it is crucial to create more alignment between

organizations over the metrics used for ESG.

Looking at sustainability indexes, the first sustainability index of its kind, the Dow Jones

Sustainability Index (DJSI) was created by Dow Jones in 1999. The Dow Jones Sustainability

Index was created in cooperation between S&P and RobecoSAM.33 RobecoSAM defines its ESG

research in terms of being “pioneers” in the collection and reporting of ESG data. The data is

sourced from over 3,400 international companies using 80-120 “industry-specific questions.”34

Shortly after the creation of the DJSI, FTSE4Good, now under the FTSE Group, launched in 2001.

FTSE4Good released a report in 2011 titled “10 years of impact and investment” which made a

connection between companies with high ESG scores and a greater market beta than those with

low scores.35 The company uses a “risk relative scoring method” to determine the ESG score of a

given firm.36

Morningstar, based in Chicago, is at the forefront of sustainable investment scoring with a focus

on investors, advisors, and asset managers.37 Morningstar creates its indexes based on data from

Sustainalytics. The firm also notes the increase in ESG reporting by firms and the increase of

professional and academic research on firm ESG practices.38 Using the data from Sustainalytics,

Morningstar creates an “asset weighted average” of the scores in order the formulate a Portfolio

Sustainability Score, which has deducted the Morningstar-created Portfolio Controversy Score.

The Portfolio Sustainability Score then is measured against those of industry peers in order to

create the Morningstar Sustainability Rating.39 Thomson Reuters and Bloomberg have created

large company focuses on sustainability and ESG data.40 Thomas Reuters compiles its ESG data

based on technology from Insight360 on Eikon in its own database of over 400 metrics and 6,000

companies worldwide.41 In addition to reporting on ESG and SRI, the Bloomberg Terminal has

expanded in its data to include that of RobescoSAM in its ESG function. Rebecca Pomfret, an

32 Tomlinson, Brian. "ESG and Fiduciary Duties: A Roadmap for the US Capital Market." The Harvard Law School

Forum on Corporate Governance and Financial Regulation ESG and Fiduciary Duties A Roadmap for the US

Capital Market Comments. November 1, 2016. Accessed December 01, 2016.

https://corpgov.law.harvard.edu/2016/11/01/esg-and-fiduciary-duties-a-roadmap-for-the-us-capital-market/.

33 "DJSI Family Overview | Sustainability Indices." Accessed November 29, 2016. http://www.sustainability-

indices.com/index-family-overview/djsi-family-overview/.

34 "About Us." Sustainability Indices | Sustainability Indices. Accessed November 29, 2016.

http://www.sustainability-indices.com/.

35 "FTSE4GOOD. 1O Years of Impact & Investment." FTSE, 15, accessed November 29, 2016.

http://www.ftse.com/products/downloads/FTSE4Good_10_Year_Report.pdf.

36 "ESG-Ratings." FTSE. Accessed November 29, 2016. http://www.ftse.com/products/indices/F4G-ESG-Ratings.

37 "The Morningstar Sustainable Investing Handbook." Morningstar. Accessed November 29, 2016.

http://corporate1.morningstar.com/Morningstar-Sustainable-Investing-Handbook-2/.

38 "The Morningstar Sustainable Investing Handbook." Morningstar, 3, accessed November 29, 2016.

http://corporate1.morningstar.com/Morningstar-Sustainable-Investing-Handbook-2/.

39 "ESG Research Data." Thomas Reuters, 4, accessed November 30, 2016.

40 "ESG Data Usage | Sustainability at Bloomberg | BCAUSE | Bloomberg L.P." Bloomberg.com. Accessed

November 30, 2016. https://www.bloomberg.com/bcause/customers-using-esg-data.

41 "ESG Research Data." Thomas Reuters. Accessed November 30, 2016.

13 |

ESG Product Manager at Bloomberg describes this partnerships in terms of helping “financial

professionals consider relevant ESG data into their decision-making.42

Corporate Social Responsibility (CSR)

According to the OECD, Corporate Responsibility relates to the “fit” and mutual dependence

between businesses and the societies in which they operate. The act of corporate responsibility

therefore is any action taken by businesses to further this relationship. Over time more and more

corporations have engaged in activities that have shown to society their commitments to this

relationship and to abide by legal and ethical standards, such as the development of policy

statements and later management systems. In starting these initiatives, corporations work closely

with government bodies, NGOs and labor unions.43

CSR Trends

The Economist published an article in January of 2008 titled “A Stitch in Time How companies

manage risks to their reputation.” This article described CSR as a tactic employed by companies

aimed at “risk management.”44 Risk management has been an important issue for organizations

throughout time but has increased due to the greater amount of information available on company

performance and policies. This article addresses the evolving nature of risk management and the

role of CSR. The author does not argue that risk management is the only reason for companies

engaging in CSR at the time, but makes a compelling argument for CSR campaigns that

immediately follow bad press about a corporation. One law, the Alien Tort Claims Act is used to

prosecute companies on American soil whose human rights violations were committed abroad.

This Act is an example of a legal instrument that has caused scandals for many corporate entities.

In fact, the author writes that the “CSR industry believes that a broader understanding of the world

in which they operate can help companies manage risks better.”45

It is important to note the role that globalization has played in the changing legal environment for

firms operating abroad, as well as the role that CSR has played in reputation risk mitigation. As

firms have begun to outsource parts of their service, operations, and manufacturing, less oversight

is available to management. Violations can occur at the hands of contracted organizations

employed by the corporations themselves. With globalization, the duty of firms to maintain ethical

practices is more complicated, but also increasingly necessary. As a result, one CSR trend at the

time was to increase international codes on how certain industries operated globally, often in

partnership with UN organizations and NGOs. One example is the Kimberley Process certification

that emerged in diamond import and export46, or the Ethical Trading Initiative targeting workers’

42 "Bloomberg ESG Function for Sustainability Investors Adds RobecoSAM Data | Bloomberg L.P."

Bloomberg.com. September 29, 2016. Accessed November 30, 2016.

https://www.bloomberg.com/company/announcements/esg-function-adds-robecosam/.

43http://www.oecd.org/corporate/mne/corporateresponsibilityfrequentlyaskedquestions.htm

44 "A Stitch in Time." The Economist. January 19, 2008. Accessed November 30, 2016.

http://www.economist.com/node/10491043.

45 "A Stitch in Time." The Economist. January 19, 2008. Accessed November 30, 2016.

http://www.economist.com/node/10491043.

46 "The Kimberley Process." Global Witness. April 1, 2013. Accessed December 1, 2016.

https://www.globalwitness.org/en/campaigns/conflict-diamonds/kimberley-

process/?gclid=CPnqjbDW09ACFZZMDQodrMoKEQ.

14 |

rights.47 At the time of the article’s publication, 2008, the editor of Ethical Corporation magazine,

Toby Webb predicted that the future of CSR would trend towards anti-corruption. CSR according

to Hannah Jones of Nike uses the term “return on investment squared” to describe the benefits to

society as well as investors that come from CSR programs.48

Anti-corruption has been very much at the forefront of efforts taken by international organizations

for many years. In 2000 the United Nations Global Compact was founded on ten principles in four

categories: Human Rights, Labour, Environment, and Anti-corruption. While the United Nations

was founded on the partnership and collaboration of the governments of 192 nations, the Global

Compact focuses on business, and more specifically, private corporations. Principle 10 of the

Global Contract notes that “Businesses should work against corruption in all its forms, including

extortion and bribery.”49 Companies here are able to become signatories of the “Anti-corruption

Call to Action” in order to pressure governments to strengthen anti-corruption legislation and

become a model for anti-corruption practices. Anti-corruption has continued at the forefront of the

United Nations Sustainable Development Goals (SDGs) of 2016 in goal 16: “Promote just,

peaceful and inclusive societies.”50 The SDGs highlight the world’s most pressing issues and the

ways impact can be measured in the next 15 years. Clearly corruption remains a global issue but

corporations have used anti-corruption policies as a focus for CSR activity, thereby promoting

their commitment to fighting industry corruption.

In January of 2016 Tim McClimon of American Express published his predictions for CSR trends

in 2016. Each trend focuses on the growth and universality of CSR. The first trend predicted by

McClimon is the change of CSR practices to mandatory from voluntary. In 2016, EU member

states will be required to disclose a number of company policies including: bribery and anti-

corruption, diversity of board, human rights respect, environmental, and benefits for employees

and society. Similar CSR disclosure requirements already exist in France, Singapore, and Denmark.

Certain countries, namely India and Mauritius, have actually created a mandatory donation amount

to CSR programs of 2% pre-tax income for corporations. McClimon’s second prediction focuses

on CSR reporting. Here he predicts that CSR reports will shift to a report on mandatory required

CSR completion and CSR activities intrinsic to a company’s business. What he terms “materiality

assessments” will show the CSR activities important to key stakeholders and will look like

financial and management reports. This focus on materiality is very much aligned with the mission

of the SASB. The third prediction shows an increase in uncertainty in the true nature of an

organization. This comes at the obscurity already present between not-for-profits, for-profit firms,

and even B and Benefit Corporations, which will be further explained in the regulatory section,

engaging in activities towards the social good. Lastly, McClimon argues against those who have

47 "The Ethical Trading Initiative (ETI) Is a Leading Alliance of Companies, Trade Unions and NGOs That

Promotes Respect for Workers' Rights around the Globe." Ethical Trading Initiative | Respect for Workers

Worldwide. Accessed December 01, 2016. http://www.ethicaltrade.org/.

48 "A Stitch in Time." The Economist. January 19, 2008. Accessed November 30, 2016.

http://www.economist.com/node/10491043.

49 "The Ten Principles | UN Global Compact." The Ten Principles | UN Global Compact. Accessed November 30,

2016. https://www.unglobalcompact.org/what-is-gc/mission/principles.

50 "Peace, Justice and Strong Institutions - United Nations Sustainable Development." United Nations. Accessed

November 30, 2016. http://www.un.org/sustainabledevelopment/peace-justice/.

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said that CSR is becoming outdated in predicting further growth and increased alignment

throughout an organization towards CSR programs.51

Additional predictions made by Maeve Miccio of CSRwire for trends in 2016 include: increased

influence by employees of CSR initiatives in organizations, increased public-private partnerships

on CSR, and increased organization around initiatives created by the international community.52

Susan McPherson of Forbes also included two additional predictions for 2016 that are extremely

relevant to the evolution of CSR: social justice and climate change.53 In social justice we have seen

brands creating campaigns surrounding relevant social justice issues that in the past have been

limited to the political space. Likewise, climate change is an issue that is growing in the CSR realm

and is at the forefront of the environmental area of ESG.

SRI Trends

One of the greatest trends at the center of SRI is the increase in access to information. Data

collection and distribution from outside sources as well as company transparency have allowed

consumers and investors to incorporate additional data into their decision making on purchases

and investments. In addition to the use of ESG factors and SASB reporting, a number of indices

exist ranking companies according to CSR and SRI performance. According to Forbes, Microsoft,

Google, the Walt Disney Company, and BMW are some of the top companies for CSR. Individual

and corporate sustainable investments are increasing with the increase of reporting through the

various ranking and index systems highlighted.54

Another important area to consider in the trends of SRI is how focus areas of sustainable and

responsible investments have changed over time. In 2014 Barclays, in conjunction with The

Economist Intelligence Unit produced a report titled, “Women in Focus Gender diversity and

socially responsible investing.” This report compares “Rankings of ESG issues mentioned in the

financial press” in 2009 and 2014. In 2009 the top 15 issues were: sustainable energy, sustainability,

compensation, health, social equality, labor standards, political conflict/oppression, lending

practices, regulation/taxation, fossil fuels, governance, environment, diversity, agriculture/food,

and ethical issues. In 2014 the list shifted significantly with diversity moving from 13th to 6th.55

President and CEO of Pax World Management, Joseph Keefe, writes that “women are more

inclined than men to want their investments aligned with certain social and environmental

51 McClimon, Tim. "2016 Trends in Corporate Social Responsibility." CSR Now! January 4, 2016. Accessed

November 30, 2016. http://about.americanexpress.com/csr/csrnow/csrn177.aspx.

52 Miccio, Maeve. "Five CSR Trends to Watch for in 2016." CSRwire Talkback. December 11, 2015. Accessed

November 30, 2016. http://www.csrwire.com/blog/posts/1678-five-csr-trends-to-watch-for-in-2016.

53 McPherson, Susan. "5 CSR Trends That Will Blossom In 2016." Forbes. January 8, 2016. Accessed November

30, 2016. http://www.forbes.com/sites/susanmcpherson/2016/01/08/5-csr-trends-that-will-blossom-in-

2016/#641b1a84742a.

54 McPherson, Susan. "5 CSR Trends That Will Blossom In 2016." Forbes. January 8, 2016. Accessed November

30, 2016. http://www.forbes.com/sites/susanmcpherson/2016/01/08/5-csr-trends-that-will-blossom-in-

2016/#641b1a84742a.

55 "Women in Focus Gender Diversity and Socially Responsible Investing." Barclays. 2014, 14, accessed November

30, 2016. https://www.investmentbank.barclays.com/content/dam/barclayspublic/docs/investment-bank/global-

insights/women-in-focus-gender-diversity-and-socially-responsible-investing-2.4mb.pdf.

16 |

values.” 56 As more women have taken executive positions, this investment alignment has

increasing influence over the investment practices of corporations. [cite?]

The influence of the millennial generation is one that must be considered in sustainable investing

trends. According to Morgan Stanley, millennial investments from those surveyed tend to focus

on funds relating to clean energy (33%), positive screening (36%), and those associated with

positive change (34%). This information came from a poll of 1,003 25-75-year-old high net worth

(HNW) investors. The poll found that of millennials today, 66% are “familiar” with the concept

of SRI.57 Calvert Investments furthers this statistic of familiarity by stating that this is twice the

percentage of familiarity than other generations. They also note that the millennial generation is

also twice as likely as other generations to actually invest according to SRI practices.58 In a study

by Deloitte, findings show a strong connection between millennials and an alignment of values in

corporations. Those surveyed see ethical behavior by corporations as greater than previous years

and “judge the performance of a business on what it does and how it treats people.”

The millennial viewpoint, according to Deloitte, is very much focused on how employees are

treated and the job creation taken by employers. Therefore, many are heavily influenced by

rankings produced on the best places to work. Additionally, TIAA-Cref Asset Management in a

report titled, “Socially responsible investing: Strong interest, low awareness of investment

options”, notes that of the participants in their survey of those under the age of 35, 76% are “very

interested” or “interested” in SRI (as compared to 64% of all participants). While the interest is

clear, 67% of women under the age of 50 and 71% of millennials actually do not know what

options are available to them for responsible investments.59 As the millennial generation adds to

what has become a more diverse workforce, additional pressure is put on organizations to invest

responsibly. Yet, it is necessary to fully educate the population on how best to invest responsibly

in order for individuals to better realize their interests through their investments.

Global Regulatory Environment

The relationship between financial markets and policymakers evolves constantly. The rapid

development of financial products needs regulation. Especially for ESG, sufficient regulation is

needed to provide clarity and safeguards within the financial industry.

56 Keefe, Joseph F. "Women and Sustainable Investing." Pax. Accessed November 30, 2016.

http://paxworld.com/system/storage/19/31/5/2910/20131010_women_and_sustainability.pdf.

57 "Investing in the Future: Sustainable, Responsible and Impact Investing Trends." Morgan Stanley. April 20,

2016. Accessed November 30, 2016. http://www.morganstanley.com/ideas/sustainable-investing-trends.

58 Ford, Lynne. "Why Women and Millennials Are Likely to Drive Growth in Responsible Investing." Calvert

Investments. April 2016. Accessed November 30, 2016. http://www.calvert.com/perspective/women-and-

investing/women-drive-growth.

59 "Socially Responsible Investing: Strong Interest, Low Awareness of Investment Options Survey of TIAA-CREF

Retirement Plan Participants—2014." TIAA-CREF Asset Management. 2014. Accessed November 30, 2016.

https://www.tiaa.org/public/pdf/survey-of-TIAA-CREF-retirement-plan-participants.pdf.

17 |

Fiduciary duty

What is it and who has it60

What is fiduciary duty?

Fiduciary duties (or equivalent obligations) exist to ensure that those who manage other people’s

money act in the interests of beneficiaries.

Fiduciary duties are generally seen as requiring a higher standard of performance than those that

are generally imposed in contracts. The most important fiduciary duties are:

Loyalty: fiduciaries should act in good faith in the interests of their beneficiaries, should

impartially balance the conflicting interests of different beneficiaries, should avoid

conflicts of interest and should not act for the benefit of themselves or a third party;

Prudence: fiduciaries should act with due care, skill and diligence, investing as an

‘ordinary prudent man’ would do.

Who has fiduciary duty?

In investment, the most common fiduciaries are the trustees of trusts or pension funds. Beyond

trustees, different jurisdictions have different interpretations of who exactly holds fiduciary

obligations and who simply has duties of care. For instance, in the UK investment consultants do

not generally define themselves as fiduciaries, whereas they are accepted as such in the United

States. Moreover, in the US, under the Employee Retirement Income Security Act (ERISA), asset

managers have direct fiduciary obligations, and the appointment of asset managers is itself a

fiduciary function. In contrast, in the UK where fiduciary obligations are not defined in this way,

some asset managers believe that their relationship with clients has a fiduciary character whereas

others consider the relationship to be limited to the contract between them.

The changing landscape

In many jurisdictions, fiduciary duty is widely considered as imposing obligations on trustees or

other fiduciaries to maximize investment returns. The maximization of return may have led to an

increasingly shorter-term investment focus. Consequently, ESG risks were often neglected in

practice as the appropriate balance between short- and long-term return shifted. Long-term and

systemic risks to savers have been overlooked, and there has been relatively low demand for active

engagement directed at the creation of long-term sustainable investment value.61

This perception is changing, driven by two factors. First, ESG issues are gaining credibility. The

materiality of ESG issues helps make the argument that investors should not take into account

these factors in investment practice has become less tenable. The 2005 Freshfields Report62 on

fiduciary duty stated:

“…in our opinion, it may be a breach of fiduciary duties to fail to take account of ESG

considerations that are relevant and to give them appropriate weight, bearing in mind that some 60 Rory Sullivan, Will Martindale, Elodie Feller, and Anna Bordon. Fiduciary Duty in the 21st Century. UN Global

Compact, UNEP, and PRI, 2015.

61 Rory Sullivan, Will Martindale, Elodie Feller, and Anna Bordon. Fiduciary Duty in the 21st Century. UN Global

Compact, UNEP, and PRI, 2015.

62 Reported by the law firm of Freshfields Bruckhaus Deringer, commissioned by the United Nations Environmental

Program Finance Initiative (UNEP FI).

18 |

important economic analysts and leading financial institutions are satisfied that a strong link

between good ESG performance and good financial performance exists”.

When social factors materially impact the financial performance of an investment, or when there

is a consensus among the fund’s beneficiaries that social factors should have weight in investment

decisions, SRI is necessary.63

The second driver of the changing landscape are investor expectations. As more and more

investment organizations make commitments to responsible investment, it is likely that the duties

that investors owe their clients will also evolve to reflect these changes. That is, the interpretation

of fiduciary duty, both in practice and in law, is likely to be much wider than at present. As a result

of the global financial crisis, investors are increasingly expected to take into account factors such

as systemic risks and “black swan” events, as well as the insights from areas such as behavioral

finance, in their investment decisions.

South Africa

South African law is recognized as pioneer in incorporating ESG factors into fiduciary duties.

Following the global financial crisis, Regulation 28 to the Pension Funds Act was overhauled in

2011 to modernize outdated regulations, reduce systemic risk, and improve protection for

pensioners. In the specific context of ESG integration, the most notable change was the additional

of a requirement for retirement funds to consider ESG factors when making investment decisions.

Specifically, Regulation 28(2) (c)(ix) states: “Before making an investment in and while invested

in an asset the fund and its board must consider any factor which may materially affect the

sustainable long-term performance of the asset including, but not limited to, those of an

environmental, social and governance character”. The preamble to Regulation 28 explains that:

“Prudent investing should give appropriate consideration to any factor which may materially affect

the sustainable long-term performance of a fund’s assets, including factors of an environmental,

social and governance character. This concept applies across all assets and categories of assets and

should promote the interests of a fund in a stable and transparent environment”.64

United States

US SIF65 worked in a coalition with a diverse set of partners to persuade the Department of Labor

to rescind its 2008 bulletin on Economically Targeted Investments, which had discouraged

fiduciaries for retirement plans in the private sector from considering environmental and social

factors in their investments. The Department of Labor, which is responsible for enforcing the

ERISA, issued new guidance in 2015 that clarifies that fiduciaries of ERISA-governed pension

funds “may consider ESG goals as tie-breakers when choosing between investment alternatives

that are otherwise equal with respect to return and risk over the appropriate time horizon.” This

guidance also includes a recommendation that “environmental, social, and governance issues may

have a direct relationship to the economic value of the plan’s investment,” and thus these issues

63 William Sanders. Resolving the Conflict Between Fiduciary Duties and Socially Responsible Investing. Pace Law

Review, 35(2), 2014.

64 The Impact of Sustainable and Responsible Investment. The US SIF Foundation, 2016.

65 US SIF: The Forum for Sustainable and Responsible Investment

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“are not merely collateral considerations or tie-breakers, but rather are proper components of the

fiduciary’s primary analysis of the economic merits of competing investment choices.”66

Benefit Corps and B Corps

Among the top contributors to the advancement of ESG integration are the evolving corporate

entities known as benefit corps and B corps.

Benefit Corporations67

What are Benefit Corporations?

A benefit corporation is a legal way to incorporate a new type of corporate entity with modified

obligations including not only the pursuit of financial success, but also additional explicit purposes.

It involves higher standards of purpose, accountability and transparency:

● Purpose: Benefit corporations commit to creating public benefit and sustainable value in

addition to generating profit. Here, sustainability is an integral part of their value

proposition.

● Accountability: Benefit corporations are committed to considering the company’s impact

on society and the environment in order to create long-term sustainable value for all

stakeholders.

● Transparency: Benefit corporations are required to report, in most states annually and using

a third party standard, showing their progress towards achieving social and environmental

impact to their shareholders and in most cases the wider public.

Benefit corporations reject the myopic model of using profit maximization as the primary lens in

decision making. They are required to consider all stakeholders in their decisions. This gives them

the flexibility to create sustainable value over the long term, and even through exit transactions

such as IPOs and acquisitions.

Benefit Corporation Legislation

In the US, 31 states including the District of Columbia have passed benefit corporation legislation

and 7 states are currently in the process of creating this legislation. Benefit corporation legislation

has enjoyed an almost 90% approval rate from legislators in both parties.

Building on the success of benefit corporation legislation in the US, the nonprofit B Lab is already

working with governments in several countries to create and implement mission-aligned structures

to promote their use. So far, legislation in two jurisdictions outside the mainland United States and

Hawaii have passed – Puerto Rico and Italy. In 2016, legislation is moving forward in Australia,

Argentina, Chile, Colombia and Canada.

B Corporations68

What are B Corps?

B Corps are for-profit companies certified by B Lab to meet rigorous standards of social and

environmental performance, accountability, and transparency. Today, there is a growing

community of more than 1,600 Certified B Corps from 42 countries and over 120 industries.

66 The Impact of Sustainable and Responsible Investment. The US SIF Foundation, 2016.

67 http://benefitcorp.net/

68 https://www.bcorporation.net/

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A growing number of multinational and publicly-traded companies (e.g. Unilever and Danone) are

interested in engaging with the B Corp movement. However, a number of institutional and

practical barriers have made it hard for multinationals and publicly listed companies to earn B

Corp Certification. At the September 2015 launch of B Lab UK, B Lab announced that it is

establishing a Multinationals and Public Markets (MPM) Advisory Council. The council’s work

will last through 2017 and will result in a clear path to B Corp Certification for multinationals and

public companies.

Benefit Corporations vs B Corporations

Certified B Corporations and benefit corporations are often confused. They both meet higher

standards of accountability and transparency. Both create the opportunity to unlock our full human

potential and creativity to use the power of business for the higher purpose of solving society's

most challenging problems. Some companies are both incorporated as benefit corporations and

certified as B Corporations – others are just one or the other.

Table 1. Differences between B Corps and Benefit Corps69

Issue Certified B Corporations Benefit Corporations

Accountability Directors required to consider impact

on all stakeholders

Same

Transparency Must publish public report of overall

social and environmental performance

assessed against a third party standard

Same*

Performance Must achieve minimum verified score

on B Impact Assessment

Self-reported

Recertification required every two

years against evolving standard

Availability Available to every business regardless

of corporate structure, state, or country

of incorporation

Available as an alternative

incorporation status in 30 U.S. states

and D.C.**

Cost B Lab certification fees from $500 to

$50,000/year, based on revenues

State filing fees from $70-$200

Role of B Lab Certifying body and supporting 501c3,

offering access to Certified B

Corporation logo, portfolio of services,

and vibrant community of practice

among B Corps.

Developed Model Legislation, works

for its passage and use, offers free

reporting tool to meet transparency

requirements; No role in oversight

* Delaware benefit corps are not required to report publicly or against a third party standard

** Oregon and Maryland offer benefit LLC options

69 https://www.bcorporation.net/

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Corporate Disclosure

In July 2015, the World Federation of Exchanges (WFE) published an analysis report on ESG

initiatives across the globe based on a survey conducted in 2014, and responded by 56 member

exchanges in EMEA, APAC and Americas. The results indicate that, 57% (32) of the respondents

reported that listed companies on their markets were required to disclose some ESG information

beyond corporate governance, and nearly half of them (15) said that both the regulator and the

exchange itself required disclosure in some form. For those required by the regulator, 12 out of 17

respondents replied that it is a mandatory requirement for listed companies, with only 14% of

regulators’ requirements being voluntary. Whereas 8 exchanges had voluntary disclosure policies

in place, with only 3 others with mandatory disclosure. Most sustainability disclosure requirements

covered all the three dimensions of ESG, with 20 exchanges requiring some form of disclosing

environmental issues, though 18 exchanges said that in their jurisdiction, listed companies were

only required to disclose corporate governance information. Additionally, at least 22 different

sustainability-related indices have been created by members of WFE and there are also a number

of indices planned for the near future.70

Europe

EU Shareholder Rights Directive71

In April 2014, the European Commission published a proposal for the revision of the Shareholder

Rights Directive (Directive 2007/36/EC) requiring the disclosure of diversity and other ESG

information by certain large listed European companies. The proposal is being examined by the

co-legislators (European Parliament and Council). It would expand the areas to be covered in the

disclosure and implement a mandatory approach.

It includes a number of measures aimed at facilitating the exercise of shareholder rights and

enhancing those rights where appropriate. It also comes with additional transparency requirements

along the investment chain:

Mandatory disclosure by institutional investors and asset managers on their voting

engagement and certain aspects of asset management arrangements, in particular around

how they integrate long-term considerations into their investment policies;

Disclosure of the remuneration policy and individual remunerations, combined with a

shareholder vote;

Binding disclosure requirements on the methodology and conflicts of interests of proxy

advisors;

Creating a framework to allow listed companies to identify their shareholders and requiring

intermediaries to rapidly transmit information related to shareholders and to facilitate the

exercise of shareholder rights.

Asia

Across Asia, national regulatory systems are developing progressively to promote corporate

disclosure of ESG issues.

70 Exchanges and ESG Initiatives - SWG Report and Survey. World Federation of Exchanges - Sustainability

Working Group (SWG), 2015.

71 2014 Global Sustainable Investment Review. Global Sustainable Investment Alliance, 2015.

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Stock Exchanges72

The region’s stock exchanges are playing a critical role in enhancing ESG reporting.

In China, both the Shenzhen Stock Exchange (SZSE) and the Shanghai Stock Exchange

(SSE) have introduced comprehensive guidelines for listed companies.

In 2012, Hong Kong Exchanges and Clearing Limited (HKEx) introduced the ESG

Reporting Guidelines which currently are voluntary.

In October 2014, the Singapore Stock Exchange (SGX) announced that it is mandating

listed companies to publish sustainability reports

Government Leadership73

While most sustainable investment markets in Asia remain in the early stages of development, a

number of governments are actively promoting growth on a larger scale.

In Japan, 160 institutions, including the Government Pension Investment Fund and the

Pension Fund Association for Local Government Officials, endorsed the “Principles for

Responsible Institutional Investors” within six months of its introduction in February 2014

by Japan’s Financial Services Agency.

In Malaysia, the government has committed to promoting the country as a regional center

for sustainable investment, primarily by establishing ESG-related products, launching

dedicated investment funds, and adopting ESG principles for government-managed assets.

In South Korea, one of the first countries in Asia to embrace “green growth” as a

development strategy, the government has introduced initiatives to shift the country

towards a low carbon and resource efficient economy.

United States

Dodd-Frank Financial Reform Law74

In 2010, shareholder advocates in the United States won an important victory when the Dodd-

Frank Wall Street Reform and Consumer Protection Act was signed into law. It gave explicit

authority to the SEC to implement a rule to allow shareholders, within certain parameters, to

nominate directors to the boards of their portfolio companies and to have access to the company’s

proxy statement to make the case for their nominees. The law specified, too, that publicly traded

companies must allow shareholders – at least once every three years – to hold an advisory vote on

their executives’ pay packages – an important tool shareholders have used to hold management

more accountable.

Dodd-Frank provisions important to SRI investors:

Executive Compensation and Pay Disparity: Dodd-Frank includes a provision that

requires public companies to disclose CEO-to-worker pay ratios. The provision reflects

investor concern that the dramatic rise in US CEO pay levels over the past three decades

has come at the expense of shareholders and other stakeholders, including company

employees. Moreover, executive pay packages that are tied primarily to short-term

financial indicators and stock prices can provide incentives for CEOs to take excessive

72 2014 Global Sustainable Investment Review. Global Sustainable Investment Alliance, 2015.

73 2014 Global Sustainable Investment Review. Global Sustainable Investment Alliance, 2015.

74 The Impact of Sustainable and Responsible Investment. The US SIF Foundation, 2016.

23 |

risks. In August 2015, after years of increasing pressure from lawmakers and sustainable

and responsible investors awaiting action, the SEC issued the pay ratio disclosure rule. It

stipulates that companies would must disclose, beginning in 2017: the median of the annual total compensation of all its employees, except the CEO

the annual total compensation of its CEO

the ratio of those two amounts

Consumer Financial Protection Bureau: In response to the late-2000s financial crisis, in

which deceptive and predatory home lending practices were a significant contributing

factor, sustainable and responsible investors supported the Dodd-Frank Act’s creation of

the Consumer Financial Protection Bureau (CFPB) to enforce federal laws and issue

regulations to protect financial consumers. As of September 2015, the CFPB reports that

its enforcement activity has resulted in more than $11 billion in relief for over 25 million

consumers, and that its supervisory actions have resulted in financial institutions providing

more than $248 million in redress to nearly two million consumers. The Bureau has

handled over 700,000 complaints from consumers addressing all manner of financial

products and services.

Public Policy on Corporate Political Contributions75

Since January 2010, when the Supreme Court’s decision in Citizens United vs. Federal Election

Commission removed restrictions on political advertising and spending by corporations and unions,

concerned investors have looked to regulatory and legislative means to limit the damage from the

decision. In November 2011, US SIF asked the SEC to support a rulemaking petition that urged

the SEC to require full disclosure by companies of their political spending. As of February 2016,

the SEC had received more than 1.2 million comments on the petition – a record in SEC

rulemaking history. In addition to sustainable, responsible and impact investors and public interest

groups, 15 senators and 70 members of the House of Representatives contributed comments.

Although the SEC had announced in January 2013 that it would consider requiring public

companies to disclose political spending, this has not been on the its regulatory agenda in

subsequent years. Investors and other proponents of increased disclosure have been urging the

SEC to re-list the proposal on its regulatory agenda given the unprecedented support.

Public Policy on Climate Change Issues76

In January 2010, the SEC issued the guidance saying that companies should report to investors if

they are likely to face material impacts from climate-related developments in the following areas:

legislation and regulation, international accords and treaties, regulation or business trends, and the

physical impacts of climate change. A few months earlier, in October 2009, the SEC Division of

Corporation Finance had signaled its growing awareness of this issue when it issued guidance that

it would no longer allow companies to routinely omit shareholder proposals that ask companies to

evaluate risk from climate change and other health and environmental issues.

Regulatory challenges

Asset owners and asset managers are becoming increasingly aware of the risks and opportunities

related to ESG issues. But complying with new regulations affecting ESG investing and adhering

75 The Impact of Sustainable and Responsible Investment. The US SIF Foundation, 2016.

76 The Impact of Sustainable and Responsible Investment. The US SIF Foundation, 2016.

24 |

to voluntary codes could be challenging to incorporate into investment policies and portfolio

management investment processes.

Short or long term?

European Commission’s (EC’s) proposed amendment to the Shareholder Rights Directive,

intended to apply to all companies quoted on stock exchanges within the European Union (EU):

“…asset managers’ main concern has become their short-term performance relative to a

benchmark or to other asset managers. Short-term incentives turn focus and resources away from

making investments based on the fundamentals and longer-term perspectives, from evaluating the

real value and longer-term value creative capacity of companies and increasing the value of the

equity investments through shareholder engagement.”77

At first glance, this directive isn’t overtly ESG-related. However, the “long-termism” inherent in

the EC’s comments seems to encourage investors to look at the ESG credentials of the securities’

issuers, since a robust approach to ESG suggests a long-term focus.

Economic incentive or control?

While countries may be signatories to key accords and international treaties, the way in which they

implement ESG objectives into their national legal framework and/or enforce them differs widely.

Either economic incentive or the more-aggressive command-and-control approach is commonly

used to tackle environmental regulation.78

By creating a tax-based incentive program, European countries have constructed a full cost-benefit

analysis by helping companies understand both the monetary and environmental “costs” they are

contributing to. This approach to environmental control is widely non-existent in the United States,

which implements a control-and-command approach where the government sets strict emission

levels.79

Voluntary codes are subject to different interpretation across the globe, and they are not

enforceable to ensure consistent application. Whether these are determined at country, industry or

company level, every voluntary code can be deciphered to each segment differently.

Look forward and possible development

Better public policies have been developed as a result of the work of sustainable investors, and an

array of field-building and standard-setting organizations have been created – many of them started

and managed by SRI professionals. As ESG consideration becomes more accepted and widely

considered, we can expect that this process should lead to more specific laws and regulations –

similar to what we’ve seen in financial regulation.80

77 Mamadou-Abou Sarr, and Ansumana Bai-Marrow. The Challenges of ESG Investing - Regulation. Northern

Trust, 2015.

78 Mamadou-Abou Sarr, and Ansumana Bai-Marrow. The Challenges of ESG Investing - Regulation. Northern

Trust, 2015.

79 Mamadou-Abou Sarr, and Ansumana Bai-Marrow. The Challenges of ESG Investing - Regulation. Northern

Trust, 2015.

80 Mamadou-Abou Sarr, and Ansumana Bai-Marrow. The Challenges of ESG Investing - Regulation. Northern

Trust, 2015.

25 |

The 2016 US presidential election has brought unpredictable changes to the political environment

where skeptics allege it highly possible that strong deregulation moves will be implemented by the

new government, particularly to the Dodd-Frank Law. Regardless of potential changes in the US,

if current trends continue, other national governments likely will continue pushing for greater

transparency by investors and their agents around how they incorporate considerations of ESG

factors into their investment-making decisions.

Benefits/Costs of SRI

Financial Reasons to Invest in SRI ESG Funds

Economics Academic Literature on diversified investments

Global research has largely indicated that the SRI and non-SRI peers have yielded similar returns

historically or underperformed by a small amount of 25 basis points per annum on average.81 This

difference is not found to be statistically significant by most meta-studies. Meta-study refers to

study of other studies. In this case study of other studies comparing SRI vs. Non-SRI investment

portfolios. Only 17% or less of the meta-studies research indicates underperformance by the SRI

portfolios as is indicated by the graph below.82

Source: Graph of holistic meta-study by Miriam von Wallis and Christian Klein, 201583

This is for well-diversified portfolios like equity indexes, industry focused funds etc. Tables 1, 2

and 3 in the Appendix list most of this research.84

81 Richard Robb and Martin Sattell, ‘Socially Responsible/Impact Investing—Theoretical and Empirical Issues’

forthcoming in Capitalism and Society

82 For example, the Performance of Socially Responsible Investment study by Dr. Emma Stojstrom of the

Stockholm School of Economics covered 21 latest meta-studies on SRI investments out of which only 3 (14%)

suggest underperformance by the SRI ESG peer groups of investments. These are studies conducted over 2008-10.

83 Miriam von Wallis and Christian Klein, ‘Ethical requirement and financial interest: a literature review on socially

responsible investing’ Business Research, October 2015, Volume 8, Issue 1

84 Miriam von Wallis and Christian Klein, ‘Ethical requirement and financial interest: a literature review on socially

responsible investing’ Business Research, October 2015, Volume 8, Issue 1

26 |

Economics Academic Literature on individual companies

According to economic research, most empirical research (75-80%) finds positive relationships

between the CSR factors and the company stock price.85 However, some non-SRI sin stocks, like

gaming, tobacco and alcohol, outperform SRI returns historically but are not likely to replicate this

performance henceforth into the future because of increased cost of capital, penalties, and

competition.86

CSR primarily refers to the role of the business to satisfy the various stakeholders associated with

it which would include its employees, suppliers, communities and locales they operate from and

the well-being of their customers and society at large besides just the owners of its shares. The

CSR is also being increasingly studied in Management and Finance theories as to how it affects

the shareholders. Traditional finance theory focused on maximizing shareholder’s returns. Recent

research has demonstrated “that stakeholder-oriented societies have higher company values than

shareholder-oriented societies, which serves as proof of CSR’s compatibility with shareholder gain

maximization.”87

Finance Industry Research

A recent cutting-edge Morgan Stanley report on Mutual Funds found that “investing in

sustainability has usually met, and often exceeded, the performance of comparable traditional

investments.” 88 However, there is a debate about the performance around issues such as

definitions and classification of SRI portfolios etc. A microcosm of this debate can be found, for

example, in the Feb 2016 WSJ article ‘Does Socially Responsible Investing Make Financial Sense?’

The article presents two contrary viewpoints about the financial benefits of SRI ESG investments.

One point of view is that SRI ESG firms are generally undervalued and thus are bound to perform

better over time. This is because the CSR characteristics are not tangible as the financial returns

measuring profitability, growth etc. However, overtime the benefits of SRI ESG activities of the

firm manifest themselves in better financial returns and higher stock prices. The critics of SRI

ESG investments point to the definitions and standardization of the SRI ESG investments. But

these concerns seem redundant given that SRI ESG criteria are defined by different investor groups

apropos to their norms and ethical worldviews. On their desired SRI ESG patterns the investors

around the world have moved on to choose their investment funds which are estimated in trillions

of dollars.89

85 Table 4, Studies on the relationship between ethical behavior and company performance, Miriam von Wallis and

Christian Klein, ‘Ethical requirement and financial interest: a literature review on socially responsible investing’

Business Research, October 2015, Volume 8, Issue 1

86 Richard Robb and Martin Sattell, ‘Socially Responsible/Impact Investing—Theoretical and Empirical Issues’

forthcoming in Capitalism and Society

87 Allen, F., E. Carletti, and R. Marquez. 2007. Stakeholder capitalism, corporate governance and firm value,

working paper, SSRN.

88 Morgan Stanley’s 2015 report ‘Sustainable Reality: Understanding the Performance of Sustainable Investment

Strategies’ http://www.morganstanley.com/sustainableinvesting/pdf/sustainable-reality.pdf

89 Details about the market size of the SRI ESG funds can be found in the next section ‘Market Size’ on pg. 30

27 |

Economic Reasons to invest in SRI ESG Funds

Besides the financial reasons many investors take into account larger geo-economic and human

health reasons such as pollution, tobacco smoking and secondhand smoke, guns and violence etc.

“The [SRI ESG] investors thus believe they are fixing these market failures or missing markets

problem and thus adding economic value by making the economy more efficient.”90 There are

different categories of investors and many take into account externalities. The traditional basic

model of investments included three primary characteristics of a security: Risk, Return and

Liquidity. However, now a new paradigm which includes a fourth characteristic of investments -

sustainability/CSR/ESG SRI- is taking place in the world of finance:

Source: Investor needs in the investment process: Cengiz, Braun, von Nitzsch.91

Investors’ Satisfaction/Promote ESG Causes/Shareholder Activism

There are investors for whom other reasons may outweigh purely financial and economic

investment drivers. For example, in Islamic Finance usury is considered unethical, so is investing

in pork products or farms. So regardless of the financial benefits of these two investments those

averse to them will prefer to not have them in their investment portfolios. “As early as 1948, UK

church investors established their own investment portfolios considering ethical constraints.”92

Many funds didn’t invest in South Africa due to political ethical reasons in order to reject and

boycott that regime for its apartheid or social-racial segregation policy.

In the past couple of decades there has been an exponential increase in SRI ESG investment funds

signaling a clear shift in ‘consumer preferences’ for investment products opening a whole new

chapter in the field of Finance.93 This represents the fact that many investors want investment

returns in accordance with their values, which might be based on their religion or political

worldview.94 This category of investors want no moral qualms on getting their returns and thus

want to be happier more satisfied human beings irrespective of earning lower returns on their

medium to long term investments. Active impact investing may in fact foster ESG goals that the

90 Richard Robb and Martin Sattell, ‘Socially Responsible/Impact Investing—Theoretical and Empirical Issues’

forthcoming in Capitalism and Society

91 Cengiz, CBs, D. Braun, and R. von Nitzsch. 2010. Alpha-Vehikel oder Preis für das Gute Gewissen? Eine

Performanceanalyse ethischer Investments, Corporate Finance biz 1(4): 263–271

92 Sparkes, R. 2001. Ethical investment: whose ethics, which investment? Business Ethics: A European Review

93 For the latest market size data see Market Size section of this report Pg. 33

94 Pasewark, W.R., and M.E. Riley. 2010. It’s a matter of principle: the role of personal values in investment

decisions. Journal of Business Ethics 93(2)

28 |

investor may feel strongly about thus adding positive utility beyond just the prevention of moral

dissatisfaction and distress.

Research has shown that the SRI investors feel strongly about the ESG issues with 84% wanting

to avoid harmful companies; 73% wanting to support positive impact companies; and 69% looking

out for ethically clean investments.95

Research has shown that the SRI ESG investors are younger, comparatively better educated, with

many “working in caring professions” and even many educated middle-aged investors.96 Besides

private investors, institutional investors also seem to be moving to SRI. This implies large amounts

of investments being channeled into SRI ESG category. “Many institutional investors have

explicitly adopted the promotion of environmental, social and good corporate governance

compliant investing into their investment policy.”97

The economic research indicates that SRI fund flows are overall less sensitive to past returns than

conventional fund flows and that SRI investors are more likely to re-invest in funds they already

own.98 99 This clearly supports the idea that some categories of investors have non-economic

drivers for their investment.

The best-performing SRI funds receive the largest share of the inflow, but the poorest performing

SRI funds do not experience the similarly large outflows. This is due to SRI fund investors’

difficulty to find adequate ethical funds that match their non-financial goals. They have higher

search costs to determine a fitting alternative fund.100

Market Size

Sizing the SRI market is a challenge since most investors do not make any information about their

assets under management publicly available. Because of that, surveys are the only tool to put asset

figures together. However, surveys themselves also pose many challenges; first, finding all the

investors that have SRI assets under management is difficult; second they have to be willing to

answer the questions; and third, the responses they give are not verifiable.

On the one hand, if some investors are left out when doing the selection of respondents or they

choose not answer there may be an underestimation of the market. On the other hand, the responses

95 Lewis, A., and C. Mackenzie. 2000b. Support for investor activism among UK ethical investors. Journal of

Business Ethics 24(3)

96 Miriam von Wallis and Christian Klein, ‘Ethical requirement and financial interest: a literature review on socially

responsible investing’ Business Research, October 2015, Volume 8, Issue 1

97 Risklab. 2009. E.S.G. risk factors in a portfolio context.

http://www.risklab.com/media/ipe_0410_-esg_risk_in_a_portfolio_context.pdf

98 Benson, K.L., and J.E. Humphrey. 2008. Socially responsible investment funds: investor reaction to current and

past return. Journal of Banking and Finance 32(9)

99 Bollen, N.P. 2007. Mutual fund attributes and investor behavior. The Journal of Financial and Quantitative

Analysis 42(3)

100 Miriam von Wallis and Christian Klein, ‘Ethical requirement and financial interest: a literature review on

socially responsible investing’ published in Business Research, October 2015, Volume 8, Issue 1

29 |

may not be accurate as people that have interests in the industry might have incentives to inflate

their own numbers.

Beyond survey issues, definitional problems also are a relevant factor. The way SRI is defined can

change the size of the market dramatically. This is a critical matter since different organizations

tend to use different definitions. However, there has been a major move towards a consensus for

the purpose of market sizing. Most academic papers and industry reports refer to The Global

Sustainable Investment Alliance (GSIA) when talking about SRI market size. Because of that, the

industry is moving towards using GSIA definitions for this purpose. This means defining

“Sustainable investing or SRI as an investment approach that considers environmental, social and

governance (ESG) factors in portfolio selection and management, without drawing distinctions

between this and related terms such as responsible investing, socially responsible investing and

impact investing”.

It is also important to describe the different investment strategies, used to manage SRI assets;

according to the GSIA they are the following:

1. Negative/exclusionary screening: the exclusion of particular sectors or companies based

on specific criteria related to ESG.

2. Positive/best-in-class screening: selecting the companies to invest based on positive ESG

performance relative to peers.

3. Norms-based screening: only selecting the companies that fulfill minimum standards based

on international rules.

4. Integration of ESG factors: systematic and explicit inclusion of ESG factors into financial

analysis.

5. Sustainability-themed investing: investing in topics or assets related to sustainability.

6. Impact/community investing: investments where the financing is provided with a clear

social or environmental purpose.

7. Corporate engagement and shareholder action: using shareholder power to influence

corporate behavior.

For the reasons discussed above, the figures in this report come from GSIA for the global market

and from the American association member of GSIA called US SIF Foundation for the US market.

These associations publish biennial survey reports, and the GSIA report is a collection of the

surveys performed by the member associations in their respective regions.

30 |

Global Market

The global market figures discussed below come from only one source, the GSIA Global

Sustainable Investment Review. The GSIA seems to be the most reputable source for this data as

this report is cited by many academic101 and industry reports102.

The main issue when using GSIA’s reports is that in past reports “Global” figures only include

Europe, the United States, Canada, Asia and Australia. Also, this report is actually a collection of

surveys made by member associations, which might lead to inconsistencies as some questions are

not homogenous across regions. Furthermore, some of the questions are not mandatory so some

of the data gathered is not based on all investors.

The last GSIA Global Sustainable Investment Review report available is from 2014 - 2016 report

is likely to be released in the first quarter of 2017. In 2014 the global SRI market size was 21.4

trillion dollars in assets under management; this represents a 61% increase from 2012. When

comparing the regions included in the report most of the SRI volume come from Europe and the

United States. However, even though the former has been the leader in the field during the last

decades, the latter has been the fastest growing one with and expansion of 76% of the AUM in the

two-year period 2012-2014.

In terms of strategies, negative screening still held the largest share accounting for 14.4 trillion

dollars in 2014. However, ESG integration is growing more rapidly and reached $12.9 trillion

globally in 2014, more than doubling its 2012 level. Even though the industry as a whole has grown

significantly positive/best-in-class strategies stayed flat. However, this might be due a

101 Examples of academic papers citing GSIA Global Sustainable Investment Review include: Bozesan (2014), Revelli

(2016), Scholtens (2014), Shieh (2016), Tetiana (2014), Tokumaru (2016), Utz and Wimmer (2014), to name a few –

full citations were not included here due to space limitations but they can be found in the bibliography.

102 Examples of industry reports citing GSIA Global Sustainable Investment Review include: J.P. Morgan Private

Bank (March 2016), UBS: ETF Insights (2016), Oekom Research (May 2013), Morningstar Magazine

(December/January 2016)

$3,740

$6,572

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2012 2014

US

D B

illio

n

Responsible Investments Global Growth

Asia Australia/NZ Canada United States Europe

$13,261

$21,358Global: 61%

US: 76%

Source: GSIA

$8,758

$3,740

$589 $134 $40

$13,608

$6,572

$945 $180 $53

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Europe UnitedStates

Canada Australia/NZ Asia

US

D B

illio

n

SRI Growth per Regions

2012 2014Source: GSIA

31 |

methodological change in the US survey, which increased from three to five the number of

strategies from which the investor could choose 103.

US Market Size

The data on assets under management for the United States included in this report come from only

one source, the US SIF, as most academic104 and industry reports105 refer to their biennial report.

However, as opposed to GSIA global report, the 2016 US SIF report is already available.

According to US SIF, the American SRI market was 8.7 trillion dollars in AUM in 2016. This

figure includes ESG Incorporation and Shareholder Resolutions (ESG at $8.1 trillion, resolutions

at $2.6 trillion, with some overlap). This means that SRI assets account for one in five dollars

professionally invested in the US106.

103 Negative/exclusionary, ESG integration and positive/best-in-class in 2012 and added impact investing and

sustainability-themed investing in 2014. Norm-based screening was not included as one of the options in both years

in the US but it is included in Europe and Canada.

104 Examples of academic papers citing US Sustainable, Responsible and Impact Investing Trends report include:

Bilbao-Terol et al. (2016), Boerner (2015), DiPerna (2015), Dorfleitner et al. (2015), Mahn (2016), Soler-Domínguez

and Matallín-Sáez (2016), Unruh, et al. (2016), Viehs (2015) to name a few – full cites are available in the bibliography.

105 Examples of industry reports citing US Sustainable, Responsible and Impact Investing Trends report include: J.P.

Morgan Private Bank (March 2016), TIAA-CREF Asset Management (April 2015), Oekom Research (May 2013),

Sustainable Investor for SRI Connect (April 2010), Cascade Financial Strategies (), Morgan Stanley: Institute for

Sustainable Investing (March 2015), Morningstar Magazine (December/January 2016) to name a few – full cites are

available in the bibliography.

106 This is based on an estimation made by Cerulli Associates cited in the US SIF report that sized total US assets

under management at 40.3 billion dollars.

$8,280

$5,935

$4,589

$3,038

$999

$70

$86

$14,390

$12,854

$7,045

$5,534

$992

$166

$109

$0 $3,000 $6,000 $9,000 $12,000 $15,000

Negative

Integration

Engagement

Norms-based

positive

Themed

Impact Investing

USD Billion

Global Growth by Strategy

2014 2012

Source: GSIA

32 |

Note: the years showed in the chart correspond to the releases of US SIF Foundation’s report.

SRI in the US had a quite steady growth since 1995 (the only decrease was in the period 2001-

2003107). However, the growth experienced in the first decade of the 2000s averaged only 3% per

year, while since 2010 the average annual growth has been 19%, showing a sharp acceleration in

the uptake of SRI.

Going deeper in the analysis of the US SRI market, it is important to differentiate the types of

investors acting in the industry as they had dissimilar behaviors. Money managers and financial

institutions have a more holistic approach to SRI and had 8.1 trillion dollars in assets under

management in 2016. On the other hand, Institutional Investors, who had in 2016 4.7 trillion

dollars in AUM are still more inclined to use exclusionary strategies. These two types of investors

had 4.7 trillion dollars of overlapping assets.

ESG Incorporation by Money Managers and Financial Institutions

From the 8.1 trillion dollars in SRI assets under management, money managers and financial

institutions have the largest share in “not listed” products. This type of assets accounted for 66%

107 This decrease may be explained by a generalized drop in US capital markets. S&P 500 dropped 31% from the

beginning of 2001 to the beginning of 2003 - SRI data corresponds to the beginning of the year.

33 |

of the total SRI assets and 5.4 trillion dollars in 2016. This is explained by the lack of disclosure

of some investors. Aside from not specified assets, mutual funds account for the largest share and

totaled 1.7 trillion dollars in 2016, showing little growth since 2014 – only 3%.

Note: Other Investment Funds include variable annuities, ETFs, Closed-End Funds, Alternatives and Other Pooled

Products. The last two accounted for 98% of the assets in this category in 2016.

With respect to strategies, only 100 managers out of 300 voluntarily disclosed the ones they used.

These 100 managers had a total of 2.1 trillion dollars in SRI assets. Furthermore, they reported

that 1.5 trillion dollars, that is to say, more than 70%, employed ESG Integration strategies. The

second most used strategy, negative screening, was incorporated in 0.9 trillion dollars or 44% of

SRI assets. Each of the other three strategies108 included in the US survey were only used in 3%

or less of the assets.

The survey data implies that most of the times, money managers include more than one criteria

when analyzing SRI issues. In fact, according to US SIF survey, in 2016, 87% of SRI assets

included more than one criteria; 35% of the times more than five criteria were taken into account.

108 Positive/best-in-class, Impact investing and Sustainability themed investing

34 |

Moreover, a subset of 105 managers - with 2.9 trillion dollars in AUM - answered the question

related to motivation. Of those managers who answered, the vast majority -85%-, stated that the

main reason for incorporating ESG was Client Demand.

ESG Incorporation by Institutional Investors

The total SRI AUM these investors had in 2016 was 4.7 trillion dollars, an increase of 17% from

2014 or an average of 8% per year. This represents a slowdown from the growth shown in the

previous biennial when institutional investors expanded their SRI assets under management by

63%, averaging 28% per year.

Institutional investors are more inclined to use negative/exclusionary strategies than other

investors. From the 75 institutions - out of 477 captured in the US SIF 2016 Report - that disclosed

the investment strategies, 75% stated they used this type of strategy. However, this is below from

the 93% reported in 2014, when 182 out of 480 institutional investors responded this question.

Other strategies that were only disclosed to be used by 15% to 20% of the respondents in 2014

were up to at least 50% in 2016. Although we need to be cautions when drawing conclusions given

the decrease in the share of respondents to this question, this seems to indicate an increase in

complexity and a diversification in the strategies used by these investors.

Institutional investors’ motivations for incorporating ESG factors in their investments are very

different from the ones that money managers have. While the latter indicated that the most

important driver for them was client demand, the former stated this in only 31% of the cases.

Mission (86%) and Social Benefit (84%) were the main motives declared by the institutional

investors. The respondents to this question were 94 out of the 477 surveyed institutions.

35 |

Funds managed by the public sector were 2.7 trillion dollars or 57% of total AUM for institutional

investors. These investors include federal, state, county and municipal governments, as well as

public employees’ pension funds, totaling 184 institutions. The second largest share of SRI assets

were held by corporate retirement plans and investment portfolios. Less than 10 of these

institutions were included in the report but they held 1.5 trillion assets. In the third place in terms

of value of ESG assets were the Education Institutions as 82 of them held almost 0.3 trillion dollars.

Case Studies (General Electric, StatOil, Unilever)

Introduction

Corporate investment in environmental, social, and governance (ESG) practices has been widely

investigated in recent years. Studies show that a business corporation may benefit from these

resource allocations on multiple levels, ranging from higher market and accounting performance

to improved reputation and stakeholder relations. However, poor data quality and the lack of a

universally adopted framework for the disclosure of extra-financial information have hindered the

field of research. Candriam uses unique Best-In-Class approach, supplemented by Norm-Based

analysis, to analyse a company’s ability to manage their human, natural, social and economic assets

in order to ensure sustainable welfare. In this section, we will examine three case studies to provide

empirical analyses of the return on investment in ESG initiatives, and discuss why Candriam’s SRI

methodology could be an effective way of analyzing a company’s long term safety and growth.

General Electric

Background

General Electric, or GE, is an American multinational conglomerate corporation incorporated in

Schenectady, New York and headquartered in Fairfield, Connecticut, United States. The company

operates through four segments: Energy, Technology Infrastructure, Capital Finance and

Consumer & Industrial. In 2015, Fortune ranked GE the 8th largest firm in the U.S., as well as the

14th most profitable109.

109 http://beta.fortune.com/fortune500/general-electric-11

36 |

GE aligns sustainability means with its business strategy to meet societal needs while minimizing

environmental impact and advancing social development 110 . GE tracks its progress among

Environmental, Social, and Governmental factors and releases annual sustainability report to

address the general achievements in ESG practices.

Among all GE’s sustainable initiatives, Ecomagination is the most well-known and heavily

invested project that aims at enhancing resource productivity and reducing environmental impact

at a global scale through commercial solutions for customers and their own operations. In this case

study, we will focus on the details of Ecomagination and discuss its impact on the company’s

reputation and profitability.

Findings

Ecomagination is GE’s commitment to imagine and build innovative solutions to today’s

environmental challenges while driving economic growth. In 2005 GE launched its

“Ecomagination” initiative in an attempt to position itself as a “green” company. GE is currently

one of the biggest players in the wind power industry, and it is also developing new environment-

friendly products such as hybrid locomotives, desalination and water reuse solutions, and

photovoltaic cells. The company “plans to build the largest solar-panel-making factory in the U.S.,”

and has set goals for its subsidiaries to lower their greenhouse gas emissions. From year 2005 to

2015, GE has invested $17B in Ecomagination program111.

It has been ten years since the launch of General Electric’s multi-billion-dollar green brand

initiative, Ecomagination. Through the end of 2015, GE had invested $17 billion in clean tech

R&D through Ecomagination while generating $232 billion in revenue from its products. A decade

ago, GE was considered to be one of the worst polluters in the world - an environmental dinosaur

from the industrial revolution. In green circles GE’s name was tarnished, conjuring images of

greenhouse gases and toxic waste sites. It seemed no one would forget their notorious polluting of

the Hudson River with toxic chemicals for almost three decades after WWII112.

Today, GE’s reputation has done a 180. In fact, Fortune recently named the company one of the

world’s top global green brands. Thanks to Ecomagination, GE has spent 10 years putting its

money towards cleaner energy like wind and solar power, and cleaner technologies including

lower emission-aircraft engines and water purification technology. Not surprisingly,

Ecomagination is also one of GE’s most successful business initiatives of all time, having

generated up to $160 billion dollars in revenue for the company.

Discussions

Some consider Ecomagination a brand-makeover to solve a bad environmental reputation. Others

call it a PR strategy. In general, Ecomagination is a best practice of how a brand can be a powerful

driver of change. It is incredibly difficult to steer large, global organizations with hundreds of

business units and thousands of people in a particular direction. GE used the branding of

Ecomagination to navigate these changes successfully.

110 http://www.gesustainability.com/how-ge-works/sustainability-at-ge/

111 https://www.ge.com/about-us/ecomagination

112 http://www.huffingtonpost.com/dr-alexander-haldemann/startup-slideshow-test_b_7181672.html

37 |

There are, however, also some criticisms and doubts on the projects. A Harvard Business Review

article by Andrew Winston argues that GE is avoiding hard choices about Ecomagination. When

the company committed $10 billion in R&D for “clean tech” technology by 2020, it put at the top

of the list of priorities a goal to develop alternative water technologies for fracking natural gas.

Fracking is contentious process, but one that even some major environmentalists have supported

as long as there is no significant methane leakage during extraction (which negates the greenhouse

gas reduction that comes from substituting gas for coal)113.

Despite some criticism, the overall campaign was successful, especially in the area of

communication. Many businesses and government sectors talked about Ecomagination and

adopted the idea. Since the government had a need for Ecomagination, it opened a lot of doors for

GE. However, it was noted that Ecomagination moved too slowing in its product development.

There are not enough fulfilment of products to reflect its concept. GE is a company that focuses

on quality and thus when products go through tests or reliability, the timeline is lengthened.

Ecomagination is developed from the corporate segment, and with this said, GE Corporate is

looking for new ideas. They are inviting the world to take part and is investing a lot of venture

capital to invest in these ideas114.

Evaluation

Ecomagination is a business-to-business campaign that aimed to change traditional business

operations into environmental-friendly companies. GE’s goals intended to identify, convince, and

implement changes that would benefit prospective businesses, while marketing GE as a highly

strategic company that also intends to make a profit for its partners. All communication tools and

tactics were successfully implemented to achieve desirable factors for Ecomagination. Although

there are criticisms, the investment and efforts GE has made on this environmental-friendly

initiative not only fostered new revenue growth from its product innovations, but also altered the

company’s business reputation very positively.

Statoil

Background

Statoil is a Norwegian multinational oil and gas company headquartered in Stavanger, Norway. It

is a fully integrated petroleum company with operations in thirty-six countries. By revenue, Statoil

is ranked by Forbes Magazine (2013) as the world's eleventh largest oil and gas company and the

twenty-sixth largest company, regardless of industry. The company has about 23,000 employees.

In 2016, 10 oil and gas companies made it into the Global 100 Most Sustainable Corporations in

The World Index, an index that evaluates companies based on Energy productivity, Carbon

productivity, Innovation capacity and some other ESG factors. Statoil made it to number 17 on

this index beating the other 9 oil and gas corporations on the list115. The result is surprising because

people rarely connect a company from the oil and gas sector to an environmentally responsible

image. In this case study, we will investigate the efforts Statoil has made on sustainability and how

113 https://hbr.org/2014/08/ges-failure-of-ecomagination

114 https://www.scribd.com/doc/71335647/ecomagination-Case-Study

115 http://www.corporateknights.com/magazines/2016-global-100-issue/2016-global-100-results-14533333/

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a company from a controversial sector could become a socially and environmentally responsible

entity.

Findings

Statoil proves that governments can effectively run globally competitive companies and use these

companies to equitably distribute wealth and advance social justice. Norway is the world’s 8th

largest oil exporter but is not a member of OPEC and, consistent with its tradition of owning the

Nobel Prize, is a major advocate of human rights116. Under these circumstances, Statoil invested

heavily on resolving environmental, social and governance controversies. The company’s

sustainability statement clearly states: “helping to meet the world's growing energy needs in an

economically, environmentally and socially responsible manner”.

From the governance perspective, Statoil’s CEO earns about $2 million a year and its blue collar

workers earn 3 times as much as their British peers117. Through its innovation portal, the company

regularly issues open innovation challenges in order to incentivize experts to assist the company

in developing solutions to business problems. Statoil’s ethics and anti-corruption training program

are mandatory for all employees and business partners.

Environmentally, the company faces climate change challenges, as oil and gas companies are all

significant emitter of greenhouse gases. Energy use for power and heat generation represents the

largest direct source of greenhouse gas emissions from operations of these oil companies. Flaring,

venting and leakages represent smaller, but nevertheless significant, sources of emissions. Statoil’s

efforts to reduce direct emissions include: improving energy efficiency, reducing methane

emissions, eliminating routine flaring, scaling up carbon capture and storage. The company is

indeed the leader in certain areas among its peers. In 2015, Statoil established a carbon intensity

target of 9 kg CO2/barrel of oil equivalent (boe) for its upstream exploration and production

activities, while the average intensity in the industry is close to 18kg CO2/barrel.118

116 (The Economist, 2013)

117 (The Economist, 2013)

118http://www.statoil.com/no/InvestorCentre/AnnualReport/AnnualReport2015/Documents/DownloadCentreFiles/01

_KeyDownloads/2015_Sustainability_report.pdf

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Source: Statoil 2015 sustainability report

Besides increasing the efficiency of using conventional energy, Statoil is also investing in

renewable energy. The company has been testing its unique floating offshore wind technology

over the past six years and is building the Hywind Scotland offshore wind farm which is expected

to produce 140GWh per year and supply 20,000 Scottish households with renewable power. This

is the world’s first floating offshore wind park with several turbines installed. The Hywind

technology opens up vast areas of development in places where conventional bottom fixed

structures are not feasible119.

Discussions

Statoil has displayed remarkable expertise in brand management. The company has successfully

marketed themselves as an environmentally friendly and sustainable fossil fuel company. Statoil

works hard to prove to the public that they are the best in the industry, and thus that they are better

fit to produce oil than anyone else. They demonstrate this by showing figures of carbon emission

in production, talking highly of the strict Norwegian standards and highlighting their ethical

concerns by supporting initiatives like EU Emission Trading Scheme (ETS)120.

When confronted with their impact on the environment, Statoil directed the focus to coal. If

directly replaced coal, gas would lower emissions significantly. Statoil argues that by comparison,

their fossil fuels might actually be seen as part of the solution to climate change. However, research

indicates that investing in gas as a ‘transition’ to clean energy, does not give significant value in

119

http://www.statoil.com/no/InvestorCentre/AnnualReport/AnnualReport2015/Documents/DownloadCentreFiles/01_

KeyDownloads/2015_Sustainability_report.pdf

120 http://www.greenpeace.org/new-zealand/Global/new-

zealand/P3/publications/Statoils%20Sustainable%20Greenwash%20Guide.pdf

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terms of lowering emissions. The use of gas would have to be short-lived not to exceed the UN

climate goals and require huge investments in infrastructure121.

Some people also argue that another key for Statoil’s success in creating its social-responsible

image is its successful use and partnership with social media companies. Partnering with LinkedIn,

and building a community on LinkedIn seems like a smart move from Statoil. The community has

grown by 205% since 2012. B2B businesses, and most organizations that aren’t directly in contact

with the end-consumer, can follow Statoil’s example when repositioning their brand as a thought

leader.

Evaluation

Statoil proves that governments can effectively run globally competitive companies and use these

companies to equitably distribute wealth and advance social justice. The company’s use of

technology and knowledge deliver truly sustainable value (economic, environmental, social)

through the rapid development and implementation of improved products, processes, systems that

deliver more solutions than those offered by competitors. The corporate investment in ESG not

only improves its business reputation, but also developed a positive business model that enhances

the company’s long-term growth.

Unilever

Background

The Anglo-Dutch Unilever is a well-known producer of household consumer products that go from

food and beverages, to cleaning agents and personal care. However, this company is not only

renowned for its products that are present in 190 countries, but also because it is widely recognized

as a world leader in terms of ESG practices. Since 2009, when Paul Polman was appointed CEO

sustainability became a key element in the company’s strategy. “Unilever has a simple but clear

Purpose – to make sustainable living commonplace. We believe this is the best long-term way for

our business to grow.” 122

This change in strategic view of Unilever resulted in the introduction in 2010 of Sustainable Living

Plan (USLP). According to Unilever this plan is a “blueprint for achieving our vision to grow our

business, whilst decoupling our environmental footprint from our growth and increasing our

positive social impact.” 123

Findings

Under the umbrella of the USLP in 2015 Unilever reached a milestone of 1 million tons of CO2

savings from energy in manufacturing, which means a 36% reduction since 2008. The company

has also avoided costs of over 600 million euros as a result of eco-efficiency saving in the

factories124. During 2015 the company managed to achieve zero waste to landfill over 240 factories

across 67 countries; by doing this Unilever had 200 million euros of cost-benefits and created

121 http://www.greenpeace.org/new-zealand/Global/new-

zealand/P3/publications/Statoils%20Sustainable%20Greenwash%20Guide.pdf

122 Unilever Annual Report and Accounts 2015

123 Sustainable Living - Unilever global company website

124 CEO’s review, Strategic Report 2015

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hundreds of jobs125. This initiative continued in 2016 achieving zero waste to landfill in 400

additional locations. In addition to that, in 2015, 60% of agricultural raw materials were sourced

sustainably, a new high for Unilever 126 . The company has also pledge that by 2020 water

abstraction by its factories will be below 2008 levels.

Still, Polman stated that the company’s biggest impact comes from driving consumer’s behavior

through sustainable living brands - like Dove, Lifebuoy, Ben & Jerry’s and Comfort. This is

especially relevant since the company announced that these brands grew 30 percent faster than the

rest of the company’s business last year, and accounted for about half of Unilever’s growth in

2015127.

Tackling socially related issues, in 2015 Unilever became the first company to produce a human

rights report using the UN Guiding Principles Reporting Framework128. This report recognizes that

the company still has some work to do but it enhances transparency, facilitating and strengthening

governance. Moreover, the company has put the focus on its impact on different stakeholders

particularly, its suppliers and the communities in which they are immersed.

From a governance standpoint, Unilever has worked on improving transparency and oversight with

different initiatives. Unilever has set an organizational framework which includes surveillance

from the managerial structure129 and oversight from external boards of experts130. The company

has also created a strict code of conduct in which it elevates its reputation for conducting its

business with integrity to a very special place. “This reputation is an asset, just as real as our

people and brands” 131

In terms of governance it is also important to have an alignment within the company in which

things are key to have a good business performance. In this sense, both Paul Polman, the CEO and

Michael Treschow the chairman of the board agreed in their statements for the 2015 Strategic

Report that USLP has contributed to the success of Unilever.

Raw materials are critical for the company’s production of goods, because of that Unilever has to

achieve a timely and secure supply of them. However, to be able to accomplish this in the long

term the company needs to be sure it is doing it in a sustainable way. Unilever has gone a long

way in this path, the two initiatives described below are two examples of that.

125 “Journey to zero waste”. Unilever (February, 2016)

126 CEO’s review, Strategic Report 2015

127 http://www.environmentalleader.com/2016/07/14/how-coca-cola-unilever-akzonobel-other-leading-companies-

report-on-sustainability/#ixzz4QSu4NUac

128 CEO’s review, Strategic Report 2015

129 “Sustainability and corporate responsibility are championed and led by a member of the Unilever Leadership

Executive (ULE): Keith Weed, Chief Marketing and Communications Officer. The ULE is responsible for the

operational leadership of the business”

130 The Corporate Responsibility Committee oversees Unilever’s conduct as a responsible business; and Audit

Committee supervises Unilever's overall approach to risk management, including the corporate risks and related

mitigation/response plans

131 Extract from introduction to Unilever Code of Conduct quoted in Corporate Governance - A Unilever Vietnam

perspective.

42 |

Sustainable Palm Oil Sourcing

Unilever estimates to impact 5 million tons of Palm oil or 8% of global production. The company

states to achieve that by using 1 million tons of crude palm oil and its derivatives and half a million

tons of crude palm kernel oil and its derivatives132.

In order to attain sustainable palm oil, Unilever has five principles to build upon RSPO 133

Principles & Criteria, in addition to national and international laws and agreements. The principles

are the following:

i. No deforestation

ii. No development on peat

iii. No exploitation of people or communities

iv. Driving positive social and economic impact for smallholders and women while protecting

forests

v. Transparency

This particular initiative that Unilever has put in place in the last years is focused on improving

ESG practices. The first two principles deal with Environmental issues, the third and fourth take

care of Social issues and the last one seeks to improve Governance.

In 2015 Unilever was the largest end user of physically certified palm oil with about 300 thousand

tons but only covering 19% of the volume. However, the company is committed to reach 100

percent by 2019.

Sustainable Tea

Unilever has three tea brands Lipton, PG tips and Brooke Bond. Lipton is the world’s best-selling

tea, with annual sales of around 3 billion euros coming from over a hundred countries.

The company sources tea mostly from Africa and Asia from farmers on 750,000 smallholdings,

and estimates that one million people work there. Unilever also grows about 10% of the tea from

estates owned by the company in Kenya and Tanzania.

In 2007 Unilever committed to sustainably source 100 percent of the tea by 2020. The company

also pledged to source from all Lipton tea bags from Rainforest Alliance Certified sources by the

end of 2015. Unilever not only achieved that but by 2015 it was also sourcing 66 percent of total

volumes from sustainable sources134.

Discussions

Many companies make efforts to reduce waste and utilize energy use. But to meet its broader goals,

Unilever has to change what goes on beyond its corporate walls. When it measured the greenhouse-

gas emissions associated with its products, it found that significant emissions came in the supply

chain—ie, not from Unilever itself. So it had to get the support of its suppliers, who range from

food giants such as Cargill to small farmers in India.

132 Unilever Sustainable Palm Oil Sourcing Policy - 2016

133 Roundtable on Sustainable Palm Oil

134 Sustainable tea - leading the industry. Unilever global website

43 |

Yet although Unilever may be able to buy its own raw materials from sustainable sources, it alone

is rarely big enough to make a difference to any given commodity worldwide. As a result, Mr

Polman spends a lot of time trying to persuade his peers and rivals to act more sustainably, too. A

big test of his effectiveness will come with palm oil, a crop which plays a significant role in

deforestation (tropical forests are often cleared illegally to make way for palm-oil plantations).

There is a bigger challenge for the Sustainable Living Plan: it will not be possible to meet its goals

without changing customer's’ behavior. Three years ago the company measured the carbon

footprint of 2,000 products and found that on average 68% of greenhouse-gas emissions in their

life cycles occurred only after they got into the hands of consumers, mostly through the energy-

intensive process of heating water (eg, for tea bags or washing powder).

Evaluation

Unilever’s case showed the importance of product quality control in order to reach a company’s

sustainability goal. Just as we mentioned in the discussion section, many companies implement

ESG practices within the company’s boundary, Unilever, however, goes beyond its corporate walls, reach out to suppliers, industry peers, and consumers to meet its broader goals in

sustainability. Unilever’s CSR practices not only enhanced the company’s reputation and market

performance, but also maintained very positive engagement with its key stakeholders.

Concluding remarks

The discussion of SRI is one at the forefront of the modernization of traditional investing and

increased alignment between individual and corporate values and financial interests. The ability to

invest directly in organizations based on performance metrics that include ESG factors is shaping

how many investors view returns. Investors are getting closer to being able to quantify

environmental and social impacts in traditional return terms. Additionally, corporations that excel

in various ESG areas, such as the three cases discussed, are becoming models. Challenges in the

field include the need for standardization of SRI definitions, reporting, and evaluation of

investment and corporation performance. SRI is a rapidly growing investment sector, and one that

is likely to continue to expand in the US context.

44 |

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Other Online Articles and Relevant Links:

https://en.wikipedia.org/wiki/Socially_responsible_investing

https://en.wikipedia.org/wiki/Environmental,_social_and_corporate_governance

http://www.investopedia.com/terms/s/sri.asp

http://www.ussif.org/sribasics

http://www.socialfunds.com/

http://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-

you-need-to-know/#387c98605863

http://money.usnews.com/money/personal-finance/mutual-funds/slideshows/8-great-socially-

responsible-funds

http://www.marketwatch.com/story/socially-responsible-investing-has-beaten-the-sp-500-for-

decades-2015-05-21

http://michaelbluejay.com/sri/

http://www.uua.org/finance/investment/sri

http://www.investmentnews.com/article/20160306/FREE/160309960/socially-responsible-

investing-is-coming-of-age

http://www.wsj.com/articles/does-socially-responsible-investing-make-financial-sense-

1456715888

https://www.cfainstitute.org/learning/future/knowledge/pages/esg.aspx

52 |

Appendix: Tables of Meta-studies from Miriam von Wallis and Christian Klein

Tables from: Miriam von Wallis and Christian Klein’s article ‘Ethical requirement and financial

interest: a literature review on socially responsible investing’ published in Business Research,

October 2015, Volume 8, Issue 1, pp 61–98

Table 1: Studies proving equal performance of ethical and conventional investments

References Sample

period

Performance

measurement

Benchmark Selection of social

component

Amenc

and

Sourd (2008)

2002–

2007

Jensen ∝, sharpe SBF 250

DJEuroStoxx

DJ Stoxx, MSCI

Social index, ethical

mutual fund

Bauer et al.

(2005)

1990–

2001

Jensen ∝ Worldscope

market value

equity index

Ethical mutual fund

Bauer et al.

(2007)

1994–

2003

Jensen ∝, average

Returns

sharpe Carhart’s ∝

Candadian

Stocks

in Wordscope

database

Ethical mutual fund

Bauer et al.

(2006)

1992–

2003

Carhart’s ∝ Worldscope

Australia index

Ethical mutual fund

53 |

Bello (2005) 1994-

2001

Jensen ∝, sharpe,

eSDAR

S&P 500

DSI 400

Ethical mutual fund

Cengiz et al.

(2010)

1991–

2009

Treynor, sharpe,

eSDAR, Treynor-

Black

World index

Datastream

Ethical mutual fund

Cummings

(2000)

1986–

1996 Jensen ∝, average

returns Treynor

sharpe

3 Australian

market based

indices

Ethical mutual fund

Guerard

(1997a)

1987–

1996

Average returns Vantage Global

Advisor 1200

Equity Index

Social index

Hamilton et al.

(1993)

1981–

1990

Jensen ∝ NYSE Ethical mutual fund

Kreander et al.

(2005)

1995–

2001

Jensen ∝, Sharpe,

Treynor

No Ethical mutual fund

Mill (2006) 1982–

2004

Jensen ∝ No Ethical mutual fund

54 |

Sauer (1997) 1986–

1994

Jensen ∝, Sharpe,

Average returns

S&P 500

CRSP Value

Weights

Market Index

DSI 400 index

Schröder

(2004)

2000–

2002

Jensen ∝, sharpe MSCI Social index, ethical

mutual fund

Statman (2000) 1990–

1998

Jensen ∝,

eSDAR,

average returns

S&P 500 Social index,

ethical mutual fund

Teoh et al.

(1999)

1986–

1989

Average returns No Analysis on

companies divesting

from South Africa

55 |

Table 2

Studies proving underperformance of ethical over conventional investments

Study Sample

period

Performance

measurement

Benchmark Selection of

social component

Geczy et

al. (2005)

1999–

2001

Sharpe Customized

benchmark

Ethical mutual

funds

Gregory et

al. (1997)

1986–

1994

Jensen ∝ HGSCI, FTASI Ethical mutual

funds

Kahn et al.

(1997)

1987–

1996

Total return S&P 500 Tobacco

companies

excluded from

S&P 500

Mueller

(1991)

1984–

1988

Jensen ∝,

Treynor

Vanguard index

500

Ethical mutual

funds

Tippet

(2001)

1991–

1998

Jensen ∝,

Treynor

All ordinaries

accumulation

index

Ethical mutual

funds

Teper

(1992)

1979–

1989

Total return S&P 500 Ethical mutual

funds, KLD 400

index

56 |

Table 3

Studies proving outperformance of ethical over conventional investments

Study Sample

period

Performance

measurement

Benchmark Selection of social

component

Bragdon and

Karash (2002)

1997–

2001

Jensen ∝,

CAGR

MSCI, S&P

500

Global LAMP

index

D’Antonio et

al. (1997)

1990–

1996

Jensen ∝,

average returns

LCB KLD 400

D’Antonio et

al. (2000)

1990–

1996

Jensen ∝,

eSDAR,

average returns

S&P 500

LCB

Social index

Derwall et al.

(2005)

1995–

2003

Jensen ∝ No Self-assessment of

eco-efficiently

ranked portfolio

DiBartolomeo

and Kurtz

(1999)

1990–

1999

Jensen ∝,

Treynor

Russel 1000 Social index

Epstein and

Schnietz (2002)

1999 Jensen ∝,

Treynor

No Split of Fortune

500 in

environmental,

labor and non-

abusive firms

Gompers et al.

(2003)

1990–

1998

Tobin’s Q No Construction of

corporate

governance index

Grossman and

Sharpe (1986)

1960–

1983

Jensen ∝,

Treynor

NYSE, S&P

500

Construction of

South Africa-free

portfolio

Hill et al.

(2007)

1995–

2005

Jensen ∝,

Treynor

S&P 500,

NIKKEI 225,

FTSE 300

Ethical mutual

funds

57 |

Kempf and

Osthoff (2007)

1992–

2004

Jensen ∝ S&P 500, DSI

400

Best-in-class

approach, positive,

negative screening

of index

Luther et al.

(1992)

1972–

1990

Jensen ∝,

Treynor,

eSDAR

FT All sharpe,

MSCIP

Ethical mutual

funds

Mallin et al.

(1995)

1986–

1993

Jensen ∝,

Treynor, sharpe

eSDAR

No Ethical mutual

funds

Shank et al.

(2005)

2000–

2003

Jensen ∝,

Treynor

NYSE Ethical mutual

funds, fund of most

valued SR firms

Travers (1997) 1992–

1997

Jensen ∝,

average returns

MSCI EAFA Ethical mutual

funds

58 |

Table 4

Studies on the relationship between ethical behavior (CSR) and company performance

Study Sample

period

Performance

measurement

Relation fin.

perf./ethical

behavior

Determination of

ethical behavior

Blacconiere

and Northcut

(1997)

1986 Jensen ∝ (+) Environmental

screening and

ranking of 10-K

reports

Boyle et al.

(1997)

1986 Jensen ∝ (−) Defense contract

organizations who

signed (ethical)

defense industry

initiative

Brown

(1998)

1984–

1996

Market adjusted

returns

(+) Fortune rating on

responsibility to

community and

environment

Dasgupta et

al. (2001)

1990–

1994

Jensen ∝ (+) Positive and

negative reported

environmental news

Dowell et al.

(2000)

1994–

1997

Tobin’s Q (+) Which

environmental

standards does

company adhere to

(a) local, (b) US, (c)

global

Edmans

(2011)

1984–

2009

Carhart’s ∝ (+) Employee

satisfaction: 100 best

companies to work

for in America

Hamilton

(1995)

1989 Jensen ∝ (+) Companies reported

toxic release

inventories

59 |

Hillman and

Keim (2001)

1994–

1996

Market value

added

(+) (−) Screening of KLD

database with regard

to social issue

participation and

stakeholder

management

Humphrey et

al. (2012)

2002–

2010

Jensen ∝,

Average returns,

Sharpe ratio,

Carhart’s ∝

No ESG scores provided

by SAM

Jones and

Murrell

(2001)

1989–

1994

Jensen ∝ (+) Top family-friendly

companies

Judge and

Douglas

(1998)

1992–

1994

Jensen ∝, ROI,

Earnings

growth, Market

share

(+) Screening: are

environmental

issues integrated into

the strategic

planning process?

Klaasen and

McLaughlin

(1996)

1985–

1991

Jensen∝ (+) Winning an

environmental

award and being

exposed to an

environmental crisis

Konar and

Cohen

(1997)

1989–

1992

Jensen ∝ (−) Companies

mentioned in media

in relationship with

toxic release

inventories (TBI)

Konar and

Cohen

(2001)

1989 Tobin’s Q (+) Aggregated pounds

of toxic chemicals

and number of

environmental

lawsuits pending

against the firm

60 |

Ogden and

Watson

(1999)

1991–

1997

Relative returns (+) Customer

satisfaction

Verschoor

(1998)

1996 Ranking

financial perf.

(+) Commitment to

ethical behavior

Waddock

and Graves

(1997)

1990–

1993

ROA, ROE,

Total return

(+) Fortune 500 rating +

KLD rating

Wright and

Ferris (1997)

1984–

1990

Jensen ∝ (−) Divestment of South

African business

units