Anti-corruption, Bribery & Ethics
SRIs look for ethical standards that are monitored and enforced through avenues such as strong whistle-blower and training programs. They expect companies to have policies in place to prevent the payment of bribes to gain a business advantage.
CONFUSED BY THE TERMS?
To evaluate an effective board structure, SRIs consider the following:
An effective Chairman that is separate from the CEO.
If the roles are combined there should be a strong Lead Independent Director.
The Board should be comprised of individuals with appropriate and diverse experience and be transparent on disclosing their skillset.
Sufficient independence from senior management.
Evidence of board oversight on ESG through a committee or a board charter.
SRIs look at board diversity as key to business success and defines diversity in the broadest sense.
Following the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) released in June 2017, SRIs look at companies’ scenario analysis to evaluate the soundness of their climate change policy. These
disclosures provide an opportunity to show shareholders that the company has a strategy in place to adapt to various potential outcomes.
Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.
Corporate Social Responsibility (CSR)
The measurement of a company’s ability to contribute to sustainable development and the way in which it conducts business that is not at the expense of any stakeholder.
Diversity, Inclusion & Parity
SRIs acknowledge the benefits of a diverse workforce represented through skills, age, experience, gender and ethnic backgrounds. The presence of LGBTQ rights is also an important factor.
Reporting on the gender pay gap is required for UK companies.
Environmental, Social and Governance (ESG)
The evaluation of a company’s environmental, social and governance performance. The importance of factors within each E, S and G pillar will vary by industry and investor.
Health and Safety
Managing risks and maintaining safe working conditions is important for companies, as this can have direct consequences for the reputation of a company as well as opportunities for improving efficiencies.
SRIs prefer investing in companies with effective processes in place and seek disclosure on this topic through companies’ safety records.
Human capital is a key driver of value creation in a company and includes various aspects such as:
Collective representation (bargaining) as an expression of the employees’ freedom of association recognising the rights of workers to organise themselves.
Poor labour practices impact employee performance and turnover.
Wage disparity or CEO pay ratio, measure the disparity between the CEO’s salary vs the employees’ median. This item is required disclosure in the US.
Human rights is often viewed through the lens of the UN Global Compact, which often underlines SRIs approach to responsible investment.
Investor relations is a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company's securities achieving fair valuation. (Adopted by the NIRI Board of Directors, March 2003.)
SRIs look for companies to have processes in place to engage with local communities to minimise any negative impacts of their operations. As part of this evaluation they are also interested in companies’ investments in the community.
SRIs measure the carbon footprint of their portfolios vs. a benchmark. The footprint measures amount of carbon dioxide released into the atmosphere as a result of the activities of a particular organisation, most often expressed as tonnes of CO2 emission per USD million of revenues.
Carbon optimisation is an investment approach that seeks to optimise the carbon footprint of a portfolio by taking into account the carbon emissions of the securities in the investment universe.
Low-carbon economy is an economy based on low-carbon power sources with minimal carbon emissions into the environment. It makes reference to a world where the temperature increase is contained below 2°C or 1.5°C.
SRIs look for compensation plans of senior management to be clear and transparent. Compensation structures should be aligned with companies’ goals and avoid rewarding management for poor, mediocre, short-term or risky performance. Investors are increasingly looking for sustainability goals to be included in compensation plans.
Resources & Energy
SRIs evaluate the extent to which companies are active in renewable energies such as wind, water, biomass, solar and geothermal power, or in improving energy efficiency.
SRIs consider the materiality of energy expenditure by sector (for example, energy use as a percentage of operating expenses), the efficiency of energy use (for example, energy consumed per USD of revenue or unit of production) and the financial benefits associated with energy use reduction (for example, energy savings per year or per unit production).
Approaches to specific governance factors vary by geography. However, in general, governance structures should empower shareholders. Shareholders should have appropriate rights to ensure that boards are accountable for their actions. Opinions vary on the approach to equality of shareholders based on voting rights, dividend distribution and the allocation of other rights.
SRI seek companies where shareholders have a say in major decisions such as significant transactions and changes in company bylaws. Depending on jurisdictions, SRIs will also seek to influence with their votes board nominations and executive remuneration.
A sustainable supply chain can offer value creation opportunities and competitive advantages for businesses.
SRIs monitor supplier practices and records with regards to human and labour rights, the environment, health and safety and anti-corruption principles. They also prefer companies to maintain membership in industry initiatives.
Supply chain management affects the production process from product design and development, to material selection, manufacturing, packaging, transportation, warehousing, distribution, consumption, return and disposal.
Environmentally sustainable supply chain management and practices can assist organizations in not only reducing their total carbon footprint, but also in optimizing their end-to-end operations to achieve greater cost savings and profitability.
The measurement of a company’s capacity to endure. While this can mean financial and business model, it is also an umbrella term under which sits ESG as a way to measure a company’s sustainability.
Sustainable and Responsible Investor (SRI)
Sustainable and responsible investment (”SRI”) is a long-term oriented investment approach which integrates ESG factors in the research, analysis and selection process of securities within an investment portfolio. It combines fundamental analysis and engagement with an evaluation of ESG factors in order to better capture long term returns for investors, and to benefit society by influencing the behaviour of companies. - Eurosif
Water Management and Pollution
How companies manage water risks and capitalise on opportunities, may drive long-term returns for shareholders. Externalities from unsustainable water use may present a risk to the portfolio’s long-term value.
The increased interest in water security also leads to a call for better data concerning water use, water pollution and water scarcity.