Communicating your company's environmental, social and governance priorities is no longer a practice to consider, its a practice to execute.

1. 16 MAY 2011 IR update

2. Communicating your
company's environmental,
social, and governance
priorities is no longer a
practice to consider-
it's a practice to execute.
By Lisa Ciota
M
iltonFriedman's statement shown
above is often seen as a refutation
of corporate socialresponsibility.
But the world has changed since 1971.
Today,we have a more holisticview of the
complex business environment. Todeliver
sustainable growth and profits, a company
must consider a wide range of environ-
mental, social,and governance (ESG)factors.
These include the implications of where
the company obtains resources and how
it uses them, the labor and environmental
impact of operations, and the company's
relationships with customers, local com-
munities, and key stakeholders.
How a company addresses these factors
provides insight into whether it is attuned
to the external environment and how the
company handles strategy, operations, and
risk. This is why some investors consider
ESG an indicator of management quality.
The implications for investor relations
are great. As more investors look beyond
financial metrics and incorporate qualita-
tive factors into their investment evalu-
ations, an IRO must communicate the
company's ESG priorities in the context of
its strategies, opportunities, and risks.
Niche Strategy No More
Traditionally, interest in ESG perfor-
mance has been the province of socially
"There is only one social responsibility
of business: to use its resources and
engage in activities deSigned to increase
its profits without deception or fraud."
responsible investors whose objectives
are to align financial activities with social
values and beliefs. Because of its size,
socially responsible investing has some-
times been viewed as a niche investment
strategy. Reinforcing this perception is the
fact that the majority of portfolio managers
and buy-side analysts at mainstream insti-
tutions don't ask questions about environ-
mental, social, or governance matters.
Since 2007, however, total investments
in the United States based on ESG cri-
teria increased 13 percent to $3.1 tril-
lion, representing about 12 percent of
the $25 trillion in assets under manage-
ment, according to the Social Investment
Forum's 2010 report on U.S. socially
responsible investing trends.
Including Europe-where total socially
responsible investments are double the
amount in the United States-and the rest
of the world, total assets under manage-
ment using ESG criteria globally is about
$10 trillion, as reported in Eurosif's 2010
European SRIStudy. This represents about
$1 of every $12 in total global assets under
management, based on the estimate of
global assets under management in the
United Nations Principles for Responsible
Investment (PRI)2010 Report on Progress.
This is just one sign that the sands are
shifting. Between legislative and regula-
-Milton Friedman,1971
tory trends, concerns about the long-term
impact of climate change, increased focus
on governance, and greater attention to
nonfinancial risk, many investors and
asset managers see ESG integration as a
key element in mitigating risk and driving
returns. In more and more cases, these
investors and asset managers want to
incorporate ESG criteria into their invest-
ment decision-making process, both
directly and indirectly.
Influential Networks
The momentum is evident in the
number of institutions joining ESG net-
works or signing onto major ESG investing
initiatives with the PRI, the Carbon
Disclosure Project (CDP), the Investor
Network on Climate Risk (INCR), and the
Institutional Investors Group on Climate
Change (IIGCC). The largest of these are
the PRI, which has 800 signatories world-
wide that collectively manage $22 trillion
of assets, and the CDp,with 550 signato-
ries managing $70 trillion of assets. This
represents approximately 18 percent and
58 percent, respectively, of the estimated
total global assets under management.
Signatories to these initiatives include
major pension plans such as TIM-
CREF,CaIPERS,NYCERS,and socially
responsible investors such as Calvert
IR update MAY 2 0 1 1 17

3. 18 I MAY 2 0 1 1 IR update
and Trillium. Other signatories are main-
stream asset management firms including
BlackRock, ClearBridge Advisors, Deutsche
Asset Management, and JPMorgan Asset
Management. Even private equity firms
such as Kohlberg Kravisand Roberts have
signed onto the PRI.
ESG Integration
Given the size and significance of PRI
signatories, many believe that ESG inte-
gration is reaching critical mass. Still, the
extent to which ESG criteria are actively
applied across PRI signatory portfolios
varies. According to the PRI, 46 percent
of signatories have extensive internal pro-
cesses to implement responsible invest-
ment (in listed equities in developed
markets).
At ClearBridge Advisors, for example,
relevant and material ESG factors are
already integrated into the fundamental
research platform, according to Mary Jane
McQuillen, portfolio manager and head of
the ESG investment program. "Our ana-
lysts have internalized this approach," she
says, "given the potentially relevant impact
that environmental, social, and governance
factors can have on valuation."
Other investors and asset managers are
taking a different approach, with some
implementing ESG overlays and others
expanding proxy-voting policies. One of
the PRI's key priorities is to support signa-
tories' efforts to incorporate ESG into the
investment analysis and decision-making
process for all asset classes.
Growing Demand for ESG
Reporting
As PRI signatories further embrace this
priority, demand for ESG-related perfor-
mance data will rise. At the same time,
a growing number of regulators around
the world are calling for greater sustain-
ability reporting. For example, in the
United States, the Securities and Exchange
Commission provides guidance on cli-
mate change disclosure; South Africa and
Denmark require integrated financial and
corporate responsibility reports annually;
and in Sweden, state-owned companies
must issue sustainability reports using the
Global Reporting Initiative (GRI) frame-
work for sustainability reporting.
During the past few years, there has
been a significant uptick in companies
issuing sustainabiliry reports using the GRI
framework. Last year, approximately 2,500
companies, including 80 percent of the
Global Fortune 250 companies, produced
such corporate responsibility reports. To
support further adoption of sustainability
reporting, in January 2011, GRllaunched
Focal Point USA to help U.S. companies
strengthen reporting efforts.
Benchmark Your Company
Investors have ready access to GRI data
through the Bloomberg and Thomson
Reuters portals, which make it easy for
analysts to screen and compare companies
across entire sectors. Companies need to
realize that they are not being evaluated
individually on these nonfinancial factors,
but against global peers. Analysts can also
find sustainabiliry information on more
than 1,500 companies by downloading
reports at http://www.globalreporting.orgl
GRIReports/GRIReportsList/ and sorting by
key criteria.
Mike Wallace, director of GRI's Focal
Point USA, suggests that IROs download
this list and sort it by industry and sector
to gain insight into corporate strengths
and opportunities as well as informa-
tion about competitors. This information
may also help build a case for starting or
strengthening a company's sustainability
reporting.

4. What's an IRO to Do?
Even with a plethora of ESG information
available, investors will continue to (Urn
to IROs, recognizing the value they bring
to the table and their connection to the
C-suite. Ingrid Dyott, managing director at
Neuberger Berman, notes that ESG inves-
tors are increasingly sophisticated and are
looking for high-quality, consistent, and
transparent communications about corpo-
rate strategies and related ESG priorities.
Here are steps for the IRO to take:
• Know the relevant and material ESG
risks for your company and industry.
Understand how those risks may impact
operations, supply chain, competition,
reputation, and other key areas. Build rela-
tionships with managers of the following
teams: operations; quality control; human
resources; corporate responsibility; and
environment, health, and safety. Be an
advocate for sustainability reponing, and
be a reviewer of your company's repon.
• Understand the existing level of ESG
interest in your company. Compare
your top 50 or 100 holders against the list
of signatories of the PRI, CDp, and other
ESG networks and socially responsible
advisory firms. Yourinvestor targeting
service may be able to help you with this
analysis. You may be surprised by how
many of your investors use ESG criteria in
their decision-making process somewhere
within their organization. Karli Anderson,
director of investor relations at Newmont
Mining, regularly performs such an anal-
ysis. Currently, approximately 50 percent
of Newmont's shares outstanding are held
by institutions that use ESG criteria.
• Target and prioritize your ESG com-
Be knowledgeable
about your company's
strategic ESG
priorities and how
they can benefit your
business model.
munication efforts. Anderson says that
"environmental and social considerations
are essential to having a social license to
operate, and our investors know that. At
Newmont, these considerations are inte-
gral to our operating strategies, and we
communicate openly about our environ-
mental and social priorities in that con-
text." In fact, Anderson sets annual goals
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5. for incorporating ESG-related content into
her U.S. and European investor commu-
nications. Newmont exemplifies a best-
practice approach: Start with core business
strategy and operations, identify links to
priority ESG issues, and integrate these
messages into your existing communica-
tions vehicles, where applicable.
• Do your homework, staying abreast
of current issues. Ruth Venning, director,
investor relations, at Hospira, explains,
"When we receive social responsibility sur-
veys, we have a process in place to learn
about the firm behind the survey, asking:
Are they current or potential investors? Are
they target holders? Or, if they represent or
influence investors, how much assets under
management do they have? We also consider
how the survey information is likely to be
used and the type of exposure it will receive.
Together, these factors help us prioritize
our efforts." Venning collaborates with her
colleagues in environmental, health and
safety, public affairs, and human resources to
ensure that information is consistent and to
streamline the response process. In addition
to keeping a set of standard corporate social
responsibility/ESG FAQs, Venning suggests
monitoring your peers' ESG initiatives and
messaging as part of your ongoing competi-
tive intelligence efforts.
Get Ready for the New
Reality
During the past several years, the way
ESG data is integrated into the investment
decision-making process has changed.
Long-term investors are taking a holistic
view and frequently do not make as much
of a distinction between ESG and financial
factors in their analysis. This new reality
presents opportunities and challenges for
investor relations. Dyott and McQuillen
have similar advice for IROs:
• Be knowledgeable about your company's
strategic ESG priorities and how they can
benefit your business model (for example,
reducing risk or enhancing efficiency).
• Communicate thoughtfully and consis-
tently about ESG priorities.
• Be engaged and inclusive in facilitating
discussions on material ESG topics.
Taking these steps will help foster
stronger relationships with investors and
will enhance the credibility of IR and your
company. mI!J
Lisa Ciota is principal, Strategic & Investor
Communications, Downers Grove, Illinois;
lisa.ciota@gmail.com.
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