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The Inevitable Friendship Between Lawyers and ESG Experts: From a Normative to a Compliance ESG Regulatory Framework

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The Inevitable Friendship Between Lawyers and ESG Experts: From a Normative to a Compliance ESG Regulatory Framework

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The Inevitable Friendship Between Lawyers and ESG Experts: From a Normative to a Compliance ESG Regulatory Framework

  1. 1. Chris Burkett | @burkett_chris Baker & McKenzie LLP The  Inevitable  Friendship  Between  Lawyers  and  ESG  Experts:   From  a  Norma>ve  to  a  Compliance  ESG  Regulatory  Framework Marjella Alma eRevalue Will Martindale | @WillJMartindale UN-Supported Principles for Responsible Investment Martina Macpherson Hermes EOS Kristie McIntyre HP Inc
  2. 2. © 2015 eRevalue, Ltd. 18 November 2015 SB’15 London The inevitable friendship between lawyers and ESG experts: from a normative to compliance ESG regulatory framework. Marjella Alma Chris Burkett Martina Macpherson Dr Kirstie McIntyre Will Martindale
  3. 3. Today’s Panelists Marjella Alma, eRevalue (Moderator) Martina Macpherson, Hermes Investments Christopher Burkett, Baker McKenzie Will Martindale, UN PRI Dr Kirstie McIntyre, HP Inc © 2015 eRevalue, Ltd.
  4. 4. How will you ensure that your business is still around by 2020? © 2015 eRevalue, Ltd. • Investor demands, stakeholder expectations and compliance requirements for ESG issues are snowballing. • Current approaches to monitoring ESG issues are manual, subjective and incomplete. Technology can help.
  5. 5. Do you understand the transition from voluntary to mandatory ESG disclosure requirements? *https://www.globalreporting.org/resourcelibrary/Carrots-and-Sticks.pdf • In 2013, research identified 180 ESG-related regulations*. • Our team of lawyers has identified more than 1500 regulations across 91 countries (as of October 2015). © 2015 eRevalue, Ltd.
  6. 6. Prominent ESG issues in regulations Top issues in mandatory regulations No outliers in voluntary regulations 1. Waste (13.8%) 2. OHS (12.2%) 3. Labor Rights (9.8%) 4. Energy Use (9.7%) 5. Product & Service Safety (9.7%) 1. Stakeholder Inclusion (6.0%) 2. Human Rights (5.0%) 3. Labor Rights (5.0%) 4. Energy Use (4.6%) 5. Greenhouse Gases (4.4%) © 2015 eRevalue, Ltd. *Based on eRevalue’s proprietary regulatory database.
  7. 7. What’s emerging in 88 draft regulations? *Emerging regulations: Refers to drafts of potential regulations in the legislative process OR new regulations not yet entered into force; captured by eRevalue’s proprietary database, based on 88 emerging regulations. © 2015 eRevalue, Ltd. 1. Customer privacy and security 2. Information security 3. Human rights 4. Labor rights Countries Top Issues
  8. 8. © 2015 eRevalue, Ltd. What’s specific to 2015? A growing focus on the supply chain. Our team of lawyers has identified 19 emerging supply chain related regulatory initiatives in 2015. The UK Modern Slavery Act is just one example.
  9. 9. Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. © 2015 Baker & McKenzie LLP Sustainable Brands London The Inevitable Friendship Between Lawyers and ESG Experts: From a Normative to a Compliance ESG Regulatory Framework 7
  10. 10. © 2015 Baker & McKenzie LLP Labour / Human Rights Risks 8
  11. 11. © 2015 Baker & McKenzie LLP Converging Standards & Frameworks 9
  12. 12. © 2015 Baker & McKenzie LLP Global Instruments -  OECD Guidelines for Multinational Enterprises ( http://www.oecd.org/daf/inv/mne/) -  Ten principles of the UN Global Compact ( http://www.unglobalcompact.org/) -  ISO 26000 Guidance Standard on Social Responsibility (http://www.iso.org/iso/home/standards/iso26000.htm) -  UN Guiding Principles on Business and Human Rights (http://www.ohchr.org/EN/Issues/Business/Pages/BusinessIndex.aspx) -  ILO Tripartite Declaration of Principles concerning Multinational Enterprises on Social Policy ( http://www.ilo.org/empent/Publications/WCMS_094386/lang--en/index.htm) 10
  13. 13. © 2015 Baker & McKenzie LLP The Intellectual Debate is Over 11 “The United Nations' 2011 Guiding Principles on Business and Human Rights "mark the end of the beginning. Now that we have a common foundation of minimum standards and processes, they will need to be developed in a more granular way.“ -  John Ruggie, •  Operationalizing the UNGPs - Protect, Respect, Remedy. •  Minimum - human rights policy, due diligence processes/risk analysis, remediation. •  ‘Soft’ law to ‘hard’ law, litigation risk increasing.
  14. 14. Transparency Legislation: Voluntary to Mandatory - the next wave in compliance
  15. 15. © 2015 Baker & McKenzie LLP DM Ref: 6281627 Social Transparency •  Non-financial reporting, particularly in the area of global supply chains is moving from voluntary CSR reports to legislated requirements. Examples include: •  California Transparency in Supply Chains Act •  Obama Executive Order on Trafficking & Federal Contracts •  UK Modern Slavery Act – Transparency Amendments •  EU Directive on Non-Financial Reporting •  Trend is clear: Mandatory corporate reporting of non-financial impacts and activities is the next wave in the compliance movement (labour and human rights standards at the forefront) 13
  16. 16. © 2015 Baker & McKenzie LLP DM Ref: 6281627 UK Modern Slavery Act 2015 | Supply Chain Reporting •  Corporations with a global turnover of £36 million (including subsidiaries) must prepare a labour and trafficking statement each financial year, outlining steps they are taking to keep their business and supply chains clean. Applies to listed and non-listed companies •  Statement may include details of a company’s due diligence processes, risk analysis, etc. •  Must be approved by the Board and signed by a director. •  Statement must be posted in a prominent place on a company’s homepage. •  Is your business affected? 14
  17. 17. Key Drivers
  18. 18. © 2015 Baker & McKenzie LLP DM Ref: 6281627 Key Drivers •  Legislative leaders (e.g. California, UK) •  Responsible/Activist Investors •  NGO activism, ease of communication on social media •  International Organizations •  UN Global Compact •  UN Principles for Responsible Investment •  UNEP Equator Principles •  ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (MNE Declaration) •  UNHCHR Business and Human Rights •  UNODC Anti-corruption •  UNCTAD Corporate Responsibility Reporting, World Investment Report 16
  19. 19. Next Steps
  20. 20. © 2015 Baker & McKenzie LLP DM Ref: 6281627 Ensure your board is aware of the significant potential risks of reputational and brand harm from the shifting landscape. Who is responsible in your business? Legal, compliance, CSR? Companies should be pro-actively considering whether they are at risk, and if so develop a global strategy Seek out global strategic advisors in this area What now? 18
  21. 21. © 2015 Baker & McKenzie LLP DM Ref: 6281627 5 essential elements of compliance that should be present in every organization’s compliance program Monitoring, Auditing and Response Training and Communication Standards and Controls Risk Assessment Leadership Compliance programme •  Active involvement of Senior Management •  Empowerment of HR & Legal Personnel •  Deep dive risk assessments; repeated regularly •  Code of ethics •  Effective business partner and supplier due diligence •  Repeated risk-based training for key staff •  Board training •  Audits •  Effective whistleblower channel and investigation protocols 19
  22. 22. For professional investors only Excellence. Responsibility. Innovation. Sustainable Brands Conference 2015 An Introduction to Hermes Equity Ownership Services The Inevitable Friendship Between Lawyers and ESG Experts: From a Normative to a Compliance ESG Regulatory Framework Martina Macpherson
  23. 23. Engagement Scope Source: Hermes EOS, 2015 Engagement Addresses all Actors in Society 1 Company Returns Higher long term company ROI Economy-wide Returns Higher long term economic growth Responsible Investment • Policy Makers • Gov’t • Regulators Investors • Civil Society Groups • Industry Ass’ns • NGOs • Academia Companies Public policy engagement Market best practice engagement Corporate Engagement Stewardship Engagement Broad (non-)financial objectives … … drive a broad (collaborative) engagement approach Societal Benefits Long term more stable, just society SB - 2015
  24. 24. Engagement Objectives Engagement Themes Focus on the Trade-off of Short vs. Long Term 2 Short term costs Long term benefits Area Engagement objective Short term cost Long term benefit Strategy/ Finance • Maintain capital discipline by avoiding further balance sheet leverage • Earnings per share does not rise • Reduced risk of insolvency • Improved earnings in times of higher cost of debt Environment • Improve energy efficiency of operations • Additional non-capitalised investment depresses earnings • Highly certain return on investment • Reduced regulatory risk from rising energy costs/ cost of CO2 Social • Reduce level of fatalities • Additional investment for no cash return • Avoided lost earnings from loss of reputation, lost ‘social licence to operate’ or regulation; I • Improve productivity Governance • Increase independence of board • Effort to recruit and integrate new non-execs • Broach subject of retirement • Higher performing board that identifies long term risks and opportunities for shareholders Source: Hermes EOS, 2015 SB - 2015
  25. 25. Engagement and ‘Policy Integration’ Legal Frameworks for ESG, UK 3SB - 2015 Source: Eurosif, European SRI Study 2012 *Please note that The Law Commission published a final report “Fiduciary Duties of Investment Intermediaries” in July 2014, following a “Review on Equity Markets” by Prof. John Kay. It concluded that trustees should take into account factors which are financially material to the performance of an investment, including over the long term. Where trustees think ethical or ESG issues are financially material they should take these into account. In October 2014, the Government published its progress report on the implementation of the Kay Review. In it, the Government welcomed the Law Commission’s conclusions on the consideration of long-term factors, as well as their view that trustees may make investment decisions based on non-financial factors in some circumstances. Name Affects Type Introduced by Date introduced Description The Occupational Pension Schemes (Investment) Regulations – Regulation 2(3) (and equivalent for stakeholder pensions and charities)* Occupational Pension Funds (and subsequently stakeholder pensions and charities) Regulation (secondary legislation) UK Parliament 1999 (in force since 2000) regulation republished and amended 2005/2010/2015, see also Pensions Act 1995 (SIP Requirements) Requires occupational pension funds to disclose their responsible investment policy in their ‘statement of investment principles’. This requirement was subsequently extended to ‘stakeholder’ pension products and to charity investors. Companies Act Companies Act (primary legislation) UK Parliament 2006 Directors’ duties; business review (corporate reporting); non-binding vote on remuneration report, etc. Institutional investors Act (primary legislation enabling implementation by regulation) UK Parliament 2006 Disclosure of records. Act enables the measure to be introduced by regulation; currently no plan to do this. UK Corporate Governance Code UK listed companies Listing rules UK Listing Authority (UKLA), a division of the Financial Services Authority 2010-14 Listing rules require disclosure of compliance on ‘comply or explain’ basis. UK Stewardship Code Asset managers, asset owners and service providers Voluntary code Financial Reporting Council (UK financial reporting regulator) 2010 / 2012 Good practice standards on engagement with companies, including associated issues such as conflicts of interest and reporting. UK-regulated asset managers Financial Services Authority Handbook (rules set by financial services regulator) Financial Services Authority (UK financial services regulator) 2010 / 2012 Mandatory disclosure of commitment to the Stewardship Code on ‘comply or explain’ basis. “Charities and investment Matters” (CC14) Charities Guidance Charity Commission (UK charities regulator) 2011 Guidance across the spectrum of potential investment approaches, including on ESG risks, mixed motive investing and programme-related investments.
  26. 26. Excellence. Responsibility. Innovation. Hermes Investment Management Hermes Investment Management is focused on delivering superior, sustainable, risk-adjusted returns – responsibly. Hermes aims to deliver long-term outperformance through active management. Our investment professionals manage equity, fixed income, real estate and alternative portfolios on behalf of a global clientele of institutions and wholesale investors. We are also one of the market leaders in responsible investment advisory services. Our investment solutions include: Private markets International Real Estate, Pooled funds, Segregated mandates, UK Real Estate, UK Real Estate Debt, Infrastructure, Private Equity. High active share equities Asia, Global Emerging Markets, Greater China, Europe, Global and Small & Mid Cap. Specialist fixed income Global High Yield Bonds, Illiquid Credit, Multi Strategy Credit, UK Government Bonds and UK & Global Inflation-Linked Bonds. Multi asset Multi Asset Inflation Responsible Investment Services Corporate Engagement, Intelligent Voting, Public Policy Engagement and PRI. Offices London | Singapore Contact information United Kingdom +44 (0)20 7680 2121 Africa +44 (0)20 7680 2205 Asia Pacific +65 6808 5858 Australia +61 2 9924 6402 Canada +44 (0)20 7680 2136 Europe +44 (0)20 7680 2121 Middle East +44 (0)20 7680 2205 United States +44 (0)20 7680 2136 Enquiries marketing@hermes-investment.com
  27. 27. © Copyright 2012 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice.1 Sustainability @ HP Inc Dr Kirstie McIntyre. Director, WW Operations November 2015
  28. 28. © Copyright 2012 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice.2 Value of Sustainability to HP Customers call for it Commercial segments (retail, education, healthcare, government) have strong expectations 90% HP’s WW annual revenue depends on social and environmental compliance requirements Employees value it Investors watch for it Employees that volunteer are more motivated and more likely to recommend HP as a great place to work (HP data) 63% of millennials want their employer to contribute to social or ethical causes (Brookings, 2014) HP listed in Dow Jones Sustainability World Index four years running and in FTSE4Good since 2003. HP recognized leader by Carbon Disclosure Project receiving the highest rating possible, monitored by 800+ investment houses and dozens of enterprise and public sector customers
  29. 29. © Copyright 2012 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice.3 Protecting the Environment •  1st tech company with carbon reduction goals for operations, products, and supply chain •  Closed loop recycling innovations in >75% of ink cartridge units (plus 1M+ water bottles/day) •  Responsibly sourced paper: >50% is Forest Stewardship Council-certified •  Graphics solutions printing technology with health and environmental advantages •  370+ PC products recognized by environmental certifications (36% more vs. any competitor) •  Responsible product return and recycling in 73 countries; 2.8B lbs since 1987 (most in IT) Strengthening Society •  Many industry-firsts in fair treatment of workers in supply chain since 2003 •  Diversity & inclusion excellence awards in US, Mexico, Japan, Europe since 2014 •  Strong history of employee volunteering and giving (1.6M hours, $105M value in 2014) (HPQ) •  Decades of success improving education and entrepreneurship thru technology (>500K users) •  Support for entrepreneurs thru Kiva partnership: 120K employees loaned $4.7M (HPQ) Uncompromising Integrity •  Longstanding respect for human rights in policies and practices •  Privacy accountability leader (most trusted technology brand per Ponemon Institute) •  99.9% of employees completed Standards of Business Conduct training (FY15) •  Transparent and award-winning sustainability reporting (2014 Clarion Award) © Copyright 2015 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice. HP has a legacy of strength
  30. 30. © Copyright 2012 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice.4 Sustainability growth direction and trends Customers demand sustainability Millennial preferences Access over ownership Retailers, iconic brands and CEOs focusing on sustainability Supply chain transparency Increased regulation Blurring of consumer & enterprise markets (BYOD) Circular economy Academic inception of theory/ idea Think-tank/ NGO adoption Gov research / white paper developmen t Regulation
  31. 31. © Copyright 2012 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice.5 Any questions? Achieved top “A” rating on CDP’s 2015 Global and S&P 500 Performance Indices and 2015 Supplier Performance Index Listed on both World and North America Index for 2011-2015 Named to 2014 list of the 100 Best Corporate Citizens Received Excellence Award for fourth time Included on the FTSE4Good Index since 2003 Honored with Tribute Award for volunteering and service to communities Received three 2014 awards, including one for overall environmental sustainability Awarded 2014 Corporate Citizenship Award Won 2015 award for best social service campaign for Matter to a Million program Recognized as a top U.S. company for contributions to communities in 2013 and 2014 Named one of Canada’s Greenest Employers for eighth year in a row Received award for Best Carbon Disclosure Placed first in IT industry on list of 2014 Most Trusted Companies for Privacy Received 100% on Corporate Equality Index for 2003-2015 Named one of Brazil’s most sustainable companies in 2013 and 2014 Won 2014 award for Innovation in Collaboration Named among the Top 50 Companies for Executive Women Won 2014 Australia ARN ICT Sustainability Award
  32. 32. Sustainable Brands will.martindale@unpri.org
  33. 33. MANAGE RISKS, ENHANCE RETURNS, BETTER FULFIL FIDUCIARY DUTY PERFORMANCE NOT PHILANTHROPY “There are statistically significant positive abnormal returns associated with going long good corporate governance firms and shorting those with poor governance.” Yale School of Management RETURNS NOT SACRIFICE “The high-sustainability companies dramatically outperformed the low- sustainability ones in terms of both stock market and accounting measures.” Harvard Business School “We believe that ESG analysis should be built into the investment processes of every serious investor and into the corporate strategy of every company that cares about shareholder value.” Deutsche Bank DIVERSE APPROACHES NOT JUST EXCLUDING UNETHICAL INVESTMENTS RISK MANAGEMENT NOT BREACH OF FIDUCIARY DUTY “Failing to consider long-term investment value drivers, which include ESG issues, in investment practice is a failure of fiduciary duty.” PRI, UNEP FI Fiduciary Duty in the 21st Century
  34. 34. THE GROWTH IN RESPONSIBLE INVESTMENT
  35. 35. GLOBAL ESG REGULATION
  36. 36. FIXING THE INVESTMENT CHAIN
  37. 37. RESOURCES !  United Nations-supported Principles for Responsible Investment: http://www.unpri.org/ !  The Sustainable Stock Exchanges Initiative: http://www.sseinitiative.org/ !  Montreal Pledge: http://montrealpledge.org/ !  Fiduciary Duty in the 21st Century: www.unpri.org/wp-content/uploads/Fiduciary-duty-21st-century.pdf !  UK Law Commission: Fiduciary Duties of Investment Intermediaries: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/ 325508/41342_HC_368_LC350_accessible.pdf !  Keith Johnson, Introduction to Institutional Investor Fiduciary Duties: http://www.reinhartlaw.com/Documents/art140402%20RIIS.pdf !  Al Gore, Navigating Sustainability: http://www.huffingtonpost.com/al-gore/navigating-sustainability_b_8072652.html !  Reuters, Sustainable Investing is a Fiduciary Duty: http://uk.reuters.com/article/2015/09/06/uk-funds-investing-duty- idUKKCN0R610O20150906
  38. 38. 18 November 2015 Discover more. www.erevalue.com © 2015 eRevalue, Ltd.

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