Trillions of dollars of pension fund, insurer and mutual fund money are already invested in companies that have been screened for their good environmental, social and governance (ESG) track record.
Assessments are made on the basis of published information, but the release of such data has been patchy, making the job much harder.
The Corporate Social Responsiobility (CSR) Directive will compel “large, public-interest” firms across the European Union to provide details on how they tackle issues such as environmental, social, employee, human rights, corruption and bribery matters.
Paul Ellis, chief executive officer of the Keighley-based Ecology Building Society, said: “The new legislation is a significant step towards providing investors with the information they need on the wider impact of companies’ activities.
“This isn’t a nice-to-have: there is increasing evidence to show that sustainability is a key driver of long-term business success, including Ecology’s 30 years of uninterrupted profit.”
A report published in January by Hermes Fund Managers bears this out, finding that well-governed companies outperformed returns on the poorly governed by an average of over 30 basis points over the past five years.
What form the disclosure may take has yet to be hammered out – the legislation still needs to be approved by EU member states – and the rules do not even prescribe the use of specific key performance indicators (KPIs), which would allow investors to compare companies more easily.
There has also been criticism that the legislation has been watered down. In its original form, it would have applied to around 18,000 enterprises across the EU, but following complaints from some companies, will now only apply to 6,000.
Mr Ellis said: “Transparency around social and environmental performance is central to improving the behaviour of businesses of all sizes, but for that to happen, investors need information they can act on. This means comparable data on key performance indicators across a wider range of companies, not just the large corporates.”
The requirements also were softened. Companies must “comply or explain”, which means they can avoid giving data if they have a good excuse. They also may be allowed to delay the release of some information by up to six months following the financial data for the same time period.
Nevertheless, the significance of the legislation is not to be underplayed. This is, after all, a vast market, with total global ESG assets under management amounting to at least $13.6 trillion at the end of 2011, according to The Global Sustainable Investment Alliance.
Some 1,200 investment managers and service providers managing nearly $35tn globally have signed up to the United Nations-backed Principles for Responsible Investment Initiative, which launched in 2006, and the new legislation builds on the work of pressure groups, academics, investors and politicians since then.
Some countries such as France already require certain information from companies, but the legislation goes much further and will make comparisons easier between companies in, say, Poland and Portugal.
“It’s an historic piece of legislation”, said François Passant, executive director at sustainability think-tank Eurosif, which represents asset owners and managers with more than 1tn euros in assets under management.
“ESG matters tend to materialise over the long term. So, if you’re a pension fund with long-term liabilities, it’s really vital you take into account non-financial risks.
“Sure, there are weaknesses – it’s a compromise – but it’s the turning point for non-financial reporting. If explanations are not reasonable, you can be challenged by shareholders.”