Environmental, Social,

and Governance Factors

at Listed Companies
A Manual for Investors
©2008 CFA Institute

The mission of the CFA Institute Centre for Financial Market

Integrity is to be a leading voice on issues of fairness, efficiency,
and investor protection in global capital markets and to promote
high standards of ethics, integrity, and professional excellence
within the investment community.

CFA Institute, with more than 94,000 members worldwide, is the

not-for-profit organization that awards the Chartered Financial
Analyst® designation.

ISBN 978-1-932495-78-2
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Environmental, Social, and Governance

Factors at Listed Companies:
A Manual for Investors

CFA Institute Centre for Financial Market Integrity

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Relevance of ESG Factors to Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Key ESG Issues to Consider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Legislative and Regulatory Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Legal Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Reputational Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Operating Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Appendix A. Sample ESG Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Appendix B. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Appendix C. ESG Organizations, Principles, and Other Resources . . . . . 25

Appendix D. ESG Studies and Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

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Introduction
Successful investing is dependent on one's ability to discern the factors that influence the
market's valuation of a Company (“Company”)1 and then judge the accuracy of that
valuation. Analysts are generally well versed in using financial metrics to understand those
drivers of corporate value and lend skilled interpretation to what is often highly detailed
accounting data. In recent years, however, nonfinancial2 factors—including environmental,
social, and governance (ESG)3 factors—have figured ever more prominently in the value of
corporations. For example, at Companies such as Enron Corporation, WorldCom, and
Parmalat, corporate scandals, and in some instances outright fraud, have rendered financial
data untrustworthy and brought corporate governance issues to the forefront of Investor
(“Investor”)4 consideration. Similarly, increased sensitivity to the potential implications of
climate change has sparked interest in the investment consequences of Companies’ strategic
positioning to address this environmental concern.
Increasingly, analysts are probing a wide variety of nonfinancial factors to better understand
their potential impact on the valuation of a Company. Traditional financial analysis already
accounts for certain “intangibles”—such as goodwill—but up to this point has been less
successful in integrating more dynamic, nonfinancial attributes. ESG factors represent a
broad set of intrinsic concerns that may ultimately affect valuation of equity, fixed-income,
real estate, and infrastructure investments.

Offering Investors Tools

This manual aims to help investment professionals identify and properly evaluate the risks
and opportunities ESG issues present for Investors in public Companies and in the process
clarify the relatively sparse and inconsistent information provided in current financial
statements. Some Investors may choose to consider ESG factors for emotional or political
reasons—for example, they may favor a product for its “social good”—but such uses are
beyond the scope of this manual, which is strictly focused on ESG factors as they relate to
investment management.
In 2005, the CFA Institute Centre for Financial Market Integrity published The Corporate
Governance of Listed Companies: A Manual for Investors so that all Investors—be they existing
Shareowners (“Shareowners”)5, potential Investors, or analysts—could learn how to better
evaluate the corporate governance risks inherent in the Companies in which they invest. The
corporate governance issues discussed in The Corporate Governance of Listed Companies are still
relevant to Investors; therefore, we refer interested readers to that document for a more
detailed analysis of corporate governance issues and do not address many of these governance
issues in this manual. Rather, Environmental, Social, and Governance Factors at Listed Companies
serves as a supplement to our earlier manual to help the Investor better understand and
evaluate the particular social and environmental factors that have the potential to affect
Company valuations.
Consideration of ESG factors in the context of investing is not a new phenomenon. Many
analysts and Investors already consider ESG-related issues in their analysis when they include
an assessment of regulations, litigation, political risks, and the like. This manual aims to help
Investors better understand the broad range of ESG factors to consider in properly analyzing
Companies, indicates where to find this information, and provides a primer on the diverse
vocabulary of ESG analysis.
1
The “Company,” as used in this manual, is the firm in which the Shareowners have an ownership position
and in which Investors are considering an investment.
2 The terms “nonfinancial” factors and “ESG” factors are used often in this manual but are not meant to be
used interchangeably, or as synonyms. ESG factors are one kind of nonfinancial factor, but there are a wide
range of nonfinancial factors that Investors must look at beyond ESG, such as key performance indicators
(KPI) and enhanced business reporting (EBR) factors.
3
Bold indicates common ESG terms defined in Appendix B.
4 The term “Investor” refers to all individuals or institutions who are considering investment opportunities in
shares and other securities of the Company.
5
The term “Shareowners” is distinguished from the term Investors by referring only to those individuals,
institutions, or entities that own shares of common or ordinary stock in the Company in question.

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What's in a Name?
Varying labels have been ascribed to similar factors in the past, including “sustainability
factors,” “corporate social responsibility (CSR) factors,” “nonfinancial factors,”
“extrafinancial factors,” and “social investment factors.” Consideration of such factors
traditionally has been used to align investment strategy with sponsor organizational missions
and philosophies, to orient investment decisions with larger societal goals and objectives, and
to make investment decision making consistent with personal political views. There also have
been academic and commercial efforts to consider the potential economic impact of these
factors on portfolio Companies, both to understand potential new opportunities on which
Companies may capitalize and to indentify risks that may place constraints on future
economic resources of a firm.

Reasons for Considering ESG

Investors may choose to incorporate the evaluation of ESG risk exposures as part of their
investment process for diverse reasons. Some may wish to better understand how future ESG
trends could affect an industry they follow, and others may believe screening for ESG factors
can lead to enhanced security selection and risk management. Some Investors might consider
an ESG analysis as one proxy for the quality of management.

Through the publication of this manual, the CFA Institute Centre does not endorse any
particular ESG screening practice but, instead, offers Investors the tools they need to
understand and consider these nontraditional ESG-related factors in order to gain a more
complete understanding of a Company's prospects.

Augmenting traditional financial analysis with consideration of ESG factors is complicated

by a changing political and regulatory landscape. Companies face varying degrees of ESG-
based risks and opportunities depending on the industries and cultures in which they
operate. For example, utilities face greater exposure to environmental risks than do software
providers, just as clothing manufacturers face unique labor challenges that do not appear in
the financial services industry. As global political and regulatory agendas shift over time, new
factors may become more acute and relevant to the investment perspective.

A Company that incorporates ESG exposures into its long-term strategic planning and
adequately communicates these factors and strategies to Investors will provide a more
complete picture of that Company’s prospective value. Strategically incorporating ESG
analysis may also position Companies to better anticipate future operating environments,
including potential costs or burdens to their existing business model.

Likewise, those money managers and financial analysts who can interpret and relate ESG
factors to a Company’s future prospects may potentially develop a competitive advantage
should others fail to recognize the same risks or opportunities related to those factors. In
order to succeed in this arena, analysts need both the willingness to assign weight to ESG
factors and an understanding of the appropriate metrics that help show how ESG
considerations affect value.

Environmental, Social, and Governance Factors at Listed Companies focuses on the legislative and
regulatory, legal, reputational, and operational ESG risks and opportunities Shareowners will
need to consider to fully understand the Companies in which they invest. This manual
addresses each risk and opportunity—along with its respective implications for Investors—
and suggests resources for incorporating those risks or opportunities into the analysis process.
Compared with the vast wealth of financial statement data gathered and analyzed as the
current standard for evaluating Companies, the collection and evaluation of nonfinancial
data is in its infancy. Information gathered in this manual will help Investors understand how
ESG issues affect a Company, identify the relevant ESG factors that affect a publicly traded
Company, and suggest further resources to help assess the potential impact of such factors
on Company values.

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Relevance of ESG Factors to Investors
In April 2006, investment funds representing more than US$4 trillion in assets backed the
United Nations Environment Programme Finance Initiative (UNEP FI) and the UN Global
Compact Principles for Responsible Investment (PRI).6 Signatories of both principles believe
that ESG factors can affect the long-term performance of investments. By July 2007, more
than 200 global institutions, representing over US$9 trillion in assets under management,
had endorsed the PRI.

CFA Institute stresses as a fundamental governing principle that financial professionals

worldwide have a duty to act in the best interests of their clients and ultimate beneficiaries.
There is an increasing recognition of the need to include the analysis of ESG factors in
order to more completely fulfill this duty (see Appendix D, under ESG, Freshfields
Bruckhaus Deringer 2005). However, it is as important as ever that the analyst maintain a
balanced and professional approach—factor in environmental or social issues while being
careful not to distort investment decisions with political or emotional agendas that do not
serve the clients’ interests.

Another key responsibility of an investment manager is to know the client well enough to
ensure that the time frames of the investment process are aligned with the client’s financial
needs. Clients with long-term time horizons will often require that their investment
managers take into account issues that have a long-term impact on valuations, which will
certainly include environmental, social, and/or governance factors.

Awareness
A growing number of Investors (such as those committed to the PRI and other initiatives)
have begun to focus on ESG factors to arrive at a more thorough understanding of the risks
and opportunities that face the Companies in which they invest. These Investors share the
view that a prudent Investor ought to consider ESG issues in his or her analysis because these
factors can have an impact on investment performance. Indeed, a number of investment
banks already employ dedicated “ESG teams” who are charged with evaluating relevant issues
and incorporating them into the larger equity analysis processes. Consulting firms have also
recently enhanced their ESG competencies to serve the growing demand from their pension
fund clients for attention to such matters.7

As Investors have increasingly included corporate governance risk exposures in their

investment decision-making processes, as well as in their engagement and proxy-voting
activities, governance ratings agencies have emerged to meet the growing demand for
information on governance-related risks at publicly traded Companies. Many Investors rely
on such private governance ratings agencies to assess the governance risk found in their
own portfolios.

Investors also have become more willing to push for governance changes at the Companies
in which they invest, sometimes taking on entrenched management teams or inattentive
Boards (“Boards”)8 to protect the Company’s value. Activist Shareowners are addressing
various governance issues, such as mismanaged Company finances, incoherent strategic
vision, failure to capitalize on investment opportunities, and management's refusal to
invest a large cash position in future growth. Some of these strategies have delivered
competitive returns for Investors and may have prompted changes in corporate behavior
that lend greater transparency to the overall market, to the benefit of all Investors.

6A copy of the paper can be found at www.unpri.org/files/pri.pdf

7 “Watson Wyatt Hires for ‘Green’ Investing,” Financial News (November 2007).
8 The term “Board” in this manual refers to both the supervisory board in countries with a two-tier board

structure and the board of directors in countries that use a unitary board.

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Along with increased Investor awareness, regulatory focus on transparency and disclosure
in governance has sharpened, as has academic research on the link between governance
practices and corporate performance. Although the intensity of focus on environmental
and social issues does not yet match the depth or breadth of scrutiny placed on corporate
governance issues, there is increasing interest in such factors as energy utilization and
production of greenhouse gases.

Climate Change Tops List of Environmental Issues

Markets are accepting scientific research that shows the earth is experiencing a climate
change. Many Investors are concerned with the degree of mankind's influence on this
change, and as a result, this environmental factor will gain expanded relevance in financial
analysis. Based on the initial response of governments worldwide, it is reasonable to assume
that in the near future Companies will need to deal with a changed corporate landscape that
addresses climate change. This new landscape might be one in which carbon-based energy
sources face either restricted use, increased taxation, and/or increased regulation (see
Appendix D, under Environmental, Intergovernmental Panel on Climate Change 2007).
Indeed, in early 2008, three investment banks announced that they had agreed to factor in
the risks posed to the environment from carbon emissions when lending to power Companies
planning to construct coal-fired power plants.9

Climate change may be the most prominent environmental issue facing Companies, but
it is clearly not the only one. Investors and analysts should understand how such issues as
pollution, resource depletion, ecosystem change, waste disposal, the use of toxic chemicals,
the license to operate in communities, and other environmental issues affect a Company
in order to fully understand the environmental risks and opportunities facing the
Companies they follow.

Although carbon-intensive industries, such as oil and gas and the utilities sector, will be a
principal target of any pending carbon legislation, the uncertainty around such changes
is currently hindering analysts and the corporate community in properly assessing the
potential future effects of regulation and changing cost structures. Future climate change
regulations will likely have ripple effects across all sectors, including those outside carbon-
intensive industries. In a carbon-constrained world, Companies that seize an early
opportunity by developing technologies in anticipation of this changed environment may
offer a lower risk profile and enhanced return opportunities to their Shareowners
compared with competitors that do not adequately prepare for these developments.

Analysts may not have access to appropriate disclosures and metrics to properly assess the
risk to a Company’s bottom line posed by a carbon-dependent business. In the absence of
uniform data that can be measured, it is not especially surprising that balance sheets and
income statements do not explicitly reflect these potential risks. Thus, the task of
developing measurement tools that give appropriate weighting to ESG factors is an
important challenge to more widespread use of such factors.

Some resources, such as the Global Reporting Initiative (GRI)10 and the Carbon Disclosure
Project11, have attempted to quantify some environmental measures in order to better
facilitate meaningful comparisons between Companies in the same industries, or with
similar risk profiles. Groups such as the Enhanced Analytics Initiative (EAI) have tried to
focus attention on factors that do not normally appear on the financial statements of
publicly traded Companies—including environmental and social factors—by allocating a
percentage of their broker commissions on the basis of how well brokers integrate analysis
of extrafinancial factors and intangibles into their mainstream (sell-side) research.

9 Howard Winn, “Banks to Evaluate CO2 Emissions on Loans,” FinanceAsia.com (6 February 2008).
10 www.globalreporting.org.
11 www.cdproject.net.

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The Social World
Social factors (such as human rights, worker rights, safety, labor relations, child labor,
community relations/development, and indigenous rights) play an increasingly expanded
role in the public's perception of listed Companies. News of a poor safety record or the use
of forced labor has the potential to damage a Company’s reputation. That negative
reputation, in turn, adversely affects the financial prospects of the Company in the public
eye by depressing revenue or prompting new regulatory burdens. In an age of instantaneous
communications, potential Investors around the globe can observe a Company’s social
behavior within seconds of an event or breaking news story. Investors need to understand the
social risks that threaten the reputation and brand integrity of the Companies in which they
invest. Similar insights into the potential implications of a Company’s labor and community
relations practices will help Investors understand their potential to influence value as well.

In some cases, the outcome of evaluating the ESG risks and opportunities may simply be
predictive, and in other cases, quite material. New protocols (such as the European Union
Accounts Modernisation Directive of 2005) require disclosure of consideration of the
potential impact of nonfinancial factors (such as environmental and employee matters)
as part of a “business review.” Such mandated disclosures may spur more systematic review
of ESG information across industries or sectors, thus improving the predictive value of this
information in the investment process.

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Key ESG Issues to Consider
Although this should by no means be thought of as an exhaustive list, the following are some
of the key ESG issues that historically have been areas of concern for Shareowners. These
and other issues will continue to offer risks and opportunities to Investors in the future.

Investors seeking a truly thorough understanding of the Company or industry being

analyzed will consider the relevance of these issues to that Company and will consider each
issue for its potential for financial impact.

Environmental

Carbon emissions, greenhouse gas emissions, disclosure/measurement and reporting

Climate change; effect on Company/risk exposure/opportunities
Ecosystem change
Facilities citing environmental risks
Hazardous waste disposal/cleanup
License to operate in communities
Pollution
Renewable energy
Resource depletion
Toxic chemical use and disposal

Social

Animal welfare
Child labor
Community relations
Discrimination
Diversity (employee/Board diversity)
Facilities, citing social risks
Genetically modified organisms
Living wage disputes
Predatory lending
Political contributions
Political risk of involvement in troubled markets, countries
Sexual harassment
Shareowner advisory vote on executive compensation
Slave labor

Governance

Cumulative voting
Dual-class share structure
Executive compensation (pay for performance, pay equity)
Majority voting
Poison pills
Say on pay
Separation of chairman/CEO position
Shareowner rights
Staggered Boards
Takeover defenses/market for control

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Legislative and Regulatory Factors
Shareowners face the risk that laws and regulations affecting a Company’s operations will
change, with potentially adverse effects on the Company’s continued profitability and even its
long-term sustainability. Investors also need to be aware of new regulatory frameworks, such
as industry self-regulation or where businesses set the bar for acceptable behavior and
governments intervene only when business fails to adequately regulate itself. Many Companies
are involved in helping to develop voluntary or regulatory frameworks concerning a number
of issues, from carbon emissions standards to worker health coverage. Such involvement at
the industry level ensures that the Companies’ perspective is represented and facilitates their
ability to implement changes if such adjustments become a regulatory mandate.

There also is an opportunity for Companies to proactively adopt new industry standards,
making them more competitive in both local and international markets and better prepared
for imminent legislation. Legislative and regulatory changes are also likely to spur the
adoption of new technologies, offering new investment opportunities for Investors.

Risks in Regulating Climate Change

Uncertainty about future legislative or regulatory actions regarding climate change means
Investors may have a particularly difficult time accounting for risks or opportunities
associated with this factor. Governments around the world may be likely to take some
legislative or regulatory action in order to address climate change, yet great unknowns—the
speed, direction, and magnitude of such governmental mandates—lend uncertainty to the
operating environment. Analysts should understand the legal and regulatory frameworks in
which public Companies operate and be able to assess the likelihood of significant changes
in these regulatory regimes.

For example, in early 2007, the U.S. Supreme Court ruled that the U.S. Environmental
Protection Agency (EPA) has the responsibility to regulate greenhouse gases under the
existing Clean Air Act, an action that could open the door for tighter regulation. Months
after this decision, President Bush's administration introduced a plan for progressively
tighter automobile emissions standards to cut U.S. gasoline consumption by 20 percent
over 10 years. As of mid-2008, multiple bills are pending in the U.S. Congress to address
the issue of climate change by attempting to reduce the amount of greenhouse gas
emissions. Based on these and other legislative efforts, it is likely that greenhouse gas
emissions will come under stricter control in the United States in the near future. Such
policy changes would have meaningful impacts on a number of industries.

On a smaller, state-sized scale, the California Energy Commission adopted stricter

greenhouse gas emissions standards for publicly owned utilities in May 2007. This action
will hit the heaviest emitters of greenhouse gases (such as coal-fired power plants) the
hardest, making it much more difficult for such plants to compete in the state of
California.12 If such a standard becomes the norm in other markets, Investors in plants
with the highest greenhouse gas emissions could suffer the greatest financial setbacks.

Elsewhere, the European Union’s 2007 tightening of allocation of carbon dioxide emission
limits has threatened to sharply limit the growth of steel manufacturing operations. One
possible outcome of this action could be to shift business to other parts of the globe where
emissions are not subject to such stringent control.13

12 “California Energy Commission Adopts Standards to Limit Power Purchases from Coal-Fired Plants,” Global

Power Report (31 May 2007).

13 “Mittal Says EU Emission Cap Will Limit Growth,” The Guardian (30 July 2007): http://business.guardian.

co.uk/story/0,,2137464,00.html; retrieved 16 October 2007.

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Not All Factors Bring Risk
Regulatory changes can bring opportunity in a number of ways. In Brazil, for example,
financial regulators established the Nuevo Mercado (New Market), a part of the São Paulo
Stock Exchange with stricter reporting rules and expanded Shareowner rights, to attract
investment from outside the country. So far, the promise of greater transparency and higher
corporate governance standards by the Companies listed on the New Market has led to great
increases in foreign capital invested in Brazilian listed Companies. A Brazilian Company that
chooses to list on the New Market sends a signal to its Shareowners that the Company is
committed to the highest level of transparency and accountability available in the Brazilian
market. Investors looking to invest in Brazil can feel more confident about the corporate
governance standards of a Company listed on the New Market than about a similar Company
without such governance safeguards.

IMPLICATIONS FOR INVESTORS

Investors need to understand the potential for changes in the legal and regulatory
frameworks that can impose additional costs or establish new opportunities for Companies.
This investing calculus is complicated when the future regulatory environment is expected
to change but the magnitude and implications of that change remain unknown—as is indeed
the case with the current state of much climate change regulation. Some Companies may be
better equipped than others to influence change and adapt, thus allowing them to maximize
opportunity and minimize disruption to their business model.

Things to consider
Investors should determine whether:

• The current or anticipated legislative and regulatory environment helps or hinders the
current and long-term strategy of a Company.
• A Company has identified and addressed the current and future legislative and regulatory
risks of the markets where it operates and has communicated those matters to Investors.
• A Company clearly communicates its strategy for addressing a current or future legal or
regulatory environment to the Investor’s satisfaction. This could include a “scenario
analysis” of possible regulatory and legislative outcomes and how the Company plans to
adapt to each potential scenario.
• A Company reports on its environmental or social performance according to a well-
recognized independent standard. For example, a Company that produces environmental
reports according to the guidelines of the Global Reporting Initiative or the Carbon
Disclosure Project offers Investors the ability to more easily understand certain ESG risks
and opportunities facing the Company.
• A Company adequately discloses its current and projected greenhouse gas emissions if
that Company operates in a carbon-intensive industry. These data will help an Investor
better understand and compare the climate change exposure a Company may face in
relation to its peers. Information that is audited or otherwise verified by an objective
third party is more compelling than self-reported data.

Where to find information about legislative or regulatory risks and opportunities

• Most Companies will disclose information about the legislative and regulatory
environment they face in their annual and/or quarterly reports to Shareowners. An
Investor may have to look in multiple places, such as the management discussion and
analysis (MD&A), legal proceedings, risk factors, business summary, or other sections of
the annual report or annual financial report.
• Some ESG-related information may be found in current financial statements because it
may reflect the past, current, and in some cases the pending costs of certain ESG factors.
Items such as write-downs of impaired assets or contingent liabilities may already reflect
a Company’s best estimates of costs related to current ESG factors.

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• Sell-side research and broker reports are increasingly covering ESG issues in their
Company evaluations, and some reports even focus on ESG issues exclusively. In addition,
some investment banks have established dedicated ESG research departments. Investors
should consider gathering information from clearinghouses for nonfinancial reports
that focus on how certain regulations may influence an industry as well as from
specialized units or firms that consider ESG issues in their analysis.
• Investors also may turn to one of the specialist research providers that have emerged in
recent years to focus exclusively on ESG issues. Because of their focus on one or more
aspects (environmental, social, or governance) of ESG issues, these services can offer a
more specialized analysis.
• If a Company operates in an environment where carbon emissions and current or future
carbon regulation is a potential concern, Investors should understand the Company’s
current or imminent potential for exposure on carbon issues. A Company may disclose
this information in its annual report or in a companion sustainability report. Central
clearinghouses, such as the Carbon Disclosure Project and the Global Reporting
Initiative also provide comparative data on thousands of public Companies.
• Many Companies already produce an annual sustainability report, environmental health
and safety report, or some other similar disclosure that provides enhanced qualitative
and quantitative data concerning the environmental, social, and safety issues relevant to
that Company. Such reports are generally found on a Company’s website and may be
ordered from the Company if an Investor prefers a printed copy of the document. These
reports increasingly feature meaningful information germane to the unique risks a
Company faces. For example, an electric utility will likely publish an environmental
report that details that Company’s yearly emissions of greenhouse gases, including trends
and expected future projections. A clothing manufacturer will likely use such a report
to describe its labor practices and how they compare with internationally recognized
standards. It is increasingly rare to find a Company that operates in an environmentally
or socially sensitive industry that does not produce such a report.
• Some Companies may report their compliance with process standards, such as ISO 14000
(environmental compliance) or SA8000 (supply chain labor practices). Others may
emphasize how they comply with performance standards such as those laid out by the
Global Reporting Initiative. If a Company reports its compliance with or performance
relative to such a standard, it is likely that the Company will mention this in its yearly ESG
report or annual report.
• Second-order effects of ESG factors (for example, increases in climate-related diseases
as a result of climate change) may make assessing their potential for impact on specific
Companies more difficult. Thus, general research related to key issues may help the
analyst develop and test hypotheses of potential effects on Companies. General news
reports and the business press may be useful in this regard, as might be more specialized
journalism that is focused on environmental and social issues related to such second-
order effects.

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Legal Factors
If Company managers do not effectively address sustainability factors and end up embroiled
in lawsuits or other judicial troubles, there is considerable potential for material losses for
the Company and Investors. Legal risks will vary by market: Companies in a relatively litigious
market—such as the United States—are apt to face legal risks more frequently than a similar
Company in a less litigious market.

Obligation to Shareowners
As Shareowners and markets increasingly recognize the effects and potential legal implications
that ESG factors have on Company valuations, it will become imperative for Companies to
understand the legal obligations they have to Shareowners to address such factors. Some
jurisdictions—for example, the JSE (Johannesburg Stock Exchange)14—strongly encourage
Companies to include certain disclosures relevant to ESG factors in reporting. A case could
be made that U.S. Securities and Exchange Commission (SEC) Regulation S-K also requires
discussion of potential ESG factors in the MD&A to the extent that those issues are material.15
International Financial Reporting Standards (IFRS) and Canadian and U.S. Generally
Accepted Accounting Principles (GAAP) already require that Companies recognize known
asset impairment if the impairment is material. Indeed, underwriters of directors and officers
liability insurance policies are considering the implications of failing to disclose corporate
exposure to the anticipated consequences of global warming.16

The Price of Risk

Environmental costs created by corporate activity may no longer be dismissed as outside the
Company’s responsibility. For example, a U.S. utility recently agreed to a US$4.6 billion
settlement—including some US$60 million for remediation of past environmental damage—
resulting from alleged violations of the EPA’s Clean Air Act New Source Review provisions
covering power plant emissions.17

Company or industry behavior can alter the legal environment and profoundly affect the
businesses in that industry. In 2006, as a result of public outcry over the lending practices of
industry practitioners, the Japanese government made legislative changes that devastated the
future financial prospects of the consumer lending industry in that country. The Japanese
government was spurred into action following criticism of industry practices, such as
aggressive collection tactics—including harassment of families and co-workers of
borrowers—that led to thousands of suicides each year by desperate borrowers.18 Activists
pushed for laws to make it harder for consumers to accumulate excessive debt. Japanese
legislators acted by placing caps both on the interest rate allowable on some consumer loans
and on a consumer’s debt ratio to one-third of annual income. These legislative changes
severely curtailed the earning power of consumer lenders in Japan, which caused some firms
14
The JSE has established the Socially Responsible Investment Index (SRI Index) to help identify Companies
listed on the JSE that embrace sustainability in their business operations. Participation in the SRI Index is
voluntary. Companies that participate are rated based on a series of criteria in social, economic, environmental
sustainability, and corporate governance practices. Each category is then divided into three subcategories:
policy, management and performance, and reporting and consultation. To be included in the SRI Index,
Companies must achieve an overall score of at least 70 and are required to achieve a certain number of points
in each individual category.
15 Regulation S-K contains the disclosure requirements for the nonfinancial statement portion of filings with

the SEC.
16 Joseph P. Monteleone, “Global Warming—Will There Be Exposures for Directors and Officers and Will It

Be Covered?” Presented at Mealey’s Global Warming Litigation Conference: Are You Ready? San Francisco,
California (6 June 2007).
17 American Electric Power, “AEP Reaches Settlement Agreement in NSR Case,” press release (9 October 2007):

http://www.aep.com/newsroom/newsreleases/default.asp?dbcommand=DisplayRelease&ID=1411;
retrieved 16 October 2007.
18 “Credit, Where Credit Is Due: Until ‘06, Japan Lenders Had Suicide Coverage,” Atlanta Journal-Constitution

(9 September 2007).

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to leave the industry and others to fail despite their attempts to continue operations. (This
example can, of course, also be seen as a legislative risk; a number of examples given in this
manual may exhibit risks or opportunities spanning multiple categories.)

If a Company operates under a policy or produces a product that is harmful to its customers
or if its manufacturing facilities involve a process that may be harmful to the environment,
the Company may face legal risks that could prove detrimental to the Company’s future
prospects. The cost of bankruptcy brought about by unforeseen ESG issues, both in terms
of its effect on Shareowners and on the Company itself, may take years and billions of
dollars to resolve.19 Such events emphasize the extreme risk that some Companies must
face when operating in industries in which ESG issues are a concern.

IMPLICATIONS FOR INVESTORS

Investors need to understand the legal risks inherent in the ESG factors relevant to the
Companies in which they invest. Similar to the factors they face with legislative and regulatory
risk, Investors must also understand how both the current and future legal environment may
potentially affect a Company. For example, stricter restrictions on greenhouse gas emissions
may change the definition of pollution and impose tougher legal obligations on Companies
in the future.

Things to consider
Investors should determine whether:

• The current or anticipated legal environment helps or hinders the current and long-
term strategy of a Company.
• A Company has identified, addressed, and communicated to Investors the risk it faces as
a result of potential changes in the legal and regulatory environment.
• A Company has mechanisms in place to research, anticipate, and address any expected
legal or regulatory changes.

Where to find information about legal risks and opportunities

• Most Companies will disclose the legal risks they face in the legal proceedings section of
their annual reports. The MD&A may also discuss strategic legal risks. Typically, this
discussion is limited to current or pending litigation, although potential future legal risks
may also be discussed.
• Sell-side research and broker reports that focus on ESG issues may concentrate on how
those issues influence the legal environment in certain markets.
• Specialist research providers that focus exclusively on ESG issues offer specialized analyses.
• Industry reports and news searches may yield further information about the risks
Companies face with regard to the legal and regulatory environment. Information
concerning the unique sustainability-related legal factors facing some Companies may
be explored further in news or industry reports that detail the challenges facing certain
industries. This analysis might not necessarily address risk to specific Companies but may
instead suggest trends in the evolution of relevant legal and regulatory frameworks that
could pose future concerns for Companies.

19 See, for example, “Asbestos Cost Creates Huge Loss for Owens Corning,” Associated Press (11 February 2003).

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Reputational Factors
Risk to a Company’s reputation from ESG-related factors is an increasingly recognized
consideration that can affect brand, market share, and public perception of integrity.
Specifically, Companies whose managers have inadequately managed ESG factors in the past
and failed to eliminate or otherwise mitigate this risk exposure could suffer greater market
value loss than otherwise comparable Companies that have properly addressed such factors.

Famous or Infamous?
Investors should consider what a Company does to maintain and protect one of its most
important assets: its reputation. Companies that anticipate challenges to the strength of their
brand identity and corporate reputation are better able to preserve the value of their
corporate franchise when any trouble does arise. Often, a good understanding of
reputational risk factors and adequate planning and preparation can save Companies from
the corporate damage done by oil spills, chemical accidents, or poorly handled labor
relations. Yet, it is also important that Investors distinguish between sound policies and mere
public relations sound bites or “greenwashing.” A Company that merely promotes itself as
“green” or socially and/or environmentally conscious without taking the necessary steps to
protect its reputation will remain vulnerable to ESG risks.

Apparel manufacturers have long faced scrutiny over labor practices and working conditions
at their own or suppliers’ factories around the world. In recent years, some Companies have
offered more transparent reporting of their labor practices in response to past criticism.
Public exposure of sweatshop conditions and employees denied a living wage have brought
negative attention to many in the apparel industry. Consequently, Companies that
understand the risks their reputation may face from such accusations will enhance both their
practices and reporting on working conditions in contract factories.

Responsibility in Action
For example, an apparel manufacturer that adopted measures to improve working conditions
in its factories and address the rising concerns of consumers, Investors, and critics about labor
standards at its factories also improved its reporting.20 This Company’s Investors may now
review the “Workers in Contract Factories” section of its environment, health, and safety
report and determine for themselves whether the Company is acting responsibly. The
Company audits—in partnership with outside environmental, health, and safety
consultants—and reports on more than 650 contract factories around the world to determine
these factories’ compliance with Company labor policies.21

In another industry, two major U.K.-based grocery store chains have competitively marketed
themselves as environmentally and socially conscious retailers and have promoted their
commitment to such policies as local sourcing of merchandise to cut down on vehicle emissions
from transporting goods to market. One chain has adopted “fair trade” policies to increase
the amount of fair trade goods in its stores and has vowed to sell only fair trade items in some
circumstances. For instance, the store will now only carry bananas if they are fair trade.22

The other chain has promised to measure and disclose the general environmental impact of
each self-branded product23 and is considering disclosing the carbon footprint of all products
sold in its stores as well.24 These issues have implications for the reputation of both
Companies—and their suppliers—if consumers will indeed differentiate products based on
the social or environmental “footprint” of a given product.

20 See “Nike Unfurls Anti-Sweatshop Measures,” Footwear News (18 May 1998).
21 See http://www.nikeresponsibility.com/#home/.
22 See “Sainsbury’s to Sell Only Fairtrade Bananas,” Datamonitor News and Comment (12 December 2006).
23 See “Tesco to Map Carbon Footprint of 30 Products,” Reuters (10 October 2007).
24 See “‘Green’ Tesco Has Worked Out the Wind Direction,” Daily Telegraph (10 October 2007).

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Some Shareowners may argue that carrying fair trade or environmentally sensitive products,
which are usually more expensive to stock, may reduce a Company’s profit margin. Others
counter that by featuring such products, Companies can not only attract a growing subset of
consumers who will seek out such products but also enhance their reputation, increase sales,
and grow market share. Indeed, a Company legitimately dedicated to such initiatives as fair
trade or selling environmentally friendly products may earn brand loyalty from consumers
inclined to buy such goods and “do something positive” for society.

IMPLICATIONS FOR INVESTORS

Investors need to understand the impact a Company’s reputation can have on its value and
assess what measures that Company has taken to deal with risk exposures. For example, a
utility Company that relies exclusively on nuclear power generation faces very different risks
from an energy provider that is powered by coal. Regardless of which factors each utility
Company might face, they all will benefit from proper planning for and management of
environmental risks.

Things to consider
Investors should determine whether:

• A Company views its reputation as a key strategic asset and manages it accordingly.
• A Company has developed adequate plans for evaluating the risks its reputation may face.
In some cases, a Board-appointed committee will be responsible for reviewing such risks
and helping to develop plans for dealing with potential reputational risks.
• A Company has identified and has adequately communicated to Shareowners the
potential reputational risks inherent in its line of business.
• A Company has mechanisms in place—such as crisis planning or training for executives/
the Board—to adequately deal with situations that may potentially harm the Company’s
reputation over the long term.
• A Company is prepared to quickly and clearly communicate with key stakeholders,
addressing issues that may affect reputation proactively rather than reactively so as to
minimize risk.
• A Company has its ESG reporting audited by an outside source. An independent audit
of a Company’s environmental and social reporting adds a level of credibility to the
information contained in any such report.
• A Company adheres to a professional or industry code of conduct that will enhance and
affirm the Company’s reputation. If so, Investors should investigate the quality of such a
code of conduct—comprehensiveness, fellow signatories, auditors of the code—to better
understand how the Company’s adherence to such a code may affect its reputation.

Where to find information about reputational risks and opportunities

• Some Companies may highlight reputation risk factors in the risks section of the annual
report. Others may place such information in an environmental health and safety or
ESG report.
• Sell-side research and broker reports produced by specialized research firms and
investment banks are good sources of such information. Additional information may also
be obtained from clearinghouses for such reports.
• Specialist research providers that focus exclusively on ESG issues produce reports that
can be helpful.
• Some Companies may inadequately account for reputation as a risk factor and fail to
provide Investors with meaningful information about how the corporate identity is
safeguarded. In such cases, Shareowners may find helpful information in third-party-
produced industry reports or through targeted news searches instead.

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• Investors may better understand the factors potentially affecting a Company’s
reputation by looking elsewhere in an industry—for example, in the annual reports of
competitors. Risks that are disclosed by some competitors but not by others may warrant
additional analysis.
• If a Company adheres to a professional code of conduct, such information will likely be
highlighted on the corporate website, in an annual report, or in a sustainability report.
• Human rights and consumer rights groups may provide Investors with resources that offer
information on both positive and negative events that can affect a Company’s reputation.

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Operating Factors
Investors face the risk that a Company’s operations may be detrimentally affected by ESG
factors, even to the extent that one or more product lines or possibly entire operations could
be severely affected, and in some cases shut down. There also are opportunities for Investors
to find Companies that are best positioned to respond to new opportunities, such as changing
consumer preferences or new technologies.

Operating risk relates to what a Company does to create value for its Shareowners; the
Company’s operations may be compromised if its business practices should prove
unsustainable. Forward-looking Companies that understand and act on the ESG factors
relevant to their operating activities will better mitigate such operating risks than will their
less proactive peers.

Examples
As an example, the U.S. National Academy of Sciences estimates that long-term changes in
weather patterns linked to climate change could reduce the U.S. wine industry’s grape
production by 81 percent by the late 21st century, threatening the US$15 billion California
wine market.25 Although small relative to the U.S. economy as a whole, second-order effects
on the California economy from disruption to this industry could be considerable.
Companies deriving significant sales from domestic wines would feel a dramatic impact if
California grape growers experience a decrease in their production of quality crops.
Preparing in advance for such a situation may help lessen the strain on California wine
businesses, and a proactive response may demonstrate a Company’s ability to remain strong
when such challenges emerge.

The market impact of—and how Companies responded to—regulatory changes in

chlorofluorocarbon (CFC) use in the 1980s is another example of ESG factors affecting
operational performance. Financial markets recognized that there were potential costs and
opportunities associated with regulatory changes mandating the elimination of CFCs from
refrigeration equipment. Seeing the opportunity, a Company that produced CFCs announced
it would end production of CFC-based products by the turn of the century. By late 1989, the
Company’s researchers had filed 20 patents for non-CFC refrigerants, and by 1990, it had
introduced refrigerants and propellants to replace CFCs. In 1993, the Company accelerated
its CFC phaseout deadline to the end of 1994, one year ahead of the timetables established
by both the 1987 Montreal Protocol and the 1990 Clean Air Act Amendments. As the market
for non-CFC refrigerants increased throughout the 1990s, this Company was well positioned
to take advantage of this ESG-related impact on operations (and reputation).26

IMPLICATIONS FOR INVESTORS

Analysts are familiar with the need to identify and consider operating risks as part of
traditional financial analysis. And although a Company’s potential operating risks from ESG
factors may seem the most obvious of the risks discussed in this manual, analysts will
sometimes overlook these factors in less obvious industries. The operating risks for industries
dependent on finite natural resources, such as oil or precious metals, may be straightforward
and easily anticipated, but nearly every industry faces ESG-related factors somewhere along
its supply chain, so it is important to consider such factors regardless of industry. Investors
should understand the many operating risks a Company faces from ESG factors, including
second-order effects.

25 M.A. White, N.S. Diffenbaugh, G.V. Jones, J.S. Pal, and F. Giorgi, “Extreme Heat Reduces and Shifts
Premium Wine Production in the 21st Century,” PNAS, vol. 103, no. 30 (25 July 2006):11217–11222.
26 See “DuPont Says It Will Phase Out HCFCs 10 Years Early,” Ozone Depletion Network Online Today

(3 January 1996).

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Things to consider
Investors should determine whether:

• Strategic analysis of ESG factors takes place at the management or Board levels. A
strategic commitment to these factors may be more prominent in environmentally
sensitive industries, although many financial and service organizations have made a
strategic commitment to understanding how ESG factors may affect their business.
• A Company has identified the potential operational risks inherent in its line of business
and established a plan to contend with such risks.
• Company management and the Board of directors effectively communicate to all
stakeholders their plan for mitigating these operating risks over both the near and long term.

Where to find information about operating risks and opportunities

• Many Companies discuss their operating risks in the risks area of their annual report. A
Company may dedicate an entire section of its annual report to operating risks if such
risks are intrinsic in the type of business in which the Company engages. Operating risks
related to suppliers or supply chain factors may also be disclosed in the annual report.
• Companies that operate in more socially or environmentally sensitive industries may
cover such factors in more depth in a sustainability, environmental, ESG, or health and
safety report.
• Specialized reporting for Companies that operate in carbon-intensive activities may
contain a great deal of data—allowing Investors to assess and compare Companies’
operating risks (see Appendix C).
• Some specialist research providers focus their analyses exclusively on ESG issues.
• Investors should monitor all Company communications and should not rely solely on
annually released reports. Operating risks sometimes appear over a shorter time
frame than can adequately be addressed in the standard, yearly reporting cycle.
Quarterly communications, press releases, and other interim communications should
convey a consistent message concerning how a Company recognizes and handles its
operational challenges.
• Shareowner proxy proposals also may be a good source of information to help Investors
identify a Company’s issues and to determine whether those issues are material to the
Company’s operation.

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Appendix A
Sample ESG Scenarios
To assist the Investor in understanding how ESG factors may affect Companies, the following
fictional scenarios explore some examples of how a Company’s value might be affected by
certain ESG-related considerations. Each example explores a specific factor discussed in this
manual—regulatory/legislative, legal, reputational, operational—defines the relevant ESG
factors, and suggests possible Investor actions. Although the suggestions given by no means
represent an exhaustive list of possible Investor actions, they should help the reader better
prepare to undertake full research of the issues addressed.

I. Analyzing Legislative and Regulatory Factors

The situation
Your client owns a significant position in ABC Company, a mid-sized electric utility. The
Company operates 15 power plants, 10 of which are coal fired and 5 of which are nuclear
powered, across a number of different markets in Europe. It is expected that pending
environmental legislation will bring change over the next two years to many of the markets
in which the Company operates. Broader European Union legislation as well as specific
country rules will likely impose stricter costs on Companies producing carbon emissions. The
probability and magnitude of such costs are not certain but would apply to all 10 of ABC’s
coal-fired power plants.

The stock of ABC Company has declined 10 percent in the past year, although it is unclear
whether that is the result of poor management or a reaction to the likely future impact
the impending legislation will have on the Company. ABC Company discusses the impacts
of such legislation in broad terms only in its public disclosures, and you need to make a
fair and informed assessment of ABC’s prospects for your client.

Relevant ESG issues to consider

• Will environmental legislation increase emissions fines, increasing costs to operate coal-
fired plants?
• Are emissions from the Company’s coal-fired plants bad for ABC Company’s reputation?
• Will ABC Company be required to make expensive upgrades to equipment to comply
with new regulations?
• How will regional and country regulations affect ABC Company’s short- and long-term value?

Possible Investor actions

• Determine whether you will be better informed if you conduct your own research or if
you purchase existing research. Either way, investigate fully how the proposed legislative
challenges could affect not just ABC Company but the industry as a whole.
• Contact experts who are knowledgeable in the industry and who cover the Company,
and ask their opinion on how these legislative challenges may affect the Company and
quality of management issues.
• Contact ABC Company and request answers to your questions.
• Review reports by industry peers to seek out relevant environmental disclosures.
• Research media coverage of actions taken by ABC’s competitors in the affected markets
and any local regulatory or legislative actions—and results—already reported.
• Review public disclosures made by other utility Companies in the markets in question.
• Develop a “buy-hold-sell strategy” based on thorough financial analysis, supported by a
full understanding of the potential and existing environmental regulations, taxes, and
impacts, to understand the current legislative debates relevant to ABC.
• Separately assess any governance issues that might affect the quality or stability of
current management.

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II. Analyzing Legal and Reputational Factors
The situation
XYZ Company produces many products—one that is particularly profitable but that has
become increasingly socially unacceptable to some groups. Anecdotal evidence in recent
years has linked the product’s use to an increased likelihood of cancer diagnoses.
Independent academic studies to determine if there is such a link have just begun but will
not be completed for another three years. XYZ Company has grown substantially lately, and
your firm is a large and potentially influential owner with a 3 percent stake in the Company.
XYZ Company shares continue to be attractive to your firm when judged based solely on
standard financial analysis.

Yet, consumer groups recently have launched a public campaign against XYZ Company and
initiated litigation calling for the removal of the objectionable product from store shelves.
XYZ Company management does not proactively comment in any detail on the issue of cancer
risk, and when specifically asked, it responds only that it does not plan to pull the product
and any legal action is without merit. The product in question brings in 15 percent of the
Company’s revenue. Recent scientific advances appear to offer the Company the option of
reformulating its product to make it less objectionable, but XYZ Company has not yet
undertaken any such steps and has not stated any intent to do so. Furthermore, any such
reformulation of the product may take up to four years to finish, and your firm estimates that
net income could be reduced by approximately 2 percent per year until any reformulation
and reintroduction of the refined product is complete.

Relevant ESG issues to consider

• If public pressure grows, turning more consumers against XYZ Company’s product, will
it drive sales profits down?
• Could public pressure escalate to a boycott of the Company’s other products?
• What happens if the independent studies do find a link between the Company’s product
and the onset of cancer? Would that news harm the Company’s long-term viability through
a loss of product revenue, litigation risk, and/or damage to XYZ Company's reputation?
• Will the Company’s competitors eventually outperform XYZ if XYZ hesitates to act while
the competitors proactively undertake reformulation and move ahead of XYZ?
• As a large Shareowner in XYZ Company, your firm may have potential influence on the
officers and directors of the Company. What will you do with that access?

Possible Investor actions

• As a large Shareowner, you could use your access to speak to Company leaders,
encouraging them to reformulate the product in an effort to protect XYZ’s long-term
business model.
• The continued absence of a full response to charges or any action to demonstrate the
Company’s willingness to address concerns only fuels the “silence = guilty” damage to
reputation and is likely to hurt the Company’s value in both the short and long term.
Offering XYZ Company’s leaders suggestions for risk management and public relations
outreach might be helpful.
• An Investor might also encourage XYZ Company’s management to proceed with the
reformulation as soon as possible; the longer the Company delays a product reformulation,
the greater the risk to the Company. Given that it will take four years to reformulate, and
the studies investigating the risk of cancer will be done in three years, it is in the best interest
of the Company to reformulate as soon as possible and limit “down time” between when
the study is released and the new product is available.

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III. Analyzing Legislative, Regulatory, and Reputational Factors
The situation
For more than three years, across several discretionary equity accounts for which you are
responsible, you have owned a significant position in shares of Big Green Grocers. In a market
characterized by thin margins and intense competition, Big Green Grocers has succeeded in
defining and expanding a global market segment of higher-end consumers who are less price
sensitive and who value availability of healthy foods presented in an attractive setting.

In four of the countries in which Big Green Grocers operates, local environmental activists
are lobbying legislators to forbid the use of plastic shopping sacks in all retail establishments,
citing both the petroleum inputs required to make the sacks and the increased pollution
sacks add to the world's landfills and oceans. Currently, 82 percent of Big Green Grocers’
customers choose plastic sacks over the other alternatives (paper sack or reusable canvas
bags). The unit cost of plastic sacks is approximately US$0.0125, and the unit cost of paper
sacks is US$0.0185; customers are not charged for either plastic or paper sacks. Big Green
Grocers sells the reusable canvas bags and realizes a profit margin of approximately US$0.08
on each canvas bag sold.

At the same time, several of the jurisdictions where Big Green Grocers operates are moving
toward regulation requiring inspection and certification of those merchants—such as Big
Green—claiming to sell organic products, potentially raising the wholesale cost of such items.
Along with these new regulations comes the prospect of significant fines to vendors who
source and sell organic merchandise without reasonable processes in place to check the
validity of organic designations.

Relevant ESG issues to consider

• Will the pending legislation force Big Green to switch to more expensive paper sacks
and/or start charging for the paper sacks? Or might it offer customers the canvas sacks
at little or no cost? What affect will this have on the Company’s value?
• What impact does the use of plastic sacks have on Big Green Grocers’ brand integrity
and reputation; how will it respond to such “green” concerns?
• What additional costs might be associated with developing and maintaining an organic
certification program?
• Will Big Green Grocers’ response to either situation pose Investor risk or
opportunity? What are its competitors doing, and how will their response affect Big
Green’s market value?

Possible Investor actions

• Analyze whether Big Green Grocers management has considered the risks to its brand,
reputation, and/or customer loyalty from using plastic sacks.
• Determine the economic cost to Big Green Grocers if the Company discontinues the use
of plastic sacks.
• Consider if alternatives to paper sacks or canvas bags exist, are viable, and if Big Green
Grocers has considered such options.
• Review Company reports and speak with Big Green Grocers’ representatives to learn if
they have considered and are preparing to address the consequences—including
financial impact—of either plastic bag legislation or organic certification regulations.
• Obtain research and compare the vulnerability Big Green Grocers and its competitors
each have to pending legislation.

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IV. Analyzing Operating Factors

The situation
A Company in your portfolio, Osiris Film Company, just received a tender offer from Arthouse
Films for €96 per share. Osiris Film Company currently trades at €90 per share and has been
slowly declining from a high of €110 three years ago. Over the same time period, Osiris’
competitors’—including Arthouse’s—share prices have trended slowly upward. The present
owners of Osiris Film Company control 35 percent of the Company’s shares, and four of the
nine Board members have publicly stated they will reject the merger offer. Arthouse
responded that if its offer is successful, the size of the Board will remain the same but the
four dissenting Osiris directors will be replaced with the Arthouse CEO and three
independent directors.

Your analysis of the Company’s financial statements finds Osiris to be worth €98–100 per
share, but you believe that the market’s recognition of lost faith in management over the
years has resulted in a “governance discount” in the share price. Meanwhile, Osiris Film
Company has placed a proposal on the proxy ballot to create a “staggered” Board structure,
requiring only a third of the Board members to come up for election every year.

You hold 9 percent of the shares of Osiris Film Company and believe it is likely that your
votes will decide the results of an expected close vote on acquisition.

Relevant ESG issues to consider

• Could concentrated ownership hinder needed change in management at Osiris?
• Will the proposed staggered Board structure further entrench a problematic management
team? How might that impact Company value?
• Is the Osiris “governance discount” in fact caused by the current management, or is some
other operational factor holding down the Company’s value? Will new ownership
improve the Company’s prospects, or will underlying operational issues remain?
• What are the similarities and differences in management, operations, reputation, or
other factors between Osiris and Arthouse?

Possible Investor actions

• Conduct your own research of annual reports, financial statements and disclosures, and
media coverage (or purchase outside research) to deny or confirm and then quantify
the suspected “governance discount.” Investigate what other factors may also/instead be
depressing Osiris’ stock price.
• Ask Osiris representatives what potential changes are being considered to improve value.
• Research Arthouse’s financial reports and reputation; do the same for Osiris’ other
competitors, assessing each Company’s governance structure to understand if that
framework could be placing the Company at a disadvantage.
• Establish a voting decision for or against the acquisition by Arthouse based on a thorough
financial analysis and a full understanding of the governance risks and opportunities
associated with either vote.

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V. Analyzing Legislative, Regulatory, and Reputational Factors
The situation
You are the portfolio manager for Small-Capitalization Fund, which invests in equity securities
globally. You are considering adding to the portfolio and have been analyzing Tiny Bubbles,
a Company that held its IPO two years ago. Tiny Bubbles has brought to market a proprietary,
patented process that significantly reduces nitrous oxide and carbon dioxide emissions from
gasoline-powered automobiles; the process already has been adopted by two major
automobile manufacturers. The stock has preformed slightly above its peer group over the
past two years.

Tiny Bubbles recently announced an adaptation of the original process and claims it will
reduce both carbon dioxide and nitrous oxide emissions from coal-fired power plants. So
far, no power producers have purchased the Tiny Bubbles process, citing the potential
additional expense of US$0.02–0.03 per kwH if they were to adopt the process. Yet, if future
legislation levies an anticipated “tax” on plants for carbon dioxide and nitrous oxide
emissions, those plants that use the new process could potentially reduce ongoing expenses
and offset some of the investment in Tiny Bubbles’ process.

Relevant ESG issues to consider

• How much will the markets shift and demand for the Tiny Bubbles technology change
if carbon tax legislation is passed? Is Tiny Bubbles’ management considering revisions
to its business model if the legislation does not pass?
• What are the prospects for limited resources or disruption to supply of other power fuels?
What impact might that have on coal-powered plants?
• Will any coal-fired plants use the Tiny Bubbles process and market themselves as a
progressive green entity? Will that spur customer loyalty to a specific power Company?
Are “green-minded” consumers willing to pay extra for cleaner energy? Might plants
impose a “green” surcharge to offset the expense of Tiny Bubbles’ process?
• What impact has similar emissions-taxation legislation had in other markets? In other
industries?

Possible Investor actions

• If the utility Companies that currently operate coal-fired power plants produce reliable
information on their own carbon dioxide and nitrous oxide emissions, use these data to
determine expected emissions in future years and the potential cost of these emissions
to the Company if legislation places a cost on these emissions.
• If these utility Companies do not produce information concerning their own emissions,
contact other knowledgeable analysts or specialty research firms to obtain this information.
• Conduct your own research of annual reports, financial statements and disclosures, and
media coverage (or purchase outside research) to determine how the economics of
power production would have to change for Tiny Bubbles’ new process to be a viable
product and positively affect the Company’s value.
• Determine what might happen to Tiny Bubbles Company’s value if either the legislation
does not pass or power plants opt to pay new fines rather than buy the new process.
• Assess what effect other (if any) emissions-reduction systems have had in other markets
or industries under such regulations: Are fines or operating costs offset by increased
Company value brought by reputational or environmental gains?
• Compare current coal-powered plant operating costs with projections for the same plant
using Tiny Bubbles’ process.
• Develop a “buy-hold-sell strategy” based on thorough financial analysis and a full
understanding of the potential environmental, legislative, and reputational risks facing
Tiny Bubbles Company and its proposed new process.

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Appendix B
Definitions

General ESG Definitions

Corporate Social Responsibility (CSR). CSR considers the impact of a Company on society
as a whole based on how the Company takes responsibility for the effect of its activities on
a number of stakeholders—employees, the communities in which it operates, the
environment—and not just on Shareowners.

Environmental, Social, and Governance (ESG). The environmental, social, and governance
issues that Investors are considering in the context of corporate behavior. Often these ESG
issues have been considered nonfinancial or nonquantifiable in nature and have a medium-
to long-term time frame in their effect on a Company.

Negative Screening. An investment approach that excludes some Companies or sectors

from the possible investment universe based on criteria relating to their policies, actions,
products, or services. Investments that do not meet the minimum standards of the screen
are not included in the investment portfolio.

Positive Screening. An investment approach that includes some Companies or sectors from
the possible investment universe based on criteria relating to their policies, actions,
products, or services. Investments that meet the minimum standards of the screen are
included in the investment portfolio.

Socially Responsible Investment (SRI). An investment process that seeks to achieve social
and environmental objectives alongside financial objectives.

Triple Bottom Line. The notion of measuring a Company’s success by more than just
financial metrics or the traditional “bottom line.” The triple bottom line attempts to
incorporate a measurement of a Company’s social and environmental performance—and
its effectiveness in addressing the needs of stakeholders beyond Shareowners—into an
overall measure of corporate success.

United Nations Principles for Responsible Investment (PRI). The PRI are a series of
investing principles drafted by institutional Investors who believe that ESG factors can affect
the performance of investment portfolios. The principles support the signatories’ belief that
Investors fulfilling their fiduciary (or equivalent) duty need to give appropriate consideration
to these factors and that the PRI provide a framework for making access to ESG information
more widely available and for incorporating these factors into the decision-making process.

Environmental Definitions
Carbon Footprint. A measure of the impact human activities have on the environment in
terms of the amount of greenhouse gases produced. It is measured in units of carbon dioxide.
A Company’s “carbon footprint” is how much greenhouse gases that Company produces over
a specified period of time.

Climate Change. A change in modern climate that alters the composition of the global
atmosphere and changes weather patterns on a global scale, likely with significant
ramifications for a number of human, animal, land, and marine systems.

Environmental Management System (EMS). An environmental management system is part

of a management system in which certain policies and procedures dealing with an
organization’s environmental policy are defined.

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Greenwash. The actions of a Company, government, or other organization that publicizes its
practices as being environmentally or socially enlightened but in reality doing little to
improve its environmental or social behavior or, in some cases, even undertaking practices
contradictory to those publicized. The term is generally used when significantly more money
or time has been spent on promoting an entity as environmentally conscious rather than on
spending resources on environmentally sound practices.
ISO 14000. The environmental management standard established by the International
Organization for Standardization (ISO). These standards help organizations to minimize
negative effects on the environment and to comply with laws, regulations, and other
environmentally oriented requirements. Certification of compliance with ISO 14000 is
performed by third-party organizations and not awarded by ISO directly. ISO 14001 is the
standard against which an organization’s environmental management system is assessed. A
system meeting the requirements of ISO 14001 is a tool that enables an organization of any
size or type to identify and control the environmental impact of its activities, products, or
services; improve its environmental performance continually; implement a systematic
approach to setting environmental objectives and targets; achieve established objectives; and
demonstrate that those objectives have been met.
Sustainable Development (Sustainability). Refers to development that “meets the needs of
the present without compromising the ability of future generations to meet their own
needs.”27 Sustainability relates to the continuity of economic, social, institutional, and
environmental aspects of human society as well as the nonhuman environment.

Social Definitions
Fair Trade. A trading partnership that seeks greater equity in international trade by
contributing to sustainable development and offering better trading conditions to, and
securing the rights of, marginalized producers and workers. Fair trade organizations are
engaged actively in supporting producers, raising awareness, and campaigning for changes
in the rules and practice of conventional international trade.
ILO Core Conventions. The International Labour Organization (ILO) is a United Nations
agency focused on promoting decent work throughout the world. Eight ILO conventions
have been identified by the ILO’s Governing Body as being fundamental to the rights of
human beings at work, irrespective of levels of development of individual member states.
The ILO Core Conventions and the dates of their adoption are:
• Forced Labour—1930
• Freedom of Association and Protection of the Right to Organize—1948
• Right to Organize and Collective Bargain—1949
• Equal Remuneration—1951
• Abolition of Forced Labour—1957
• Discrimination (Employment and Occupation)—1958
• Minimum Age Convention—1973
• Elimination of the Worst Forms of Child Labour—1999
Moskowitz Prize for Socially Responsible Investing. The annual Moskowitz Prize is the only
global award recognizing outstanding quantitative research in the field of SRI. The prize was
launched in 1996 by the Social Investment Forum—the national trade association for the
socially and environmentally responsible investing industry—to recognize the best
quantitative SRI study. The Moskowitz Prize is named for Milton Moskowitz, one of the first
investigators to publish comparisons of the financial performance of screened and
unscreened portfolios. His distinguished works include “The 100 Best Companies to Work
for in America,” an annual list published in Fortune magazine, and “The Global Marketplace:
102 of the Most Influential Companies Outside America.”
27 Our Common Future World Commission on Environment and Development 1987.

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SA8000. An international standard promulgated by Social Accountability International for
assessing working conditions based on the principles of 13 international human rights
conventions. The standard can be used to audit Companies and contractors in multiple
industries and countries. To certify conformance with SA8000, every facility seeking
certification must be audited. Auditors visit factories and assess corporate practice on a wide
range of issues and evaluate the state of a Company’s management systems necessary to ensure
ongoing acceptable practices. Once an organization has implemented any necessary
improvements, it can earn a certificate attesting to its compliance with SA8000. This
certification provides a public report of good practice to consumers, buyers, and other
Companies and is intended to be a significant milestone in improving workplace conditions.
As of June 2007, more than 1,373 facilities in 65 countries were certified to SA8000 standards.

Corporate Governance Definitions

Activism. An investing strategy that includes active engagement with a Company’s
management and the Board on ESG and other issues in order to lower risk and enhance
long-term value creation. Activism also often involves a strategic voting of Company shares
in order to support a specific issue or to bring about change in management or Board actions.

Corporate Governance. The system of internal controls and procedures by which individual
Companies are managed. It provides a framework that defines the rights, roles, and
responsibilities of different groups—management, Board, controlling Shareowners, and
minority or noncontrolling Shareowners—within an organization. This system and
framework is particularly important for Companies with a large number of widely dispersed
minority Shareowners.

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Appendix C
ESG Organizations, Principles, and Other Resources
Business and Human Rights Resource Centre. A clearinghouse of information concerning
human rights issues. The organization’s website provides links to a wide range of materials
published by NGOs (non-governmental organizations); Companies and business
organizations; UN, ILO, and other intergovernmental organizations; governments and
courts; policy experts and academics; social investment analysts; and journalists. The website
is updated hourly with news and reports about Companies’ human rights impacts
worldwide—positive and negative. The site covers more than 3,600 Companies across 180
countries. Topics include discrimination, environment, poverty and development, labor,
access to medicines, health and safety, security, and trade.
www.business-humanrights.org

Carbon Disclosure Project (CDP). An independent, not-for-profit organization that seeks to

facilitate a dialogue, supported by quality information, from which a rational response to
climate change will emerge. CDP provides a coordinating secretariat for over 300 institutional
Investors with a combined US$41 trillion of assets under management. The CDP gathers
information on the business risks and opportunities presented by climate change and
greenhouse gas emissions data from the world's largest Companies.
www.cdproject.net

Ceres. A national network of Investors, environmental organizations, and other public

interest groups working with Companies and Investors to address sustainability challenges.
Ceres launched the Global Reporting Initiative (GRI), now the de facto international
standard (used by more than 1,200 Companies) for corporate reporting on environmental,
social, and economic performance.
www.ceres.org

Conference Board Center for Corporate Citizenship and Sustainability. An organization

that attempts to help member Companies transform their corporate citizenship and
sustainability thinking and activities into integral, core business strategies, targeting business
opportunities that provide maximum economic, environmental, and societal benefits.
www.conference-board.org/knowledge/citizenshipcenter

Corporate Leaders Group on Climate Change. A group that brings together business leaders
from major U.K. and international Companies who believe that there is an urgent need to
develop new and longer-term policies for addressing climate change; they aim to work with
politicians to create the policy environment for a low-carbon future.
www.cpi.cam.ac.uk

Enhanced Analytics Initiative (EAI). An international collaboration between asset owners

and asset managers aimed at encouraging better investment research, especially research
that takes into account the impact of nonfinancial issues on long-term investment. The EAI
currently represents total assets under management of US$2.4 trillion. The EAI offers
research providers incentives to compile better and more detailed analysis of extrafinancial
issues within mainstream research. EAI members have agreed to allocate a minimum of 5
percent of their broker commissions on the basis of how well brokers integrate analysis of
extrafinancial factors and intangibles into their mainstream (sell-side) research. Such factors
typically include corporate governance, human capital management, value creation or
destruction during mergers and acquisitions, and corporate performance on material
environmental factors, such as climate change.
www.enhancedanalytics.com

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Equator Principles. A set of environmental and social benchmarks for managing
environmental and social issues in development project finance in emerging markets. The
Equator Principles commit the signatory banks and other financial institutions to not finance
any projects unless they follow the processes defined by the principles. These principles were
developed by private sector banks and were launched in June 2003. The banks chose to model
the Equator Principles on the environmental standards of the World Bank and the social
policies of the International Finance Corporation. More than 50 financial institutions around
the world have adopted the Equator Principles, which have become the standard for banks
and Investors on how to assess major development projects around the world. In July 2006,
the Equator Principles were revised, increasing their scope and strengthening their processes.
www.equator-principles.com

European Centre for Corporate Engagement (ECCE). A “laboratory for sustainable invest-
ment”; a multidisciplinary research network founded by researchers with established track
records in the academic domain and in practice. ECCE is an internationally oriented research
consortium devoted to delivering top-ranked research in the fields of corporate engagement
and sustainable finance. ECCE helps practitioners and scholars understand how businesses and
financial markets can promote sustainable development by considering ESG issues.
www.corporate-engagement.com

European Corporate Governance Forum. Established in 2004 by the European Commission

to examine best practices in member states with a view to enhancing the convergence of
national corporate governance codes and providing advice to the European Commission.
The forum is composed of 15 senior experts from various professional backgrounds (issuers,
Investors, academics, regulators, auditors) whose experience and knowledge of corporate
governance are widely recognized across Europe.
www.ec.europa.eu/internal_market/company/ecgforum/index_en.htm

European Fair Trade Association (EFTA). An association of 11 fair trade importers in nine
European countries (Austria, Belgium, France, Germany, Italy, the Netherlands, Spain,
Switzerland, and the United Kingdom). EFTA is based in the Netherlands and has Dutch
Articles of Association. EFTA gained formal status in 1990 and aims to support its member
organizations in their work and to encourage them to cooperate and coordinate their efforts.
It facilitates the exchange of information and networking, creates conditions for labor division,
and identifies and develops joint projects. EFTA organizes meetings of the members (on food,
handicrafts, marketing, managers), circulates relevant information to them, and maintains a
database of EFTA suppliers and their products, called Fairdata EFTA. It also has an office in
Brussels responsible for the execution of the Fair Procura project (funded by the EU) intended
to make public authorities and institutional buyers local actors of sustainable development.
www.european-fair-trade-association.org

European Social Investment Forum (Eurosif). A pan-European group whose mission is to

address sustainability through financial markets. Current member affiliates of Eurosif include
pension funds, financial service providers, academic institutions, research associations, and
NGOs. The association is a not-for-profit entity that represents assets totaling over €600 billion
through its affiliate membership. A number of European countries also have developed their
own social investment forums, such as UKSIF in the United Kingdom and FIR (French Social
Investment Forum).
www.eurosif.org

Fair Trade Federation (FTF). An association of Canadian and U.S. fair trade wholesalers,
importers, and retailers. The organization links its members to fair trade producer groups
while acting as a clearinghouse for information on fair trade and providing resources and
networking opportunities to its members.
www.fairtradefederation.com

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Fairtrade Labelling Organizations (FLO) International. An association of three producer
networks and 20 national labeling initiatives that promote and market the Fairtrade
Certification Mark in their respective countries. The FLO labeling system is the largest and most
widely recognized standard-setting and certification body for fair trade products. It regularly
inspects and certifies producer organizations in more than 50 countries in Africa, Asia, and
Latin America, encompassing approximately one million families of farmers and workers.
www.fairtrade.net

Global Corporate Governance Forum. A multidonor trust fund co-founded by the World
Bank Group and the Organisation for Economic Co-operation and Development (OECD) to
promote global, regional, and local initiatives that aim to improve the institutional framework
and practices of corporate governance. The forum—housed in the joint IFC/World Bank
Corporate Governance and Capital Markets Department—promotes sustainable economic
growth and poverty reduction within the framework of agreed international development targets.
www.gcgf.org
Global Framework for Climate Risk Disclosure. A tool created by 14 institutional Investors
and other organizations to encourage standardized corporate climate risk disclosure and to
help Investors analyze and compare Companies.
http://www.ceres.org/netcommunity/document.doc?id=73
Global Reporting Initiative (GRI). The product of more than 1,000 organizations and
thousands of related stakeholders who have developed a sustainability reporting framework
by which Companies may measure and report their economic, environmental, and social
performance. The framework is adaptable to different sectors and countries, lending
consistency to reporting of ESG-related information.
www.globalreporting.org
Global Reporting Initiative Sustainability Reporting Framework. The Reporting Framework
is made up of the Sustainability Reporting Guidelines (the Guidelines), Sector Supplements,
and Indicator Protocols. Together these are known as the Sustainability Reporting Framework.
The components contain reporting principles, guidance, and standard disclosures that are
generally applicable to all businesses, nonprofits, public agencies, and other organizations
large and small.
www.globalreporting.org/home
Greenhouse Gas Protocol. The most widely used international accounting tool for
government and business leaders to understand, quantify, and manage greenhouse gas
emissions. The GHG Protocol Initiative, a decade-long partnership between the World
Resources Institute and the World Business Council for Sustainable Development, is working
with businesses, governments, and environmental groups around the world to build a new
generation of credible and effective programs for tackling climate change.
www.ghgprotocol.org
Institutional Investors Group on Climate Change (IIGCC). A forum for collaboration
between pension funds and other institutional Investors on issues related to climate change.
The IIGCC seeks to promote better understanding of the implications of climate change
among members and other institutional Investors; encourage Companies and markets in which
IIGCC members invest to address any material risks and opportunities to their businesses
associated with climate change; and advocates for a shift to a lower carbon economy.
www.iigcc.org
Intergovernmental Panel on Climate Change (IPCC). Established by the World Meteorological
Organization (WMO) and the United Nations Environment Programme (UNEP) to assess
available scientific, technical, and socioeconomic information relevant to understanding
climate change, its potential impacts, and options for adaptation and mitigation. As of early
2008, the group has produced four “Assessment Reports” on climate change. The reports
provide a comprehensive assessment of the current state of knowledge on climate change.
www.ipcc.ch

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International Corporate Governance Network (ICGN). An Investor network organized to
exchange views and information about corporate governance issues internationally, examine
corporate governance principles and practices, develop and encourage adherence to corporate
governance standards and guidelines, and promote good corporate governance. ICGN
members presently control more than US$10 trillion in assets.
www.icgn.org
International Fair Trade Association (IFAT). A global association of fair trade producer
cooperatives and associations, export marketing Companies, importers, retailers, national
and regional fair trade networks, and fair trade support organizations created in 1989. In
2004, IFAT launched the FTO Mark, which identifies registered Fair Trade Organizations (as
opposed to the FLO system, which labels products). IFAT has nearly 300 member
organizations in more than 60 countries.
www.ifat.org
International Labour Organization (ILO). The tripartite United Nations agency that brings
together governments, employers, and workers from its member states to promote decent
work standards throughout the world. ILO’s main focus is to promote rights at work,
encourage decent employment opportunities, enhance social protection, and strengthen
dialogue in handling work-related issues. The ILO hosts the International Labour
Conference in Geneva each June. At the conference, conventions and recommendations are
drafted and adopted by majority decision, which sets international labor standards covering
a broad spectrum of labor-related subjects; together, they are sometimes referred to as the
International Labour Code. Adoption of a convention by the International Labour
Conference becomes a treaty in international law when a specified number of governments
has ratified the law. As of the 2008 report, there are 185 ILO conventions.
www.ilo.org
Investor Network on Climate Risk (INCR). A network of institutional Investors and financial
institutions dedicated to promoting better understanding of the financial risks and investment
opportunities posed by climate change. The INCR was launched at the first Institutional
Investor Summit on Climate Risk at the United Nations in November 2003 and now includes
more than 50 institutional Investors that collectively manage over US$4 trillion in assets.
www.incr.com
Social Accountability International (SAI). Organization whose mission is to promote human
rights for workers around the world. SAI has established SA8000, a comprehensive and
flexible system for managing ethical workplace conditions throughout global supply chains.
SAI works with Companies, consumer groups, NGOs, workers and trade unions, and local
governments as well as a network of agencies accredited for SA8000 auditing. The purpose
is to ensure that workers are treated according to basic human rights principles.
www.sa-intl.org
Social Investment Forum (SIF). A U.S. membership association dedicated to advancing the
concept, practice, and growth of socially and environmentally responsible investing.
Members integrate economic, environmental, social, and governance factors into their
investment decisions, and SIF provides programs and resources to advance this work. The
SIF membership includes more than 500 social investment practitioners and institutions,
including financial professionals, analysts, portfolio managers, banks, mutual funds,
researchers, foundations, community development organizations, and public educators.
There are a number of similar SIFs in markets outside the United States.
www.socialinvest.org

Studies of Socially Responsible Investing. A resource for investment professionals, academics,

and others interested in the quantitative aspects of socially responsible investing (SRI). This
site is a project of the Moskowitz Research Program, which is affiliated with the Center for
Responsible Business at the Haas School of Business, University of California, Berkeley.
www.sristudies.org

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Sustainable Investment Research Analyst Network (SIRAN). An analyst network that
supports more than 150 North American social investment research analysts from 30
investment firms, research providers, and affiliated Investor groups. Social research analysts
evaluate corporate policies and performance on various issues of corporate social
responsibility (CSR). CSR includes such issues as environment, health and safety, diversity
and human resources policies, and human rights and the supply chain.
www.siran.org

United Nations Environment Programme Finance Initiative (UNEP FI). A global partnership
between UNEP and the financial sector. Over 160 institutions, including banks, insurers, and
fund managers, work with UNEP to understand the affects of environmental and social
considerations on financial performance.
www.unepfi.org

United Nations Global Compact. An international initiative that encourages Companies to

collaborate with UN agencies and others “to support universal environmental and social
principles.” The compact is voluntary and aims to spread the incorporation of 10 principles
into global business activities and to garner support for UN goals. The 10 principles define
actions for businesses covering human rights, environment, and anticorruption.
www.unglobalcompact.org

United Nations Universal Declaration of Human Rights (UNDHR). On 10 December 1948,

the General Assembly of the United Nations adopted and proclaimed the Universal
Declaration of Human Rights. The declaration contains internationally accepted standards
for human rights. Although the UNDHR applies to governments as well as business, the
general principles related to business practices are as follows:

1. safe and healthy working conditions;

2. freedom of association;
3. nondiscrimination in personnel and hiring practices;
4. no forced or child labor;
5. rights to basic health, education, and housing (if operations are located in areas
where these are not provided);
6. respect for existing international guidelines and standards for the use of force;
7. protecting the economic livelihood of local communities; and
8. contributing to the public debate about matters that affect a Company’s operations,
employees, customers, and communities where the Company operates.

Some Companies are signatories to the UNDHR and, therefore, pledge to support each of
the general principles.
www.un.org/Overview/rights

World Business Council for Sustainable Development (WBCSD). A CEO-led global

association of some 200 Companies dealing exclusively with business and sustainable
development. Working with governments as well as nongovernmental and intergovernmental
organizations, the council provides a platform for Companies to explore sustainable
development; share knowledge, experiences, and best practices; and advocate business
positions on these issues in a variety of forums. Members are drawn from more than 35
countries and 20 major industrial sectors. The council also benefits from a global network of
about 55 national and regional business councils and partners.
www.wbcsd.org

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Appendix D
ESG Studies and Research

ESG
Ambachtsheer, Jane. 2005. “Socially Responsible Investing.” Benefits & Compensation Interna-
tional, vol. 35, no. 1 (July/August).
———. 2005. “What Gets Rated Gets Reviewed.” Mercer Investment Consulting (17 October):
http://www.mercer.com/summary.jhtml?idContent=1195165.
The Aspen Institute Center for Business Education. 2007–2008. “Beyond Grey Pinstripes:
Preparing MBAs for Social and Environmental Stewardship.” New York: Aspen Center for
Business Education.
The Asset Management Working Group of the United Nations Environment Programme
Finance Initiative and Mercer Investment Consulting. 2007. “Demystifying Responsible
Investment Performance—A Review of Key Academic and Broker Research on ESG Factors.”
A joint report by the Asset Management Working Group of the United Nations Environment
Programme Finance Initiative and Mercer (24 October): http://www.calvert.com/pdf/
demystifying_responsible_investment_performance.pdf.
Cogan, Douglas G. 2005. “Corporate Governance and Climate Change: Making the Con-
nection.” Summary report, Ceres (March): http://www.earthinstitute.columbia.edu/
grocc/documents/Ceres_corp_gov_and_climate_change_sr_0306.pdf.
Cogan, Douglas G., Megan Good, and Emily McAteer. 2008. “Corporate Governance and
Climate Change: The Banking Sector.” Summary report, Ceres (January): http://
www.ceres.org/NETCOMMUNITY/Document.Doc?id=269.
Derwall, Jeroen, Nadja Guenster, Rob Bauer, and Kees Koedijk. 2005. “The Eco-Efficiency
Premium Puzzle.” Financial Analysts Journal, vol. 61, no. 2 (March/April):51–63.
Forrest, S., A. Ling, M. Lanstone, and J. Waghorn. 2006. “Enhanced Energy ESG Framework.”
Goldman Sachs (9 October).
Fox, M., S. Forrest, A. Ling, and M. Lynch. 2007. “Global Food & Beverage: Integrating ESG.”
Goldman Sachs.
Freshfields Bruckhaus Deringer study in cooperation with the United Nations Environment
Programme Finance Initiative. 2005. “A Legal Framework for the Integration of Environmen-
tal, Social and Governance Issues into Institutional Investment.” 1–153 (October): http://
www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf.
Garz, Hendrik, and Claudia Volk. 2007. “What Really Counts. The Materiality of Extra-
Financial Factors.” London, UK: WestLB AG Extra-Financial Research (12 February): http://
www.eurosif.org/content/download/752/4350/version/1/file/WestLB_What+really+
counts+-+The+materiality+of_Feb2007.pdf.
Hudson, Julie, and S. Knott. 2006. “Alternative Alpha: Infrastructure—The Long View.” UBS
Investment Research (17 November).
ICGN Non-Financial Business Reporting Committee. 2006. “Responsible Governance and
Responsible Investment Need Non-Financial Business Reporting. Progress Report: An Initial
Framework for Non-Financial Business Reporting.” NFBR Progress Report (July): http://
www.icgn.org/conferences/2006/documents/curtiss.pdf.
Ling, A., S. Forrest, P. Mallin-Jones, and S. Feilhauer. 2007. “Global Mining and Steel:
Integrating ESG.” Global Investment Research Client Reports, Goldman Sachs (July).

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Mercer Investment Consulting. 2007. “The Language of Responsible Investment: An
Industry Guide to Key Terms and Organizations” (http://www.merceris.com.au//
uploads/documents/20079417574200710111757413970.pdf).
Moran, M., A.J. Cohen, and M.A. Kim. 2007. “ESG in the USA.” Goldman Sachs. (June).
Noah Financial Innovation, the United Nations Environment Programme Finance Initiative,
African Task Force, and the University of South Africa Centre for Corporate Citizenship.
2007. “The State of Responsible Investment in South Africa. A Survey of Approaches and
Perceptions of the South African Investment Community to Environmental, Social and
Governance Issues” (http://www.unepfi.org/fileadmin/documents/The_State_of_
Responsible_Investment_01.pdf).
Responsible Endowments Coalition and Business and Human Rights Program of
Amnesty International USA. 2007. Integrating Environmental, Social and Governance
Issues into Institutional Investment Management: A Handbook for Colleges and Universities
(http://www.endowmentethics.org/REC%20Trustee%20Handbook.pdf).
Schröder, Michael. 2004. “The Performance of Socially Responsible Investment: Investment
Funds and Indices.” Financial Markets and Portfolio Management, vol. 18, no. 2 (June):122–142.
Shank, Todd M., Daryl K. Manuliang, and Ronald Paul Hill. 2005. “Is It Better to Be Naughty
or Nice?” Journal of Investing, vol. 14, no. 3 (Fall):82–87.
Siddy, Dan, and Ritu Kumar. 2007. “SI2 Sustainable Investment in India. Sustainable Devel-
opment of Portfolio Investment in India’s Publicly Listed Companies.” New Delhi, India: The
Energy and Resources Institute Press (May): http://www.terieurope.org/docs/si2final.pdf.
Social Investment Forum and Mercer Investment Consulting. 2007. “Defined Contribution
Plans and Socially Responsible Investing in the United States: A Survey of Plan Sponsors,
Administrators and Consultants.” Mercer Investment Consulting survey report (5 June):
http://www.calvert.com/pdf/mercer-survey.pdf.
United Nations Environment Programme Finance Initiative. 2004. “The Materiality of Social,
Environmental and Corporate Governance Issues to Equity Pricing: 11 Sector Studies by
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———. 2006. “Sustainability Management and Reporting: Benefits for Financial Institu-
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Environmental
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Gilles, Vincent, Andrew Wright, Luis Amusategui, and Marco Cipelleti. 2003. “European
Emissions Trading Scheme: Bonanza or Bust?” UBS Investment Research (September).

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Global Reporting Initiative and KPMG Global Sustainability Services. 2007. “Reporting the
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Industry—Module 1: Threats and Opportunities” (http://www.innovestgroup.com/pdfs/
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———. 2002. “Climate Change and the Financial Services Industry—Module 2: A Blueprint for
Action” (http://www.unepfi.org/fileadmin/documents/ cc_fin_serv_ind_module2_2002.pdf).
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Kemfert, Claudia. 2005. “The Economic Costs of Climate Change.” DIW Berlin, German
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documents/publikationen/73/42861/diw_wr_2005-2.pdf).
Llewellyn, John. 2007. “The Business of Climate Change: Challenges and Opportunities.”
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CustomO16C45F94978.pdf.
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Utility Industry.” Utilities Policy, vol. 11, no. 2 (June):103–111 (http://www.sciencedirect.com/
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Conference Proceedings Quarterly, vol. 24, no. 2 (June):1–3.
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University Press.
Standard & Poors Research. 2003. “Emissions Trading: Carbon Will Become a Taxing Issue
for European Utilities” (21 August).
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resources/c981a000462ff1898450d4300190b89f-Klimaaenderung_en.pdf).
Thomas, Charles, Tessa Tennant, and Jon Rolls. 2000. “The GHG Indicator: UNEP Guide-
lines for Calculating Greenhouse Gas Emissions for Businesses and Non-Commercial
Organisations.” United Nations Environment Programme Finance Initiative (http://
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Social
Barnett, Michael L., and Robert M. Salomon. 2006. “Beyond Dichotomy: The Curvilinear
Relationship between Social Responsibility and Financial Performance.” Strategic Management
Journal, vol. 27, no. 11:1101–1122.
Bello, Zakri Y. 2005. “Socially Responsible Investing and Portfolio Diversification.” Journal of
Financial Research, vol. 28, no. 1 (Spring):41–57.
Benson, Karen L., Timothy J. Brailsford, and Jacquelyn E. Humphrey. 2006. “Do Socially
Responsible Fund Managers Really Invest Differently?” Journal of Business Ethics, vol. 65, no. 4
(April):337–357.
Brammer, Stephen, Chris Brooks, and Stephen Pavelin. 2006. “Corporate Social Performance
and Stock Returns: UK Evidence from Disaggregate Measures.” Financial Management, vol. 35,
no. 3 (Autumn):97–116.
Chong, James, Monica Her, and G. Michael Phillips. 2006. “To Sin or Not to Sin? Now That’s
the Question.” Journal of Asset Management, vol. 6, no. 6 (March):406–417.
Edmans, Alex. 2008. “Does the Stock Market Fully Value Intangibles? Employee Satisfaction
and Equity Prices.” Wharton School, University of Pennsylvania (30 January): http://
ssrn.com/abstract=985735.
Entine, Jon, ed. 2005. Pension Fund Politics: The Dangers of Socially Responsible Investing. AEI Press.
Fischer, Klaus P., and Nabil Khoury. 2007. “The Impact of Ethical Rating on Canadian Security
Performance: Portfolio Management and Corporate Governance Implications.” Quarterly
Review of Economics and Finance, vol. 47, no. 1 (March):40–54.
Hudson, Julie. 2006. The Social Responsibility of the Investment Profession. Charlottesville, VA:
Research Foundation of CFA Institute.
Kinder, Peter D. 2005. “New Fiduciary Duties in a Changing Social Environment.” Journal of
Investing, vol. 14, no. 3:24–38.
Statman, Meir. 2000. “Socially Responsible Mutual Funds.” Financial Analysts Journal, vol. 56,
no. 3 (May/June):30–39.
———. 2005. “The Religions of Social Responsibility.” Journal of Investing, vol. 14, no. 3
(Fall):14–22.
———. 2006. “Socially Responsible Indexes: Composition, Performance, and Tracking Error.”
Journal of Portfolio Management (Spring):100–109.

Governance
Anson, Mark, Ted White, and Ho Ho. 2004. “Good Corporate Governance Works: More
Evidence from CalPERS.” Journal of Asset Management, vol. 5, no. 3 (February):149–156.
CFA Institute Centre for Financial Market Integrity. 2007. “China Corporate Governance
Survey” (April): www.cfapubs.org/doi/pdf/10.2469/ccb.v2007.n3.4563.
Cheng, C.S. Agnes, Denton Collins, and Henry He Huang. 2006. “Shareholder Rights,
Financial Disclosure and the Cost of Equity Capital.” Review of Quantitative Finance and
Accounting, vol. 27, no. 2 (September):175–204.
Chi, Jianxin (Daniel). 2005. “Understanding the Endogeneity between Firm Value and
Shareholder Rights.” Financial Management, vol. 34, no. 4 (Winter):65–76.
Core, John E., Wayne R. Guay, and Tjomme O. Rusticus. 2006. “Does Weak Governance Cause
Weak Stock Returns? An Examination of Firm Operating Performance and Investors’ Expec-
tations.” Journal of Finance, vol. 61, no. 2 (April):655–687.

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Fan, Dennis K.K., Chung-Ming Lau, and Michael Young. 2007. “Is China’s Corporate Gover-
nance Beginning to Come of Age? The Case of CEO Turnover.” Pacific-Basin Finance Journal,
vol. 15, no. 2 (April):105–120.
Ferreira, Miguel A., and Paul A. Laux. 2007. “Corporate Governance, Idiosyncratic Risk, and
Information Flow.” Journal of Finance, vol. 62, no. 2 (April):951–989.
Gompers, Paul A., Joy L. Ishii, and Andrew Metrick. 2003. “Corporate Governance and Equity
Prices.” Quarterly Journal of Economics, vol. 118, no. 1 (February):107–155.
Haarmeyer, David. 2007. “The Revolution in Active Investing: Creating Wealth and Better
and Better Governance.” Journal of Applied Corporate Finance, vol. 19, no. 1 (Winter):25–41.
Hawley, James P., and Andrew T. Williams. 2005. “Shifting Ground: Emerging Global
Corporate-Governance Standards and the Rise of Fiduciary Capitalism.” Environment and
Planning A, vol. 37, no. 11 (November):1995–2013.
Opler, Tim C., and Jonathan Sokobin. 1995. “Does Coordinated Institutional Activism Work?
An Analysis of the Activities of the Council of Institutional Investors.” Dice Center For
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Page, Jean-Paul. 2005. Corporate Governance and Value Creation. Charlottesville, VA: Research
Foundation of CFA Institute.
Riepe, James S. 2006. “Best Practices in Corporate Governance.” In Global Perspectives on
Investment Management: Learning from the Leaders. Edited by Rodney Sullivan. Charlottesville,
VA: CFA Institute:41–57.
Selvaggi, Mariano, and James Upton. 2008. “Governance and Performance in Corporate
Britain.” Report, Association of British Insurers and Investment Affairs Departments (February):
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Smith, Michael P. 1996. “Shareholder Activism by Institutional Investors: Evidence from
CalPERS.” Journal of Finance, vol. 51, no. 1 (March):227–252.
Wolfe, Henry D. 2006. “Board Restructuring: Corporate Governance as the Path to Value
Creation in Underperforming Companies.” Journal of Private Equity, vol. 9, no. 2 (Spring):52–56.

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CFA Institute Centre for Financial Market Integrity

ESG Manual Staff

Kurt Schacht, CFA Rebecca McEnally, CFA

Executive Director Senior Policy Analyst
Capital Markets Policy Group
James Allen, CFA
Director Bob Dannhauser, CFA
Capital Markets Policy Group Senior Policy Analyst
Capital Markets Policy Group
Matthew Orsagh, CFA, CIPM
Senior Policy Analyst
Capital Markets Policy Group

Volunteer List

Brigid Barnett, CFA Samuel B. Jones, Jr., CFA

Manager, Responsible Investing Chief Compliance Officer
Canada Pension Plan Investment Board Trillium Asset Management

Paul Lee
Mick Blowfield
Director
Director of Development Hermes
University of Cambridge Programme
for Industry Jeffrey MacDonagh, CFA
SRI Portfolio Manager
Neil Brown Domini Social Investments
Morley Fund Management (UK)
Roland Machold
Treasurer
Jim Coburn
State of New Jersey–Retired
Program Manager
Ceres Sonal Mahida
Senior Corporate Governance Analysts
Noel Friedman, CFA TIAA-CREF
Managing Director of Research Products
KLD Analytics Mary Jane McQuillen
Director
Paul Hilton Socially Aware Investment Program
Director, Advanced Equities Research ClearBridge Advisors–
Calvert A Legg Mason Company

Rick Stather
Belinda Hoff Schroder’s
Research Associate
Institute for Responsible Investment Steve Waygood
Boston College Center for Corporate Head of Engagement, SRI
Citizenship Morley Fund Management (UK)

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