EABIS Research ProjectCorporate Responsibility, Market Valuation and Measuring the Financial and Non-Financial Performance of the Firm Sponsors : additional funding provided by Lloyds

Corporate Responsibility,Market Valuation and Measuringthe Financial and Non-Financial

Performance of the Firm

Sponsors :

additional funding provided by Lloyds Banking Group and Telecom Italia

Sustainable ValueEABIS Research Project

September 2009

The research team would like to thank theCorporate Founding Partners of EABIS: IBM, J&J,Microsoft, Shell and Unilever for their generousfinancial support of this project; Lloyds BankingGroup andTelecom Italia for both financial andintellectual input; the EABIS secretariat and thebusiness and academic advisory boards for theirstewardship; John Swannick, Paolo Nazzaro andJan Noterdame for co-ordination of theLaboratory; everyone who participated in thefocus groups, stakeholder consultations and 1:1interviews; those who have commented ondrafts of this report; and / or on the list ofpost-millennium practitioner reports onmeasuring, reporting and using ESG / Non orextra-financial performance data, andcommentators reviewing the draft of the finalreport.A full list of thank-yous can be foundat www.investorvalue.org

This research project has operated in supportof the Laboratory on Corporate SocialResponsibility andThe MarketValuation ofNon-Financial Performance.This is a cross-sectoral business-stakeholder cooperationproject under the umbrella of the EuropeanAlliance for CSR.The Laboratory is co-led byLloyds Banking Group andTelecom Italia andfacilitated by CSR Europe and the EuropeanAcademy for Business in Society (EABIS).

Contents

EXECUTIVE SUMMARY................................................................................................................................................... 1

1 INTRODUCTION....................................................................................................................................................... 2

2 OBSTACLESTO MAINSTREAMING ENVIRONMENTAL, SOCIALAND GOVERNANCE (ESG)

ISSUES IN INVESTMENT DECISIONS .................................................................................................................. 5

2.1 Obstacles with the Investor Community ................................................................................................... 5

2.2 Obstacles inside Companies ......................................................................................................................... 6

2.3 Underlying obstacle of lack of intellectual justification ........................................................................... 7

3 VALUE CREATION FRAMEWORK........................................................................................................................ 8

How Companies and Investors might make use of theValue Creation Framework ................................ 11

4 CHALLENGINGTODAY’S DOMINANT CONVENTION INTHE INVESTMENT COMMUNITY

AND BUSINESS......................................................................................................................................................... 12

4.1 ESG Integration:An emerging trend ......................................................................................................... 12

4.2 Influencing mechanisms ............................................................................................................................... 14

5 HOW MIGHT COLLABORATION EVOLVE? ................................................................................................... 17

6 RECOMMENDATIONS........................................................................................................................................... 19

6.1 EU CSRAlliance Laboratory ...................................................................................................................... 19

6.2 EU Commission ............................................................................................................................................. 19

6.3 Companies ...................................................................................................................................................... 19

6.4 Investors ........................................................................................................................................................... 19

6.5 Business-Led Coalitions andThink-Tanks ................................................................................................ 19

6.6 EABIS and European Business Schools...................................................................................................... 20

6.7 Recommendations for Further Research ................................................................................................. 20

7 CONCLUSION ......................................................................................................................................................... 20

Appendices ................................................................................................................................................................ 21

1 GLOSSARY............................................................................................................................................................. 21

2 BACKGROUND –To CSRAlliance, Lab and EABIS research project in support ................................ 22

3 Lab operational model......................................................................................................................................... 28

References................................................................................................................................................................... 29

For many years there have been ultimately inconclusiveattempts to prove that improved ESG (Environmental,Social, Governance) performance (frequently referredto as Corporate (Social) Responsibility [CSR]performance or, in brief, Corporate Social Performance(CSP)) affects overall business performance.This reportargues that a more fruitful approach is to identify howimproved ESG performance can improve individualelements of non-financial performance, and thereby,create future value. Specifically the report proposesthat value is redefined in terms of ‘sustainable value’. A‘value creation’ framework is proposed. This ValueCreation Framework – and an operationalisedmanagement version of it, developed by the EU CSRAlliance laboratory – can be used both by businessitself to help embed a commitment to CorporateResponsibility and Sustainability; and by the investmentcommunity to refine their business valuation models. Itshould stimulate further dialogue between companiesand investors. Growing sustainability pressuresworldwide are likely to make these arguments evensharper in future.

The Value Creation Framework and other recent workon sustainable development and business challenge theexisting dominant convention of shareholder value; andof how value is created or destroyed. As such, there aremany obstacles both in business and in the investmentcommunity (owners, fund-managers, analysts) whichwould currently work against widespread adoption ofthis new approach.

Amongst the investor community, the obstacles includelack of evidence for or understanding of, the potentiallinkages; limited or non-existent data and certainly ofanything which would be comparable acrosscompanies; confusion of terminology and shiftingdefinitions; and few incentives to change.

For companies, the obstacles include all the above, aswell as disconnects between Corporate Responsibility /Sustainability specialists and the Investor Relationsfunction; perceived lack of investor interest; and lack ofactual performance data.

During the research project, we identified, both throughthe consultations for the EU CSR Alliance Laboratory,and through studying practitioner reports producedsince 2000, a number of organisations and initiatives tochange investor community and business behaviour.

We have found a number of organisations interested incollaboration on implementation of the Value CreationFramework and / or providing access for follow-upresearch opportunities. As part speculation, partsuggestion, we show how collaborative commitmentsmight evolve over the next 1-2 years to create a criticalmass of vanguard companies and investors prepared touse the Value Creation Framework to help explain therisks associated with not embedding sustainability, andthe opportunities potentially accruing to businessesfrom doing so; and how this can be factored intoinvestor valuation models. In particular, corporate CEOswhose companies have already started to embed CRand sustainability, and are seeing improved ESGperformance, should be prepared to commit publiclythat as a group they will each – within their 2010results roadshows – explain these linkages and theirimpact on non-financial drivers of business success.There also has to be a change in the mindset of themainstream investment community, which requiresinvestor training, changes to how investors (individuallyand institutionally) are measured and incentivised; andto change time-frames from a fixation with quarterlyearnings. Recommendations to the CSR Alliancelaboratory, the EU Commission, companies, investors,business schools and EABIS are identified; and anumber of further research opportunities arehighlighted.

Executive Summary

This is the final report from a two-year EABIS funded research project. The purpose of the research hasbeen to explore how the environmental, social and governance performance of companies might impact onthe drivers of business success; how companies explain these linkages to investors, and how the investmentcommunity treats these data. The research project has been run in close contact with a parallel EU CSRAlliance Laboratory on “Corporate Responsibility and the market-valuation of non-financial performance”.This Lab has been led by Lloyds Banking Group andTelecom Italia.

1

For more than two decades, a dominant paradigmemanating from leading business people and businessschools has been “shareholder value” and that thepurpose of business is to increase shareholder value.We share the view of Ian Davis – the then globalmanaging-partner of McKinsey and Co, writing in TheEconomist magazine (By Invitation, 26th May 2005)that: “Paradoxically, the language of shareholder valuemay hinder companies from maximising shareholder valuein this respect. Practised as an unthinking mantra, it canlead managers to focus excessively on improving the short-term performance of their business, neglecting importantlonger-term opportunities and issues.The latter wouldinclude not just societal pressures, but also the trust ofcustomers, investment in innovation and other growthprospects.”

Instead, like the business leaders who produced the“Tomorrow’s Global Company” report (June 2007), we

see the purpose of business as: “To provide ever bettergoods and services in a way that is profitable, ethical andrespects the environment, individuals and the communitiesin which it operates.” (Tomorrow’s Global Company:Challenges and Choices).

Some may see profits and sustainability as mutuallyexclusive.We believe that increasingly it will beunderstood that long-term profitability requires acommitment to greater corporate sustainability.Corporate sustainability has been defined as a businessapproach that creates long-term shareholder value byembracing the opportunities and managing the risksassociated with economic, environmental and socialdevelopments.1 A sustainable enterprise is one thatcontributes to sustainable development by deliveringsimultaneously economic, social and environmentalbenefits’ 2

1Introduction

Business and society face multiple challenges: the immediate financial crisis which has triggered a widereconomic crisis; and a deeper, longer-term sustainability crisis caused by climate change, pollution, resourcedepletion, burgeoning global population, and unsustainable production and consumption.These multiplecrises intensify what was already an emerging debate about the purpose of business: how, and under whatcircumstances, business needs to internalise the externalised costs of doing business; and whether existingmethods for calculating the value of a business are any longer fit for purpose.

2

1 PWC/ SAM - The Sustainability Yearbook 2008.2 Prof Stuart Hart, Mark Milstein and Joseph Caggiano in an article in the Academy of Management Executive in 2003. ‘

Adapted from “The Necessary Revolution”, Peter Senge et al; Derived from: Hart, Milstein& Caggiano (2003)

Figure 1: SustainableValue Framework

Tomorrow

In the aftermath of the financial and economic crises,various thinkers and opinion-formers have called for a“new capitalism,” (Richard Sennett), “responsiblecapitalism”(Robert Reich) or “values-based capitalism”(Rosabeth Moss Kanter). It is argued that a coreelement of this renewed capitalism is corporatesustainability. Hitherto, the commercially successfulsustainability corporate performers have been thoseminimising risks associated with the lack of sustainability(Accenture – forthcoming). Going forward, it might beexpected that the commercially successful sustainabilityhigh performers will be those that exploit theopportunities from sustainable development.This isemphasised in two recent books. (Senge et al TheNecessary Revolution 2008) and Adam WerbachStrategy for Sustainability: A Business Manifesto – 2009)

In parallel, the EU CSR Alliance established aLaboratory on “Corporate Responsibility and MarketValuation of Financial and Non-Financial Performance”.It is the contention of the Lab and the EABIS researchteam working with the Lab that the markets do notfully understand the risks and opportunities associatedwith Environmental, Social and Governance (ESG)issues. Our central thesis is this virtuous circle: a betterunderstanding of how improved ESG performancepositively impacts on a business will lead to (a)mainstream investors proactively expecting ESG datafrom companies and understanding how to use thesedata; and (b) companies themselves measuring andreporting their ESG performance and understandinghow to use these data. In turn this will mean thatcompany-investor dialogues routinely incorporate ESGperformance discussions.Then there is positivefeedback as the dialogue further strengthenscompanies and investors in their understanding and useof ESGperformance data.

For glossary of terms see appendix 1.

Achieving this “virtuous circle” will require newapproaches to value risks and opportunities associatedwith the non-adoption or adoption of sustainability.Previously, researchers and practitioners have tended tofocus on whether Corporate Responsibility – definedas commitment to improving environmental, social andgovernance performance by minimising negativeenvironmental and social impacts, and maximisingpositive environmental and social impacts – helpsimprove business performance in terms of profitabilityand share price.

Several meta-analyses of individual studies haveexplored this link (see Figure 4 below).

Yet as The Economist magazine concluded (Just goodbusiness 18th January 2008 – The next question –does CSR work?): “A new, exhaustive academic review of167 studies over the past 35 years concludes that there isin fact a positive link between companies' social andfinancial performance—but only a weak one. Firms arenot richly rewarded for CSR, it seems, but nor does ittypically destroy shareholder value. Might clevererapproaches to CSR in future produce better returns?”

Instead of asking does CR improve businessperformance, this research focuses on how CR canimprove business success. Specifically, the researchshows how improving aspects of ESG can positivelyimpact on individual elements of what has traditionallybeen referred to as non-financial performance; and inturn, how these impact on the drivers of value-creation.

Game-Change – Changed Context of GlobalCrisis

The initiation of this project preceded the financialcrisis.The crisis has, however, given added urgency andimpetus to the project:

• Many are now looking for alternatives to short-termshareholder value which fuelled compensationrewards fundamentally misaligned with long-terminterests of the business;

• There is a desire to unpick the generic “quality ofmanagement” assessment with more sophisticatedindicators of factors both driving and exemplifyingthat “quality”, which can be translated back into anumerical valuation of the business.

3

Figure 2:Virtuous Circle

• The “sustainability crisis” and the international driveto a low carbon economy and conservation ofnatural resources requires new metrics to enableboth companies and investors to evaluate companieswell-placed for, or conversely those at risk from thetransformation.

Whilst we recognise the vital importance of debatesabout the societal added-value that business cancontribute, and the need for greater transparency andaccountability required to meet societal expectations ofbusiness, we see this as a parallel debate to debatesabout how improving ESG performance can contributeto enhanced value for the firm.This study is focussedon the latter, and specifically on what needs to changewithin firms and within the investment community, andalso within both together.

The close collaboration between the research teamand the CSR Alliance Laboratory represents a differentapproach to much academic research.We summarisethe key lessons for similar collaborations in the future ina separate note to EABIS.

This final report draws heavily on laboratory meetings,focus groups with investors held around the EU, 1:1interviews with investors, companies and experts, andcrucially on the working papers produced by theresearch team.These working papers are:

• Non-financial performance metrics for corporateresponsibility reporting revisited (Malcolm Arnold)

• The Challenges of Mainstreaming Environmental,Social and Governance (ESG) issues in InvestmentDecisions A survey of practitioners’ reports (KennethAmaeshi, David Grayson)

• Going beyond a long-lasting debate:What is behindthe relationship between corporate social andfinancial performance? (Francesco Perrini,Angeloantonio Russo, Antonio Tencati, Clodia Vurro)

• The integration of ESG information into investmentprocesses:Toward an emerging collective belief?(David Bourghelle, Hager Jemel, Céline Louche)

• Dialogues with the European investment communityon the challenges of mainstreaming Environmental,Social and Governance (ESG) issues in investmentdecisions: Summary of findings from focus groupdiscussions in: Rome, Frankfurt, Paris Stockholm andUtrecht (Kenneth Amaeshi)

These papers can be found at www.eabis.org andwww.investorvalue.org. For a fuller description of theresearch project, including our operations timeline,research objectives and lessons see appendix 2.

With the publication of this report, this EABIS researchproject is concluded. Individual members of theresearch team will be continuing their work in this field;and the EU CSR Alliance Laboratory also envisages anew dissemination phase for its work. Details can befound at www.investorvalue.org

David GraysonKenneth AmaeshiHager JemelCéline LoucheFrancesco PerriniAntonio Tencati

4

2.1 Obstacles with the Investor Community

The obstacles to mainstreaming ESG issues ininvestment decisions on the part of the investorcommunity are mainly to do with investors’ mindsets,decision techniques, investment horizons andperceptions of ESG issues.

• Investors’ mindsets, decision techniquesand investment time horizons

It was noted through our multiple data sources thatmost investors, in line with their education anddominant economic worldview, are skewed towardsquantitative analysis and short-termism in theirinvestment decisions.This often comes with a slightlyinflexible analytical framing of issues by investors, and isrecognised as a deep and structural challenge. Giventhat ESG issues are much more geared towardsqualitative analysis and long term investment decisions,sometimes, this inclination towards quantification andshort-termism negatively rubs off on to ESG issues.And where data are collected on ESG issues, they areoften undermined by inconsistencies and insufficienciesarising mainly from the differences of ESG data in termsof actors, industries, regions and countries.

• Investors’ perceptions of ESG issues

Most investors tend to think that ESG issues arecomplex, expansionary, and, therefore, contestable.According to them, ESG issues present a very highdegree of complexity, which makes them very difficultto articulate, assess and integrate into investmentdecisions.This complexity is particularly tied to thechallenge involved in understanding the boundaries of

ESG issues – i.e. what is in and what is out.Thiscomplexity is further intensified by a language confusionthat has made it difficult to articulate what is meant byESG and how to measure it. Some of the terms usedto describe this practice include – ESG, non-financialperformance; CR; extra-financial performance,sustainability.

The expansionary nature of ESG issues is also a sourceof concern for many investors.The issues are constantlyevolving and as such difficult to pin down. For example,the issue of obesity and healthy eating has entered thecorporate responsibility agenda in the developedeconomies, where it was not featured until the lastdecade or so.The same can be said of other issues suchas climate change, water scarcity and evenimmunisation (e.g. PharmaFutures –www.pharmafurures.org)3.This fluidity, while necessaryin identifying and internalising externalities arising fromcorporate actions and inactions, carries with it asignificant amount of complexity and uncertainty. Someinvestors argue that the quest to unpack and addressthese complexities often leads to information overload.

In addition to the complexities engendered by ESGdiscourse and practice, they also constitute an arena forcontestations and power relations.These contestationsand power relations in turn express themselvesthrough different interests and interest groups.Unsurprisingly, in the literature and sometimes ineveryday professional conversations on ESG issues, theinvestor community is often considered and treated asa homogeneous group.This tendency, in itself, tends toconceal the differences in both interests and powerrelations that could exist amongst investors, andappears to stand in the way of mainstreaming ESG

2Obstacles to MainstreamingEnvironmental, Social and GovernanceIssues in Investment DecisionsWhy are ESG issues not frequently represented in mainstream investment decisions? There is a growingawareness that investment decisions and the financial markets do not appropriately value ESG issues,despite the fact that these issues could be fundamental to understanding the performance of firms. Ourresearch has identified a number of possible obstacles in the way of mainstreaming ESG in investmentdecisions.These are broadly grouped into obstacles (a) with the investor community and (b) insidecompanies, which are further summarised below.

5

3 PharmaFutures brings larger pharmaceutical companies together with pharma sector investors, to explore what information is needed byinvestors that is not currently provided and how best to provide this.

issues in investment decisions. A participant in theUtrecht focus group session drew attention to the factthat:“We should be careful here to recognise thatinvestors are not an homogeneous group.They aredifferent and have different needs and therefore requiredifferent approaches”.

2.2 Obstacles inside Companies

Many of the same obstacles were identified as alsoapplying inside companies too. Drawing an analogy witha pipe carrying water, leakages (obstacles) occur atnumerous points in the pipe (achieving, measuring,reporting and communicating ESG performance).

• Companies are at different stages of CR maturity(and even within the same firm, may be moremature in certain parts of the business or onparticular topics), and only some companies,therefore, will have significant improvements in ESGperformance to be able to report;

• Even many of the more mature companies when itcomes to embedding CR and sustainability haveonly recently made the explicit link between thiscommitment and their overall strategy; others havestill to do so;

• Many have struggled with how to explain thislinkage satisfactorily, in terms of how the failure tolink creates corporate risks, and how making the linkcreates opportunities;

• Senior managers may not, therefore, yet appreciatethe significance of ESG performance data presentedto them in terms of potential or actual impact onbusiness performance;

• Or they may understand the significance of the databut not yet trust their robustness and accuracy;

• Even where the data are available, these may bedispersed in different parts of the business, or heldwithin a specialist CR / sustainability function whichmay be disconnected from the business;

• In particular, there may be a disconnect oroutmoded thinking about the role and relevance ofthe specialist ‘sustainability’ / ESG performance data;

• This could apply particularly within the InvestorRelations function with its well-established channelsof communication and processes;

• Even where those responsible for communicatingwith investors (CEO, FD, Head of Investor Relations)understand the significance of the ESG performancedata they have and this is positive, there may be areluctance to share these data with mainstreaminvestors due to seemingly justified or misplacedassumptions about the likely response of investors;

• There may, for example, be a feeling that the dataare available in the Sustainability report and yet theyget no questions from investors – not necessarilyrecognising that these reports (and even the mainannual reports often nowadays) are not seeminglyread by investors.

As a result, McKinsey & Co (see figure 3) found thatCEOs of companies already committed to embeddingCR and improving ESG performance, regard briefingmainstream investors about what they were doing asthe least important of key requirements for embedding.What is not clear is whether interviewees ratedbriefing investors low because of their assumptionsabout investor indifference; their own concerns aboutthe robustness of their ESG performance data; theirknowledge about what their ESG data currently show;or because they did not regard mainstream investors asa significant driver or obstacle for embedding CR.

Whilst the research team did not conduct a separatedetailed inquiry in academic or practitioner literatureabout these assumptions, nothing that we found in theliterature or in focus groups, interviews and thestakeholder consultations, contradicted this description.

6

Figure 3: McKinsey survey: “Performance Gap”

Source: Feb 2007 McKinsey survey of 391 UN Global Compactparticipant CEOs

2.3 Underlying obstacle of lack of intellectualjustification

For more than 35 years, research on the role andresponsibilities of business in society has been searchingfor the Holy Grail represented by the business case forcorporate responsibility.Therefore, an increasingnumber of studies on the Corporate SocialPerformance (CSP) – Corporate Financial Performance(CFP) link have been produced. CSP can be defined asthe outcome of implementing CR activities andbehaviours: it comprises principles of socialresponsibility, processes of social responsiveness, andpolicies, programmes and observable outcomes as theyrelate to the firms’ relationships with stakeholders(Wartick & Cochran, 1985;Wood, 1991). In otherwords, CSP refers to the observable and measurableoutcomes of corporate social actions.

Unfortunately, the traditional approach to the analysisof the relationship between CR, social performance andfinancial performance has led to inconclusive results:figure 4. (Barnett, 2007; Margolis and Walsh, 2003;McWilliams and Siegel, 2000; Orlitzky, Schmidt & Rynes,2003; Rubbens & Wessels, 2004). In fact, the linkbetween CSP and CFP is usually complex, not directand not immediate, and is affected by manycontingencies (Devinney, 2009).

Now, we have to recognise that there is no “silverbullet”. However, this lack of evidence has oftenundermined attempts to fully integrate CR inmanagerial decision-making. It has also impededevaluation practices of the “mainstream” investmentcommunity. If there is no clear relationship between CRand, for example, net income, earnings per share andmarket value, why should CR be taken into account ininvestment decisions?

The problem is that this approach is both simplistic andproblematic. From a strategic standpoint, not integratingCR means for companies a dramatically limitedunderstanding of their surrounding environment. Forthe investment community, not considering the possibleimpacts of CR means losing opportunities for morereliable and robust investments. Unfortunately, in thiscase, the financial dimension is still the prevailingcriterion for performance assessment. But companiesare too complex organisations to be evaluatedinternally and externally only in monetary terms.Complex organisations in complex times and incomplex environments call for more refined andadvanced methodologies and tools.

Instead of searching for the “silver bullet”, empiricalinvestigation needs to focus on a deeper understandingof what it means to succeed in CR, disentangling itsspecific dimensions.

7

Figure 4: Relationship between Social Performance and Financial Performance

IESE Review of Academic studies of link between Corporate Responsibility and Financial Performance – 2006

In more detail, the obsession with the search for aunique “business case” has left unexplored questionsabout what firms are doing in response to their actualand perceived renewed role in society and with whateffects.

In the real world, in many cases business practice showshow firms engaged in social and environmentalactivities are enlarging their sphere of responsibility andaccountability, moving beyond simple monetarymeasures and a generic definition of CR to orient andmanage their behaviour.Therefore, many companiestend to consider social and environmental performancenot as univocal constructs (ie having only oneunambigious meaning), but increasingly break it up intospecific stakeholder-firm relationships and related CRareas.

In this sense, if CR is considered as a new strategicapproach based on the crucial value of stakeholderrelationships and on the capacity of a firm to meetstakeholder needs beyond mere legal compliance, thena clear understanding of CR performanceconsequences should identify possible different targetsand investigate how specific activities translate intoorganisational, managerial or market gains according toa multiple-bottom-line thinking (Perrini & Tencati, 2006;Tencati & Zsolnai, 2009).

Trying to answer this call for reorienting business insociety research towards a deeper understanding ofthe drivers of CR-related performance, recent researchhas taken account of the impact of CR at a differentlevel of analysis (Aguilera, Rupp,Williams & Ganapathi,2007) and in specific management areas andstakeholder interactions (Perrini, Pogutz & Tencati, 2006;Tencati, Perrini & Pogutz, 2004).

A broad and in-depth review of empirical andtheoretical contributions allowed us to identify possibleareas on which CR policies can impact (CR-related

performance drivers) and the relationships of influencebetween these drivers and the financial (i.e., cost-related or revenue-related) outcomes.

The CR drivers are as follows:• Organisational;• Customer;• Society (including the relationships with suppliers);• Natural environment;• Innovation;• Corporate governance.

With regard to the financial outcomes, the revenue-related ones comprise the following:• Growth opportunities;• Competitive positioning;• Brand equity.

The cost-related outcomes are as follows:• Cost of labour;• Operational efficiency;• Cost of capital;• Risk management.

According to this approach, the real case for CR has tobe based on a different logic, in which:

(1) specific drivers of social performance are studied(in place of indicators of overall socialresponsibility);

(2) intermediate performance measures, such asoperational efficiency, are analysed to point outthe financial impact of CR (Pivato, Misani, & Tencati,2008).

Figure 5 provides a summary picture of the mainmechanisms linking CR-related drivers to specificperformance areas, as emerging from the literaturereview carried out.We call this the Value-CreationFramework.

3Value Creation Framework

Starting from the analysis of existing literature on the link between Corporate Social Performance andCorporate Financial Performance, and deepening the different dimensions underlying the relationshipbetween specific CR-related interventions and company performance, our research answered the call for amore detailed understanding of the mechanisms through which CR can impact on the performance of thefirm (see Perrini, Russo,Tencati, &Vurro, 2009).There is no doubt that CR may be beneficial for committedfirms. Less clear is what dimensions firms can leverage to improve their abilities to benefit fromresponsible behaviour.

8

Though not exhaustive, Figure 5 allows one to define ataxonomy of the conditions under which one canexpect certain results, as well as the mechanisms bywhich specific activities can relate to performanceoutcomes.

This theoretical framework provides an innovativeperspective for both scholars and practitioners.

For academia, this work opens new research avenues:disentangling specific dimensions of the CSP-CFP linkoffers insights into the driving factors explaining thevariability in corporate performance. Moreover, linkagesamong CR policies, CR-related drivers and financialoutcomes need to be further studied: there is morethan a single way in which improving company socialand environmental performance can turn intoperformance differentials.

From the practitioner standpoint, and with a specialfocus on the relationships between firms and theinvestment community, this perspective provides aninnovative and common framework through whichcompanies and financial analysts and investors cancommunicate. Firms can adopt this framework toassess and orient their own behaviour.The investmentcommunity can use this approach to better read andappreciate the initiatives and efforts carried out bycompanies, and to better evaluate the real quality ofmanagement and the sustainability of the value creationprocesses developed by the firms.

Therefore, new managerial tools are needed tosupport firms and the investment community on theone side in performance management and evaluationand, on the other, in a mutual dialogue, and tocomplement and integrate with traditional financialmethodologies.

The model advanced by the EU CSR AllianceLaboratory has exactly this purpose, that is, providingenterprises and the financial community with a toolable to improve the quality of the interaction betweenfirms and investors and the corporate performanceevaluation by adopting a more comprehensive andcomplete view – see www.investorvalue.org. Therevised version of the Lab operational model can befound at appendix 3.

The Value Creation Framework is a researchframework. It has been designed to illustrate a new,more complete and coherent approach to the analysisof the relationships between CSP and CFP. It is basedon an extended academic literature review of morethan 170 contributions.

Like every good research output it has managerialimplications too.There is an evident lack ofunderstanding between firms and the investmentcommunity. Firms are deploying broad value creationprocesses by targeting, involving and engagingstakeholders and constituencies but these efforts arenot appreciated by the market.

More generally, the current financial crisis has furthershown that the traditional financial methodologies areunable to capture the real value created by a company.Firm value and market value are only partially aligned.The perspective introduced by the framework tries toprovide a positive contribution to solve this criticalproblem. But what is clear is that if we intend to fosteran enhanced dialogue between firms and theinvestment community, then specific managerial toolsare needed. From this standpoint, the Lab proposal is amethodology that is intended to fill the gap betweenthe value creation processes generated by firms byleveraging ESG factors and the market appreciation ofthese activities.

Furthermore, the Lab model could be a promisingstarting point to establish a platform for dialoguebetween leading companies and representatives of thefinancial community to define a shared Europeanframework/set of tools (including specific performanceindicators) for valuing non-financial performance.Thisplatform should be promoted, convened andsupported by the European Commission as part of itsmulti-stakeholder engagement process – seerecommendations section below.

9

10

CR values,beliefs &activities

Work contentJob designKnowledge managementSafety and stability

CommitmentSatisfactionMotivation

Transparency and reliabilityOpen dialogueMutual understandingQuality and innovation

TrustReputationIdentificationSatisfaction

Engagement and dialogueCommunity developmentSustainable supply chainmanagement

License tooperateSocial capital

Growthopportunities

Competitivenesspositioning

Brand equity

Riskmanagement

Operationalefficiency

Cost ofcapital

Cost oflabour

ORGANIZATIONAL DRIVERS

Impact control, preventionand assessment Managerial tools andstrategies

ComplianceReliabilityReputationSustainability

Social and environmentalprograms Operational changes

New product andprocessdevelopment

Voluntary disclosureGovernance andengagement

TransparencyReliability

CUSTOMER DRIVERS

SOCIETY DRIVERS

NATURAL ENVIRONMENT DRIVERS

INNOVATION DRIVERS

CORPORATE GOVERNANCE DRIVERS

REVENUE-RELATEDOUTCOMES

COST-RELATEDOUTCOMES

Figure 5: The Value Creation FrameworkSource: Perrini et al., 2009

Figure 5:TheValue Creation Framework

11

How Companies and Investors might make useof theValue Creation Framework

The Value Creation Framework is a researchframework: the Lab model is an operational tool, tomake use of the Framework.The Framework providesa new perspective/thinking and the Lab model is a toolaimed at implementing that perspective in firms and inthe investment community.

It is not expected that any one company will be able orwill wish to demonstrate all the linkages suggested bythe framework. Rather, a company would identify thoselinkages most appropriate for it (based on available,collectible metrics; positive results from previouscompany activity; alignment with current priorities forcompany attention). Over time, it is anticipated thatmore linkages will become apparent and susceptible tocollection of positive metrics.

The Value Creation Framework and the associated Laboperational tool are an integral part of the processesand commitments required from companies to embedCorporate Responsibility and Sustainability, discussed inthe EABIS Colloquium 2008 (www.eabis2008.info).

Within the investment community, it is not expectedthat the approach supported by the Value CreationFramework and associated Lab model would replaceexisting investment models. Rather they offer richinsights for refining existing models.

The next steps would be for some of the business-ledCR coalitions such as the World Business Council forSustainable Development and CSR Europe with itsnational partners network such as Business in theCommunity in the UK or Sodalitas in Italy; and otherconvening groups for responsible business leadershipsuch as the Prince of Wales Accounting forSustainability initiative, to promote the perspectiveprovided by the Value Creation Framework and relatedLab tool to member companies.

There needs to be a critical mass of vanguardcompanies committed to adopting the approachprovided by using the Value Creation Framework andoperationalised by the Lab methodology. They canthen talk about the way that improved ESGperformance is contributing to business strategy andvalue-creation, with innovative thinking helping thecompany to generate the data to demonstrate this.Focus groups convened by the WBCSD (2008)indicated that if (say) 200 top corporate CEOs spoketo investors with a new voice, it would make asignificant difference to mainstream investors.

Simultaneously, the rationale of the Value CreationFramework needs to be incorporated into the trainingprogrammes for the investor community offered byprofessional associations such as European Federationof Financial Analysts Societies (EFFAS) and by businessschools.

In parallel, it will facilitate understanding and adoptionby both target groups: business and the investmentcommunity if:

• Worked examples become available of howcompanies are using the Value Creation Frameworkand the operational Lab proposal to stimulate thecapture and deployment of data on the ways thatimproved ESG performance is contributing tobusiness strategy and value-creation.

• Generic data are collected on some of the keymetrics in the way that, for example,Towers Perrinas compensation and human resources expertshave accumulated data on employee advocacy andbusiness performance.

• Some early adopters are prepared to allowresearchers to monitor their experience.

• Other levers – existing initiatives and organisations– can be pulled to advance awareness of thepotential of the Value Creation Framework – forexample the current revisions of the EuropeanFoundation for Quality Management (EFQM).

This is discussed further in section 6 below.

4ChangingToday’s Dominant

Convention in the InvestmentCommunity and Business

Financial market participants coordinate their actions through dominant conventions – i.e. some norms ofbehaviour that determine the normality of a situation and give saliency to implementing decisions sharedand diffused across the market.The current convention does not generally incorporate ESG informationinto company valuation. But our contention is that the myriad of initiatives that have emerged over the lastfew years to encourage the integration of ESG information represent endeavours towards changing thecurrent dominant convention of valuing companies.

12

4.1 ESG Integration:An emerging trend

The first claims and practices linked to the integrationof ESG information into mainstream investmentdecision-making appeared publicly at the beginning of2001.These were isolated projects launched by somepioneers convinced that ESG analysis can help assetmanagers and financial analysts to better assess therisks and seize the opportunities for companies.Nonetheless, in a short time period, the integration ofESG information into mainstream investment decision-making has created a growing interest within thefinancial community; and many other initiatives haveemerged to encourage traditional institutional investorsand research providers to consider ESG issues.

• ESG research providers’ development

Since the 1990’s, an increasing number of independentspecialised research organisations have been created toprovide investors with background data on ESG.Besides these independent organisations, manyresearch teams have been developed inside investmentmanagement houses to support asset managers inmanaging ESG information.

At the beginning of 2000, the research onenvironmental, social and governance issues crossed anew stage with the creation of the first ESG researchteams inside brokerage houses. In fact, thedevelopment of ESG research teams within sell-sidecompanies symbolises the first concrete steps towardsthe mainstreaming of ESG information integration.

• Institutional investors’ collaborations

ESG integration has rapidly moved from scatteredinitiatives to organised joint programmes. Among themost influential professional collaborations developedwith the objective of promoting the integration of ESGinformation into mainstream research have been theEnhanced Analytics Initiative (EAI), now merged withinthe UN Principles for Responsible Incestment (Seehttp://www.unpri.org) (UNPRI) and the CarbonDisclosure Project (CDP), (see a more complete listbelow:Table 1)

• Financial analysts’ collaborations

The financial analysts’ community has also witnessed theemergence of professional collaborations addressingthe inclusion of ESG information. In France for example,some members of the SFAF, the French association offinancial analysts, in 2002 founded a commission5 todiscuss and exchange ideas about the analysis ofsustainable development information and to increaseinvestment community awareness of the importance ofthis issue. At a European level, the EFFAS CESG(European Federation of Financial Analysts (EFFAS)Commission on ESG Environmental, Social &Governance (CESG)) was founded in October 2007with the objective of “Facilitating the integration of ESGaspects of corporate performance into investmentprocesses”.

• Other professional initiatives

Many consultancy companies have positionedthemselves in the emerging market of services relatedto ESG information and financial advice. Some of themrely on their skills in financial investment domains topropose new services combining ESG issues analysisand investment advice.The British consulting companyMercer is among the pioneering investment consultingfirm that have developed such new services. Itsnewly-created division specialising in responsibleinvestment is progressively striving for the extension ofits services to mainstream investors. Several othersconsultancy companies have also launched services tohelp investors to develop investment approaches thatintegrate ESG issues within a fiduciary framework.

• Surveys, reports and publications

The number of reports, articles and surveys publishedin the last few years about ESG information, usefulnessto the financial community and ESG integration intoinvestment decisions, represents another indicator ofthe growing interest in these issues. [Our research teamidentified more than 80 such English language reportsin the last decade alone.]

Similarly, the specialised Press has shown a greaterinterest in the inclusion of ESG issues in investmentpractices. A search in the Financial Times,Wall StreetJournal and the Australian Financial Review reveals asignificant increase in articles published on the topicsince 2006-2007.“Environmental, social andgovernance” were used as key words.

13

4 BNP Paribas Asset Management (France); PGGM (Netherlands); Deutscher Investment Trust (Germany); Dresdner investment management(Germany); RCM (UK) and Universities Superannuation Scheme (UK).

5 La Commission Finance et Développement Durable.

Enhanced Analytics InitiativeThe EAI “is an international collaborationbetween asset owners and asset managersaimed at encouraging better investmentresearch, in particular research that takesaccount of the impact of extra-financial issues onlong-term investment” [EAI, 2007].The EAI waslaunched at the end of 2003 by a foundinggroup composed of institutional investors4

managing some $364 billion in assets. InOctober 2008 EAI was integrated within:

UN Principles for Responsible Investment(UNPRI)The PRI were launched in April 2006 by formerUN Secretary General Kofi Annan incollaboration with 20 major institutionalinvestors.The initiative consists of six principlesthat provide a framework to incorporate ESGissues into mainstream investment decision-making and ownership practices.The sixprinciples are not prescriptive, the signatoriespublicly commit to adopt and implement them,where consistent with their fiduciaryresponsibilities. By 2009, the PRI had grown intoa coalition of more than 400 of the largestinstitutional investors and asset managersworldwide representing some $15 trillion dollarsunder management [Hobbs, 2008].www.unpri.org

Carbon Disclosure ProjectCDP was formed in 2000 as an independentnot-for-profit organisation. It has 475 signatoryinstitutional investors with $55 trillion in assetsunder management.The aim of the project is toassess the impacts of climate changes oncompany valuations. CDP sends outquestionnaire each year to the 500 mostimportant listed companies in the world in orderto gather detailed information about theopportunities and risks that climate changesrepresent for them.The purpose is to encouragethe development of a shared methodology formeasuring greenhouse gas emissions andfacilitate its integration in the broader analysis offinancial investments.http://www.cdproject.net/.

Table 1: Examples of collaborative initiatives

4.2 Influencing mechanisms

The myriad of initiatives – be they collaborativeinitiatives, research platforms or incentive systems –that have developed do not only demonstrate thegrowing interest in ESG but also contribute to theintegration of ESG information into investmentdecisions6.

These initiatives include a number of institutionalinvestors who are exercising pressures throughcontractual restrictions. Fund managers and sell-sidefinancial analysts may be contractually required byinstitutional investors to integrate ESG issues in themanagement mandate. Over the last ten years, manyinstitutional investors have launched calls for tendersfor bond and equity mandates to include such a

restriction. Indeed, such calls for tenders issued bymajor institutional investors, as for example the FRR7 inFrance or the Norwegian Government Pension Fund-Global, have contributed to the development of extra-financial research within investment companies.

Over the last decade, many governments havelaunched new regulations to establish ESG disclosurerequirements for pension funds.The first jurisdiction toestablish a formal obligation for pension fund ESGdisclosure was the United Kingdom in 2000. Followingthis pioneering initiative, many other governments haveput similar rules in place. Figure 7 below recapitulatesthe regulations established worldwide up toFebruary 2009.

14

6 The research team’s working paper The integration of ESG information into investment processes:Toward an emerging collective belief? DavidBourghelle, Hager Jemel, Céline Louche discusses the mechanisms in terms of DiMaggio and Powell’s 1983 framework of coercive, mimetic andnormative mechanisms.

7 FRR (Fonds de Reserve pour les Retraites) is the French pensions reserve fund.

Figure 6: ESG references published between 2003 and 2009 (as of 07 July 2009)

A number of professional collaboration networks tocreate and share knowledge about ESG informationsuch as the EFFAS Commission on ESG Issues8 havebeen set up.The main objective of these initiatives is tofacilitate the sharing of knowledge, methodologies andexpertise among the investment community. Consultingfirms, being viewed as experts, are also playing animportant role by diffusing models, best practices, andsolutions. Rankings and rewards such as such as theThomson Extel Socially Responsible Investment Survey9

(launched in 2003), the ESG Leaders Awards (launchedin 2007) or the bi-annual EAI ranking (launched in2004) reduce uncertainties as well by highlighting theefforts undertaken by the financial professionals in thedomain of ESG integration. By putting them in thespotlight, they encourage many others to join themovement and provide legitimacy to those that arealready involved.

Practices are also spread by financial analysts movingfrom one company to another. For example, in order tolaunch its extra-financial research activity in 2004,Citigroup hired the analyst who founded the ESGresearch team in HSBC. In the same way, SociétéGénérale recruited two senior ESG analysts from CMCIC to initiate its ESG research activity in 2004.Thosetransfers are helping the diffusion of models amongdifferent organisations because individuals come withmethods and practices developed with their originalemployer and tend to replicate them in the newcompany.

There are also external research initiatives: a goodexample is the creation of the AI CSRR (Associationfor Independent Corporate Sustainability andResponsibility Research).The AI CSRR has developedthe first quality standard for corporate responsibilityand SRI research and analysis.This standard namedCSRR- QS 2.1 provides a general description ofprinciples and requirements regarding the activities ofthe field of responsible research. It focuses mainly onthe operational requirements of SRI-related productsand services.

Several collaborations have also been developedbetween professional associations and academic groupsto promote research linking finance with socialresponsibility and sustainability issues, such as theFrench SIF Award, the UNPRI Academic Network, orthe European Centre for Corporate Engagement.

In February 2009, another similar initiative waslaunched in Australia.The Australian governmentannounced $AU 2.5 million funding over three years toestablish the Responsible Investment Academy.ThisAcademy will be managed by the ResponsibleInvestment Association Australasia (RIAA) andgoverned by an Australian and international AdvisoryCouncil. Its main goal is “to offer a range of premiumContinuing Professional Development (CPD) coursesas well as diploma and certificate courses10”.Theimplementation of a specific academic course isanother way to establish and legitimate the area ofresponsible investment.

8 www.effas.com/en/cesg9 now Thomson Reuters Extel/UKSIF Survey10 http://www.responsibleinvestment.org 15

Figure 7: Disclosure regulations for pension funds (Bourghelle et al., 2009)

16

Table 2: Initiatives to promote ESG measurement, reporting and use

What follows – as part suggestion, part speculation –is an examination of how the tipping point might bereached. It is based on: Lab stakeholder-engagementmeetings, focus groups, analysis of practitioner reportsand interviews conducted by the research teamdirector.

John Kotter in ‘Leading Change’ (1996) suggests aneight-step process for understanding change whichstarts with a sense of urgency and of the need forchange, see Table 3 below. The Inter-GovernmentalPanel on Climate Change, Stern Report to the UKGovernment, Al Gore’s “An Inconvenient Truth”, andnumerous subsequent reports have created that senseof urgency on climate change and arguably on thebroader issue of sustainable development. This is nowcoupled with the recognition that sustainability posesrisks to business – and a dawning understanding that italso creates opportunities.

Table 3: Understanding change

1. establishing a greater sense of urgency,2. creating the guiding coalition,3. developing a vision and strategy,4. communicating the change vision,5. empowering others to act,6. creating short-term wins,7. consolidating gains and producing even more change8. institutionalizing new approaches in the future.

Leading Change (1996) John Kotter

As previous sections of this report have shown, what ismissing is widespread understanding of how thistranslates into corporate strategy, how to measure andreport on ESG performance, and how to incorporateESG performance in valuation of businesses.

Whilst we believe the Value Creation Framework andthe related Lab operational tool can be a criticalresource for the later step, there needs to be asufficiently bold and high-powered initiative to breakthrough the current obstacles (identified in section 2).

As discussed in section 4, there are a number ofimportant initiatives already in play. The trick is not tocreate another – but rather to stimulate closercollaboration, and mutual reinforcement and division oflabour between the existing initiatives.

It is suggested that separate gatherings of corporateCEOs this autumn/winter, e.g.:

• World Business Council for SustainableDevelopment (WBCSD) CEOs meeting,Washington DC, October 2009

• putative BITC leaders’ gathering autumn 2009

• putative EU Commission’s invitation to corporateCEOs

• Prince of Wales Accounting for Sustainability annualmeeting December 2009

could each, within their own frameworks and in thecontext of their own previous work, issue similarstatements of intent for signing by corporate CEOs.Specifically CEOs would be invited publicly to committhemselves to explain in the 2010 cycle of investor-roadshows, analysts’ briefing, and CEO resultspresentations:

• The material sustainability challenges for theirbusiness and how this is impacting on corporatestrategy

• How improving ESG performance affects extra ornon financial performance and, therefore, long-termdrivers of business success (according to theperspective provided by the Value CreationFramework)

• ESG performance and expectations of futureimprovements in ESG (ESG forecasts alongside ‘risksand profits’ forecasts)

5How Might Collaboration Evolve?The table in section 4 immediately above – whilst not exhaustive – shows the ferment of activity now takingplace from an increasing range of types of organisation and geographic approach, and at an accelerating pace.It is unclear, however, whether this has yet reached critical mass to achieve a tipping point – either withcompanies or the investment community.

17

Preferably the participating CEOs would give advancenotification of their intentions directly to their investorcommunity as well.

The international accounting firm PwC is currentlyanalysing on behalf of the Prince of Wales Accountingfor Sustainability (POWAFS) and for the WBCSD, thepublic domain, standard 2009 results presentations ofWBCSD’s 200 member companies to see what theyare already saying about ESG performance andsustainability.

It is important that there be a similar exercise in 2011,extended to other companies involved through BITC,EU CSR Alliance, POWAFS which are not alreadyincluded in the WBSCD sample.This would show howthe explanations of ESG and sustainability had shiftedfrom the 2009 to 2010 reporting cycles.

It would also be necessary for some of the initiatives tofacilitate investor dialogues to assess the impact of suchincreased corporate briefing on ESG and sustainability;what had worked and what had not in these briefings,what improvements investors believe should be made;and what help – if any - investors needed (e.g. training,access to follow-up information) to optimise their useof the enhanced data.

A follow up survey of investors (owners, fundmanagers, analysts) should be conducted in 2011 toassess changes in behaviour, alongside a parallel surveyof companies to assess changes in their own behaviourand their perceptions of changes amongst investors.

18

6.1 To the EU CSRAlliance Laboratory

We recommend to the Lab to:

a refine its model in the light of the researchrecommendations;

b use the fact that it is a finite initiative and, therefore,not a competitor to existing organisations, topursue a dialogue with a number of theorganisations that have convening power withcorporate CEOs, to encourage them to seek CEOs’commitments to include in their 2010 resultspresentations to investors an explanation of whyand how they are embedding sustainability withintheir corporate strategies (as outlined in section 5above);

c in particular, to encourage the sponsors of the EUCSR Alliance – including the EU Commission itself –to invite corporate CEOs and investors to act.

6.2 EU Commission

We recommend:

a the convening by the new Commission of a meetingwith vanguard corporate CEOs and investors willingto take a lead in publicly committing to explain howthey are committed to improving and analysing ESGperformance because of the risks in not doing soand the opportunities for value-creation in so doing;

b funding for an EU equivalent of the new AustralianGovernment-funded Australian ResponsibleInvestment Academy to provide training for analystsand investors in how to evaluate ESG performanceas part of overall evaluation of quality of corporatestrategy and management.

6.3 Companies

We recommend that companies:

a adopt and adapt the perspective provided by theValue Creation Framework and use theLaboratory’s related operational tool as a vehiclefor incorporating sustainability within overallcorporate strategy;

b publicly commit at CEO level to include anexplanation of why and how they have done this, asan integral part of their investor presentations forthe 2010 results season;

c experiment with different approaches toempowering Investor Relations and CR functions intheir business to work together, e.g. through internalsecondments and participation in joint training inthe adoption of the Value Creation Frameworkapproach and in the use of the Lab methodology;

d encourage their Pension Fund Trustees to considermaking ESG performance one of the factors in theirmandates to their fund managers.

6.4 Investors

We recommend that investors:

incorporate the Value Creation Framework thinkingin their models for assessing corporate value.

6.5 Business-Led CR and SustainabilityCoalitions, Multi-Stakeholder ForaandThink-Tanks

Even if a critical mass of vanguard companies andinvestors respond positively to theserecommendations, we believe that there is a needfor “honest brokers” able to convene and facilitatestructured conversations between companies andinvestors, adopting the Value Creation Frameworkperspective, as the think-tank/consultancySustainability has done with their Pharma Futuresinitiative, (see section 2.1 above).We supportefforts by groups such as WBCSD and Accountingfor Sustainability to build a critical mass ofbusinesses accounting for and reporting to investorson sustainability impacts.

6Recommendations

19

6.6 EABIS and European Business Schools

There is a critical role for business schools as educatorsof current and future managers through executive andgraduate education programmes, and through thewritings of faculty.

We recommend that:

a EABIS uses this report and initiatives, such as thoseto encourage schools to sign, and then embed thePrinciples for Responsible Management Education,to reach out beyond CR, sustainability and businessethics faculty, to promote these ideas to finance,strategy and management faculty (seehttp://www.unprme.org) and to encourage financeand strategy departments to develop teachingcourses around ideas of long-termvalue-creation.

6.7 Recommendations for Further Research

Although this project has extended over almost twoyears and has involved an international research teamfrom five countries, and input from a range ofinternational perspectives, there are inevitably, anumber of dimensions that have not been covered andcould usefully be the subject of future research.

These include:

• The role of the ratings agencies has not beenconsidered and they have not been involved.However, a number of commentators haveemphasised that they could and should beincorporating ESG risks into their assessments.

• We have not explored the dialogue andrelationships inside companies between theCR/Sustainability function and the Investor Relationsfunction, and within the investment communitybetween ESG analysts and financial analysts andhow this can be improved. (Internal communicationhas come up several times as a barrier but itremains an under-explored ‘black box’.)

• The Value Creation Framework represents animportant breakthrough, but the next step wouldbe to show the interactions between improvementsto the individual drivers of non-financialperformance with one another.

• Further exploration of communications betweeninvestors and companies in general and about ESGin particular, along the lines recommended insection 6.5 above.

• Behaviour change: understanding how investorswork and function; how do they make decisions?

20

Building on this rich foundation of academic andpractitioner work, we believe we are contributingsomething new and positive: the definition of the ValueCreation Framework; and the vision of how a networkof contacts and collaborations with a range ofinfluential individuals and organisations could create theopportunity for a wide dissemination of the ValueCreation Framework, and associated thinking, to

decision-makers and opinion-formers across the EUand beyond.

The research process itself has involved real-timepartnership between academics and practitioners.Whilst not without difficulties and challenges, thisapproach to research also offers potentially better waysof working for subsequent EABIS research projects –see appendix 2.

In the English language alone, we have identified almost 100 practitioner reports produced since themillennium on the obstacles to the incorporation of ESG performance into the mainstream investmentcommunity’s valuation of business, and how these barriers can be overcome.Through this EABIS researchproject, we have had direct dialogue with more than 100 different organisations and initiatives working onthese topics as well as various academic researchers.This is crowded territory.

7Conclusion

Appendix 1GLOSSARY – List of Abbreviations

ESG factors are a subset of Non-Financial PerformanceESG ⇒This term has emerged globally, although mostlyin the investment community, to describe theenvironmental, social and corporate governance issuesthat investors are considering in the context ofcorporate behaviour.

ESG integration ⇒The active investment managementprocesses that includes an analysis of environmental,social and corporate governance risks andopportunities to the extent they affect the economicperformance of an investment. (FROM Translating ESGinto SustainableValue: a field guide for companies andinvestors based on a 2008 international study by theWBCSD and UNEPFI. Forthcoming 2009)

Corporate (Social) Responsibility is defined by the EUCommission as “A concept whereby companies integratesocial and environmental concerns in their businessoperations and in their interaction with their stakeholderson a voluntary basis.”

It is the commitment to minimise negativeenvironmental and social impacts and to maximisepositive environmental and social impacts. (DoughtyCentre for Corporate Responsibility). As such, C(S)R isa commitment to improving ESG Performance.

Sustainable development is development that “meetsthe needs of the present without compromising the abilityof future generations to meet their own needs.” (OurCommon Future, Report of the BrundtlandCommission, 1987).

Sustainable development & business “... leading globalcompanies of the future will be those that provide goodsand services and reach new customers in ways thataddress the world’s major challenges – including poverty,climate change, resource depletion, globalization, anddemographic shifts.” (WBCSD, 2006).

Appendices

21

Appendix 2BACKGROUND –To CSRAlliance, lab and EABISresearch project in support

The European CSR Alliance was formed by the EUCommission, Business Europe and CSR Europe inMarch 2006 as a voluntary initiative to improveCorporate Responsibility across the EU.

“The priority areas of the Alliance will be addressed by“open coalitions of cooperation” bringing togetherinterested companies ready to tackle these issues in theform of “laboratory meetings” in order to explore and todevelop joint operational projects, in partnership withrelevant experts and stakeholders and with the backing ofthe European Commission.”(European Commission CSR White Paper: 22 March2006)

One of the early laboratories to emerge through 2006and early 2007 was one on measurement andcommunication of non-financial performance and howthese data could be better used by businesses andinvestors. Early discussions amongst potential corporatemembers of this laboratory confirmed the need forresearch capacity to support their work. Duringspring/summer of 2007 this crystallised into discussionswith EABIS about whether an EABIS-supportedresearch project might run in parallel and close synergywith the laboratory. Over the rest of 2007/ beginning2008, an outline research project and research teamemerged.This team from Cranfield, Bocconi and Vlerick,has worked symbiotically with the Lab and CSR Europe:Table 4 and see timeline – Table 5.The project and theresearch team have worked in close collaboration withparticipating companies and other stakeholders.This isvery much in the spirit of EABIS-supported research tobe both rigorous, relevant and timely. Learning from thisapproach is summarised.

Research Methodology

The data for this study were drawn from multiplesources: an extensive academic literature review, semi-structured interviews, focus group discussions,stakeholder consultations, review of practitioners’reports since the start of the millennium, and a Delphipanel session.

Extensive academic literature review and semi-structured interviews

The empirical work consists of an exploratory researchbased on extensive academic literature review andsemi-structured interviews and secondary data.

Academic literature review and developmentof theValue Creation Framework

The research working paper “Going beyond a long-lasting debate: what is behind the relationship betweencorporate social and financial performance?” is basedon an extensive review (more than 170 contributions)of the relevant empirical and theoretical academicliterature on the following topics:

• alternative perspectives on the integration of CR inthe theory of the firm;

• relationship between CSP and CFP starting fromthe two comprehensive meta-analyses developedby Margolis and Walsh (2003) and Orlitzky et al.(2003);

• non-financial reporting and socially responsiblebehaviour of firms addressed also from the strategicstandpoint;

• impacts of CR strategies, policies and activities onthe different management areas (e.g., H.R.;innovation; the natural environment; and so on);

• impacts of specific CR drivers on operationalperformance;

• empirical and theoretical mechanisms driving theimpact of CR strategies, policies and activities onspecific areas of business and operationalperformance.

Interviews

25 face-to-face semi-structured interviews wereconducted between July 2007 and April 2009 withfinancial and extra-financial analysts and fund managersin France.The primary objective was to identify themain initiatives and levers that encourage theintegration of ESG information and assess theirpotential to become integrated by mainstreaminvestment community.The interviews were transcribedand coded and analysed using the qualitative dataanalysis software program QSR NVivo.

22

A series of scoping interviews with influentialindividuals selected to illustrate different elements ofthe company and investor universe (Companysecretary, head of investor relations, CR director,Finance director, Pension fund, institutional investor, fundmanager, corporate reporting specialists) wereconducted in London.

Focus Group Discussions

The focus group discussions were facilitated by a groupof experts drawn from academia and industry; seetable 4. Given the sensitivity around ESG issues –especially with regards to competitive, regulatory andcivil society pressures – these discussions were conductedin a ‘safe’ environment to encourage honest conversations,i.e. openness and sharing of information.The focus groupdiscussion sessions were governed by the ChathamHouse rule10 and as such, were not recorded – butnotes were taken by the experts from academia andindustry who observed the different sessions.

Table 4: Focus Group Session ObserversFocus Academics Institutional Business AffiliationGroup AffiliationsSessionsRome Antonio SDA Bocconi Paolo Telecom

Tencati School of Nazzaro ItaliaManagement

FrancescoPerrini

Frankfurt Antonio SDA Bocconi Paolo TelecomTencati School of Nazzaro Italia

Management

Paris Hager Lille Jan CSRJemel Noterdame Europe

Stockholm Céline Vlerick Paolo TelecomLouche Leuven Gent Nazzaro Italia

ManagementSchool

Utrecht David Cranfield John LloydsGrayson School of Swannick Banking

Management Group

Céline VlerickLouche Leuven Gent

ManagementSchool

The notes generated from the focus group sessionswere then qualitatively analysed by NVivo – aqualitative research analysis software.

Review of Practitioners’ Reports

The study searched for practitioners’ reports in thisfield since 2000 – given that much of the momentum inthis field has been, mainly, since the turn of the century- and identified 82 reports from accounting firms,investor associations, business coalitions, investmentbanks, multinational institutions, consultancies and thinktanks, governments and multi stakeholder fora. A list ofthe 82 reports was sent to 36 experts in the field toadvise on the relevance and impacts of these reports.The experts were also asked to identify other reportsthe study might have missed out in the process.Theintention here was to meta-analyse these reports withthe aim of identifying the major issues involved inintegration of ESG risks in investment decisions.

18 responses were received, out of the targeted 36practitioner respondents. A good number of thereports presented to them were considered relevantand impactful. 13 extra reports were suggested throughthis process, which were added to the mix. In total, theyconstituted well over 4,000 pages; however, a sample of22 reports – those most mentioned by therespondents was analysed.These reports were thenqualitatively analysed by NVivo – a qualitative researchanalysis software.

Delphi Panel Session

Following the outcomes of the extensive academicliterature review, semi-structured interviews, focusgroup sessions and the review of practitioners’ reports,a Delphi panel session was run in London on July 9,2009, arranged with the assistance of the Lab membersof the research project to share the findings of thestudy with experts in the field and also to get theirfeedback on how to improve on the research.TheDelphi panel session drew about 30 participants fromthe mainstream investment community, boutique SRIcommunity, academia, professional bodies, and the CR/sustainability community.The researchers were allinvolved in the Delphi panel sessions and thesuggestions/ feedback from the sessions were furtherdiscussed and reflected upon by the researchers andLab members immediately after the sessions, i.e. thenext day, whilst the feedback was still fresh on theminds of the researchers and the Lab members.

10 The Chatham House Rule reads as follows:1.1.1 "When a meeting, or part thereof, is held under the Chatham House Rule, participants are free to use the information received, but neitherthe identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed".The world-famous Chatham House Rule may be invoked at meetings to encourage openness and the sharing of information.http://www.chathamhouse.org.uk/about/chathamhouserule/ visited March 26, 2009

11 The objective of most Delphi applications is the reliable and creative exploration of ideas or the production of suitable information for decisionmaking.The Delphi Method is based on a structured process for collecting and distilling knowledge from a group of experts by means of a seriesof questionnaires interspersed with controlled opinion feedback (Adler and Ziglio, 1996). According to Helmer (1977) Delphi represents auseful communication device among a group of experts and thus facilitates the formation of a group judgement. Taken from:http://www.iit.edu/~it/delphi.html 23

24

Date

March 2006

June 2007

Sept 2007

Autumn 2007

November 2007

Jan 2008

Feb 2008

Lab

European CSR Allianceannounced.

Lab on measurement andreporting non (extra)financial performanceannounced.

CSR Europe MarketplaceBrussels. Lab presentation –identified as significantproject for EU CSR Allianceand for Commission.

Research team

Informal discussions EABIS –Doughty Centre toreconstitute researchproject previouslyterminated due todeparture of personnel.

Research team assembled.

Initial research team meetingin London hosted by LloydsTSB.

Bilateral meetings withEABIS & research teammember schools to refineproject and agree brief.

Joint

Discussions CSR alliance –EABIS about fundedresearch to support Lab.

Milan stakeholder meeting:PwC corporate reportinginitiative - at Telecom Italia.

London: Lloyds TSB HQ –stakeholder consultation.

External developments12 –

The IFC’s CommunicatingESG value drivers at thecompany-investor interface– who cares wins annualevent 2006.

UNEPFI Report on ESG

Show me the money: linkingenvironmental, social andgovernance issues tocompany value (UNEPFI,2006).

UK Companies Act expandsdirectors’ duties andenvironmental reporting(2006).

USS Report onmainstreaming ESG.

Enhanced analytics for anew generation of investor(USS, 2006).

Aspen Principles reportLong-Term Value Creation:Guiding Principles forCorporations and Investors.(McKinsey report: mostCEOs participating in UNGlobal Compact includeESG in core strategies (July2007).GS Sustain (Goldman Sachs,2007).

Fund managementtransparency andengagement onenvironmental, social andgovernance issues(FairPensions).

Citi, JP Morgan Chase andMorgan Stanley adopt TheCarbon Principles (February2008).

12 Promoting Corporate Environmental, Social and Governance (ESG) Policies with National Governments, International Organizations and InstitutionalInvestors – memo periodically updated and circulated by Michael Kane of US EPA – edition Jan 2009

Table 5:Timeline – EABIS research team and EU CSRAlliance laboratory – working together –a new approach to business – relevant, academic research.

25

Date

Winter 2007-08

April 2008

Summer 2008

July 2008

Sept 2008

Oct 2008

Nov 2008

Dec 2008

Winter 2008-09

Jan 2009

Lab

Drafting of interim Labreport supported byresearch team.

Launch of Lab interimreport and endorsement byCommission Vice-presidentVerheugen.

Research team

Initial interviews with Frenchinvestors: Céline Louche andHager Jemel.Scoping interviewsLondon/Copenhagen withinvestors, companysecretary, finance director ofFTSE100 etc. consultancies.

“Non-Financial PerformanceMetrics for CorporateResponsibility ReportingRevisited” by Dr MalcolmArnold. Cranfield publishedwork on obstacles tomeasurement, reporting anduse of ESG data –practitioner studies –Kenneth Amaeshi.

Does CSP improve financialperformance – literaturereview – Hager Jemel.

Initial work on ValueCreation Framework.

Further development ofValue Creation Frameworkand supporting academicjustification.

Revisions of meta-analysis.

Research team meeting,Brussels.

Joint

Lab leaders & research teammeet Brussels to reviewhow would work together.

Stakeholder consultationhosted by FORTIS Brussels.

Stakeholder consultationhosted by Cranfield, UK onAspen Principles, PRI, meta-analysis.

Focus group 1. Milan/Rome.

Focus group 2 Frankfurt.

EU CSR Alliance summit,Brussels.Focus Group 3, Paris.

Focus group 4, Stockholm.Focus group 5, Utrecht.


Prince of Wales Accountingfor sustainability Report(Prince of Wales Accountingfor Sustainability).

Managing ResponsibleBusiness (CiMA).

Key performance indicatorsfor environmental, social andgovernance issues (DVFA,May 2008).

The Promise of PrivateEquity Report (IFC).

Norwegian institutionalinvestors create SustainableValue Creation collaborationand release report on ESGperformance.

Valuing corporate socialresponsibility (McKinsey,2009).

26

Date

Feb 2009

March 2009

April 2009

Spring-Summer 2009

July 2009

Aug 2009

Sept 2009

Lab

Launch of finalised report.

Research team

Defining ‘Dominantconvention’ and strategies tochange.

Research team strategysession final report –Brussels.

1:1 meetings withcommentators.

Launch of research report.

Joint

Joint Lab/research teamreview by conference call.

Final Lab summit –stakeholder consultationhosted by Lloyds BankingGroup, London.

Joint meeting of Lab andresearch team.

e-consultation with invitedrespondents on finalresearch report.

After action review of Lab-research team collaborationand lessons for future EABISresearch projects.


EU multi-stakeholder Forumon CSR, Brussels –commission andstakeholders;Pharma Futures III –(Sustainability 2009).

GRI AmsterdamDeclaration.

Communicating with theright investors (McKinsey,2009).

Reaching investors –communicating valuethrough ESG disclosures(GRI, 2009).

EU commission round table1.What data dostakeholders want fromcompanies – 1 Investors.

27

OurTarget Audiences for this Research Report

We have a number of key target audiences for thisreport.

• Companies which are already committed toembedding sustainability and CorporateResponsibility who want to be able to talk to theirmainstream investors about how improved ESGperformance and integrating CR and sustainabilitywith overall strategy impacts on overall businessperformance. Companies yet to be convinced ofthe relevance of CR and sustainability to them,although these may find it useful to consult section3 on how improving ESG performance impacts onnon-financial drivers of business success.

• Mainstream investor community. (Although SRIinvestors may also find it useful to consult the ValueCreation Framework model to consider whether itsuggests any refinement of their own, existingvaluation models.)

• European policy-makers at the EU and nationalgovernment levels.The report is potentially relevantto those concerned with improving Europeancompetitiveness, as the EU Competitiveness WhitePaper (2008) postulated links between embeddingCR and competitive advantage. It is also importantfor those EU national governments which haveexplicit strategies for promoting greater quality ofCorporate Responsibility and sustainability such asDenmark and Spain.

• Business school academics – not just those workingin corporate responsibility and sustainability, butparticularly in the finance faculty who are responsiblefor research and teaching of today’s and futuremembers of the European investor communities.

Lessons from this Project for Future EABISResearch Projects

• The research team has worked closely with the EUCSR Alliance Laboratory to ensure managerialrelevance and faster access to information.This hashad a number of advantages such as enhancedaccess to practitioners through focus groups,stakeholder engagement meetings etc; and access todifferent policy-makers’ networks. It has stimulatedfresh thinking about dissemination channels anddeliverables from the project.This has come withsome challenges, such as different timescales ofbusiness and academia which had to be reconciled,

and some uncertainty about the scope of theresearch project.With hindsight, access tocompanies through CSR Europe and its nationalpartners, and from the EABIS founding partnerscould have been used much more effectively, forexample in accessing heads of investor relationsinside companies. Nevertheless, the overallexperience has been positive and we recommendthe approach is used by EABIS more in the future.

About the ResearchTeam

David Grayson is professor of Corporate Responsibilityand director of the Doughty Centre for CorporateResponsibility in the Cranfield School of Management.http://www.som.cranfield.ac.uk/som/p1436/People/Faculty/Academic-Faculty-Listing-A-Z/Last-Name-G/DavidnbspGraysonnbsp

Kenneth Amaeshi is a lecturer in the Doughty Centrefor Corporate Responsibility in the Cranfield School ofManagement.http://www.som.cranfield.ac.uk/som/p2697/People/Faculty/Academic-Faculty-Listing-A-Z/Kenneth-Amaeshi

Hager Jemel is a PhD candidate in the University ofLille, France.http://www.iae.univ-lille1.fr/intranet/cv-enseignant-jemel-hager-879.html

Céline Louche is assistant professor at the VlerickLeuven Gent Management School, Belgium.http://www.vlerick.com/research/db/search.cfm?menu1=556

Francesco Perrini is professor of Management andCSR and SIF Chair of Social Entrepreneurship andPhilanthropy Management at the Institute of Strategy,Department of Management, Università Bocconi, Milan.He is also Director of the CSR Unit at the Departmentof Management, Università Bocconi, and SeniorProfessor of Corporate Finance and Real Estate atSDA Bocconi School of Management.http://didattica.unibocconi.eu/docenti/cv.php?rif=48988&cognome=PERRINI&nome=FRANCESCO

AntonioTencati is assistant professor of Managementand CSR at Università Bocconi, Milan. He is a SeniorResearcher at SPACE Bocconi and a member of theInstitute of Technology and Innovation Managementand of the CSR Unit, Department of Management,Università Bocconi.http://didattica.unibocconi.eu/docenti/cv.php?rif=49020&cognome=TENCATI&nome=ANTONIO

28

Additional academics have worked on particularpapers. Specifically, Malcolm Arnold, Cranfield,Angeloantonio Russo and Clodia Vurro, SDA BocconiSchool of Management; and David Bourghelle, Lille

MalcolmArnold completed his PhD at CranfieldSchool of Management.

David Bourghelle is assistant professor, University ofLille - Institute of Business Administration

Angeloantonio Russo is assistant professor ofManagement, Parthenope University and UniversitàBocconi.http://didattica.unibocconi.eu/docenti/cv.php?rif=49624&cognome=RUSSO&nome=ANGELOANTONIO

ClodiaVurro is researcher with grant, Department ofManagement, Università Bocconi.http://didattica.unibocconi.eu/docenti/cv.php?rif=49710&cognome=VURRO&nome=CLODIA

Appendix 3EU CSRAlliance Laboratory Model

29

References

Aguilera, R.V., Rupp, D. E.,Williams, C. A., & Ganapathi, J.(2007). Putting the S back in corporate socialresponsibility: A multilevel theory of social change inorganizations. Academy of Management Review, 32(3):836- 863.

Amaeshi, K, & Grayson, D., (2009) The Challenges ofmainstreaming Environmental, Social and Governance(ESG) issues in Investment Decisions A survey ofpractitioners’ reports - EABIS Research Project WorkingPaper

Arnold, M., (2008) Non-financial performance metricsfor corporate responsibility reporting revisited – EABISResearch Project Working Paper

Barnett, M. L. (2007). Stakeholder influence capacity andthe variability of financial returns to corporate socialresponsibility. Academy of Management Review, 32(3):794-816.

Bourghelle, D., Jemel, H., & Louche C., (2009) Theintegration of ESG information into investmentprocesses:Toward an emerging collective belief?, EABISResearch Project Working Paper

Davis, I. (2005). By invitation. The Economist,26 May 2005.

Di Maggio & Powell (1983) Framework of coercive,mimetic and normative mechanisms.

Devinney,T. M. (2009). Is the socially responsiblecorporation a myth? The good, the bad, and the ugly ofcorporate social responsibility. Academy of ManagementPerspectives, 23(2): 44-56.

Hart, S., Milstein, M., & Caggiano, J. (2003). Academy ofManagement Executive.

Margolis, J. D., & Walsh, J. P. (2003). Misery lovescompanies: Rethinking social initiatives by business.Administrative Science Quarterly, 48(2): 268-305.

McWilliams, A., & Siegel, D. (2000). Corporate socialresponsibility and financial performance: Correlation ormisspecification? Strategic Management Journal, 21(5):603-609.

Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003).Corporate social and financial performance: A meta-analysis. Organization Studies, 24(3): 403-441.

Perrini, F., Pogutz, S., & Tencati, A. (2006). DevelopingCorporate Social Responsibility. A EuropeanPerspective. Cheltenham, UK: Edward Elgar Publishing.

Perrini, F., Russo, A.,Tencati, A., & Vurro, C. (2009). Goingbeyond a long-lasting debate:What is behind therelationship between corporate social and financialperformance? EABIS Research Project Working paper.

Perrini, F. & Tencati A. (2006). Sustainability andstakeholder management:The need for new corporateperformance evaluation and reporting systems. BusinessStrategy and the Environment, 15(5): 296-308.

Pivato, S., Misani, N., & Tencati, A. (2008).The Impact ofCorporate Social Responsibility on Consumer Trust:The Case of Organic Food. Business Ethics: A EuropeanReview, 17(1): 3-12.

PwC/SAM (2008) The Sustainability Yearbook.

Rubbens, C., & Wessels, C. (2004).The Business Casefor CSR: In What Way does CSR Contribute toCompetitiveness?. E-discussion,World Bank, 20–24September.

Senge, P., Smith, B., Kruschwittz, N., Laur, J., & Schley, S.,(2009) The Necessary Revolution, How individuals andorganisations are working together to create asustainable world. Nicholas Brealey

Tencati, A., Perrini, F. & Pogutz, S. (2004). New tools tofoster corporate socially responsible behaviour. Journalof Business Ethics, 53(1-2): 173-190.

Tomorrows Global Company (2007) Challenges andChoices.

Tencati, A., & Zsolnai, L. (2009).The collaborativeenterprise. Journal of Business Ethics, 85(3): 367-376.

Wartick, S. L., & Cochran, P. L. (1985).The evolution ofthe corporate social performance model. Academy ofManagement Review, 10(4): 758-769.

Werbach, A., 2009. Strategy for Sustainability – abusiness manifesto. Harvard Business Press.

Wood, D. J. (1991). Corporate social performancerevisited. Academy of Management Review, 16(4):691-718.

A fuller list of source materials can be found in each ofthe EABIS Research Project Working Papers.

30

Documents

EABIS Research ProjectCorporate Responsibility, Market Valuation and Measuring the Financial and Non-Financial Performance of the Firm Sponsors : additional funding provided by Lloyds