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The Actuary The magazine of the Institute & Faculty of Actuaries
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EIRiS

The definition of SEE risk is social, environmental, and ethical company activities, either direct or indirect. This may result in unanticipated additional costs, loss of market share, a decline in revenue, or a reduction of company value either in the short term or in the long term.
David Tozer of EIRiS opened the seminar with
an analysis of the adoption of SEE risk man-
agement by companies. Some examples of the costs of these risks are $70m for P&O for the Zeebrugge disaster, $263m for Nestlé for recalling bottles of Perrier, and $100m for Total for an oil spillage.
SEE risk management provides an interface between SEE issues, corporate governance, and a company’s financial health. It also provides some insight into whether senior management is exercising sufficient control and adequately discharging its responsibilities.
Since April 2005, companies have to disclose an operating and financial review, which covers the risks faced by the company, its strategy, and plans for the future, as well as key performance indicators.
EIRiS carries out research on companies and assesses them according to four components.
– First, it looks at the company’s board members. Are they regularly reviewed? What is their training? What are their pay incentives?
– Second, it assesses the company’s risk management the policy and procedures, and audit and verification.
– Third, it looks at the identification of any specific SEE risks actually disclosed by the company.
– Finally, it looks at any quantified potential liabilities and the provision of specific examples.

SEE risks and pension funds
After coffee, Mairéad Hancock explored the importance of SEE risk management to pension funds.
The NAPF says that pension scheme trustees should ensure their fund managers take into account long-term corporate social responsibility and environmental issues. Trustees should find out how their investment managers carry out their research in these areas, particularly in analysing long-term risks and opportunities for companies. Also, they should meet face-to-face with investment managers and ensure corporate social responsibility issues are on the agenda. Finally, trustees should consider the choice of investment funds available, understand the needs and wishes of the members, and seek to offer the option of an ethical fund where there is a demand for it.
The UK government has proposed a revision to the Myners principles: trustees should publish their statement of investment principles (SIP) and the results of monitoring of their own performance and that of advisers and fund managers.
For trustees to be able to carry out their due diligence and reporting they will need to know from their fund manager how SEE risks and opportunities are being researched and how they are being taken into consideration.

A reality check
After lunch, the first speaker was Chris Marsden, chairperson of Amnesty International Business Group. Mr Marsden talked about the importance of international norms in governing corporate behaviour and how this is linked to better corporate governance and management of SEE risks.
The ideal would be a world of international collaboration, with representative national governments holding corporations to account through internal regulations backed by strong international law and enforcement institutions. The reality is pro-corporation governance in strong states, weak international governance, many weak, failing, or corrupt states, and attempts by some leading corporations at socially responsible self-governance.
Non-governmental organisations (NGOs) want a strategy for improving this situation. They want to:
– recognise and make more transparent the governance role of companies and hold them accountable for their actions;
– research and publicise company social and environmental impacts and governance decisions;
– consolidate and strengthen existing codes, principles, and compacts;
– pressurise governments and stock exchanges to recognise compliance with these principles and require the same level of disclosure on corporate environmental and social impacts as on financial ones.
Examples of the governance and decisions and dilemmas facing companies include:
– approaches to global warming;
– whether to pursue global policy or accept local practices;
– how to manage conflicting interests of national government and the indigenous community; and
– which human rights to prioritise.
Under the UN Global Compact, companies agree to support and respect the protection of internationally proclaimed human rights within their sphere of influence and to make sure they are not complicit in human rights abuses. The UN norms include no forced labour, a healthy and safe working environment, fair and equal remuneration, non-discrimination, no bribery, environmental protection in line with sustainable development principles, and so on.
A company is complicit in the human rights abuses of governments, its suppliers, contractors, and customers unless it can demonstrate to itself and fair-minded external observers that it has a sound human rights policy and has done all it can within its own capabilities and sphere of influence to put right or at least challenge and to go on actively challenging and, where possible, frustrating those carrying out the abuses.
The second NGO strategy is to strengthen the case for corporate responsibility. They want to make the market take more account of externalities. They want to put pressure on individuals to counter the ‘pathological pursuit of profit and power’. Corporations are run by people. People have consciences and self-esteem, so they can make the moral case integral to doing business.

Convention Watch
The conventions here are international agreements applying to states but do not apply to companies directly. They are international principles that are broadly recognised and globally accepted. The conventions should also apply to companies because of the 100 largest economies of the world, 51 are corporations and only 49 are countries. Multinational companies are experiencing increased power owing to globalisation and are operating in both developed and developing countries. Developing countries may lack the resources to enforce agreements, especially if governments are corrupt or oppressive. Therefore, companies have a duty to support principles within their sphere of influence. The principles also assess companies on an equal basis through globally accepted rules.
This is particularly important for fund managers of government-backed pension funds as governments have a responsibility to ensure compliance. Laura Bennett of EIRiS explained how EIRiS’s Convention Watch allows investors to assess compliance and engage with companies. Convention Watch is accurate, unbiased, and transparent in the way it chooses and assesses companies.
The ten principles of the UN Global Compact cover human rights, labour, environment, corruption, and military. The conventions identified include the UN Human Rights Norms, working hours conventions, the UN Convention on Corruption, the Kyoto Protocol (carbon dioxide), the Montréal Protocol (ozone-depleting substances), and the Ottowa Convention (anti-personnel landmines).
EIRiS’s methodology is to first select a convention and identify the indicators. Companies can’t ‘breach’ the convention but they can undermine the spirit of it. Second, cases are identified using specialist NGO and UN sources and the global press. Next, they contact the affected company after checking their public documents. They put an allegation to the company and solicit a response to see what the company is doing about the case. Then they assess the company as either ‘in “breach” and not addressed’, ‘in “breach” but addressed’, or ‘pending assessment’, ie the company has indicated that it will respond but the response has not yet been received.
Laura talked through some sample cases.
– Under the human rights conventions, there were allegations that Occidental Petroleum funded security forces and provided support for an air raid, which caused 19 civilian deaths in Colombia. This company has been assessed as ‘in breach and not addressed’. The company has responded but there was no evidence of co-operating with an independent investigation into the allegations. The company has not provided the compensation that has been accepted by the majority of the persons affected.
– Under labour conventions, Abercrombie & Fitch received allegations relating to discrimination of a systematic nature in a developed country. This has been assessed as ‘addressed’. The company has not responded to the allegations, but does have an equal opportunities policy that covers gender and race. Also, a court settlement has imposed a solution designed to prevent a recurrence of the breach.
– Under the environment conventions, there are allegations that Exxon publicly opposes the Kyoto Protocol. This is ‘not addressed’. The company has replied to EIRiS and is openly hostile to Kyoto and an active lobbyist.
– Under the corruption conventions, it was alleged that Statoil were involved in bribing an Iranian consultancy firm. This has been ‘addressed’. The company has replied and stated that it has reviewed its management systems and disciplined the employees involved. There is also evidence of a bribery policy in place.

An example of ethical investment
After coffee and pastries, Christine Bergstedt Jorgensen, who had come from Denmark, talked about ethical investment. Christine is a fund manager at BankInvest, which uses EIRiS’s services.
One of the flagships of BankInvest’s investment portfolio is the global equity fund, Basis, which invests in carefully selected companies characterised by a strong cashflow and continued earnings potential. The strategy has so far led to continuous higher returns than the MSCI World Index.
There has been an increasing demand for ethical investment from institutional clients, so BankInvest has created a fund based on its successful basis fund, but with an ethical overlay or ‘ethical screening’. Companies must comply with the ten principles of the UN Global Compact and the Ottawa landmines convention. Also, no more than 10% of the company’s turnover must arise from the production of tobacco and alcohol.
EIRiS screens the portfolio for BankInvest twice a year. Equities are put into one of four categories: preferred, acceptable, unacceptable (and must be sold), and those that must be further analysed. After the implementation of the result of the ethical screening, the portfolio is calibrated so that the portfolio has the same general investment characteristics as the other global equity funds. This is done by increasing investment in those equities categorised as preferred and acceptable.
The ethical manager must approve all new investments in the portfolio and is authorised to sell those equities that do not meet the screening criteria. EIRiS’s company reports will be the primary basis for the decision.

I spy with my little
When the event was over I was itching to find out what the ‘i’ stood for in EIRiS. Apparently, it used to be called Ethical Investment Research and Information Services. The second ‘I’ shrunk when the organisation dropped the ‘Information’ from its name. Presumably it didn’t want the ‘i’ to disappear altogether, otherwise it might sound like something Father Jack would say.

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