Climate change to get higher on the IR agenda?

Pressure is growing on issuers to enhance company communications on climate change and the impact of their businesses on the environment. Several events in the last few days have ratcheted up how investors feel about this.

First is an initiative from a group of leading US and European institutional investors who speak for $1.5 trillion. They have filed a petition asking that the Securities Exchange Commission (SEC) require publicly-traded companies to assess and fully disclose their financial risks from climate change. They include funds such as CalPERS, and CERES (a European coalition of investors and environmentalists).

The petition points out that corporations should, under existing rules, disclose the risks faced in connection with climate change as they are material to shareholder investment decisions. And that the SEC should be commenting more on any absence of disclosure.

Next, a UN report released this week claims that asset managers who take environmental and social factors into account when building an investment portfolio don't suffer a performance penalty. Indeed, the U.N., who examined more than 20 academic studies, found that half said the effect was positive, while the rest were ‘neutral’.

The findings are significant as funds have frequently ignored so-called responsible investments in the belief that they don't generate as high returns as mainstream channels, but investor appetite is growing as issues such as climate change and human rights dominate headlines.

And its not just institutional investors. A story emerges about the Sisters of Saint Dominic who own 300 of the 5 billion Exxon Mobile shares outstanding. They use those few shares to keep the company talking about an issue that it would probably prefer to ignore.

So investor appetite for environmental information to be communicated is developing fast.

Channels for this communication range from the ‘passive’, such as an annual report, to the ‘active’. These include company participation in investor conferences, dedicated to environmental issues, to be run in coming weeks by investment banks such as UBS, Credit Suisse and Lehmann.

And there even news wires (yes I know – see my attribution) that focus on this. CSR Wire transmits news to those proactively signed up as interested.

So the tools are there, the investor interest is growing, and some companies are already there. Others will surely follow.

Funny how similar rule concepts cross the Atlantic as if by metamorphosis.

In the UK, we have been getting all excited about the opportunities presented by posting company materials on a website. The Companies Act notes that, providing that companies have changed their articles or passed a resolution, investors will have been deemed to have agreed to electronic delivery.

In the US, meanwhile, companies are getting used to the ‘notice and access’ rules that came in on July 1st. Under these SEC rules, companies can choose to supply proxy and other materials to shareholders through a “notice and access” model. A company choosing to follow the model must post its proxy materials on an internet web site and send a Notice of Internet Availability of Proxy Materials to shareholders at least 40 days before the meeting date.

Now in either case, companies will be concerned about a few things.

First, a retail investor PR disaster. Given the rising influence of retail investors in deciding the outcomes of votes on issues such as election of directors, companies will want to avoid being accused of ‘hiding’ notification of the election.

Second, making sure that the web site visited can accurately portray the materials, in a readable form. Some of the early (US) adopters have been criticised for the way in which their materials are accessed and retrieved from the company’s website.

Third, in order for them to receive a written notice, you have to know who the shareholders are, not easy as we have said before.

All in all, many companies are therefore adopting a wider communications policy, letting all shareholders – and the markets generally – through (especially online) media that there is something new on the website to be seen. Good practice.

Great excitement in shareholder ID circles this morning.

A new best practice guidance document from the hedge fund industry, on which it is seeking comment, is proposing more disclosure of CFD positions.

This blog has highlighted several times the fact that unless IRO’s know who their shareholders are, conducting an IR outreach is almost impossible. In the UK, companies have the advantage of obligations in the FSA’s DTR rules, and in the Companies Act, which allow companies to know who their shareholders are. However these rules exclude derivatives, except under takeover situations, where Takeover Panel rules kick in.

So it is encouraging to see today the consultation from the Hedge Fund Working Group, recommending that industry wide disclosure of derivative positions should be required. Here’s an extract from the draft guidelines:


“The HFWG acknowledges that companies have a right to know who owns them or who has an ability to easily obtain significant voting power. Indeed, members of the HFWG would welcome higher levels of disclosure.

However, the voluntary adoption of enhanced disclosure requirements by hedge fund managers (or any other particular sector of the market) would cause distortions in the market place because they would not apply to all market participants but merely to hedge funds.

Therefore, the HFWG recommends that regulators take action to introduce a regime (similar to that of the Takeover Panel in the United Kingdom applicable during takeover offer periods) requiring notification of “economic” interests in shares held via instruments such as CFDs.
The HFWG members are willing to contribute to consultations with regulators to work out a solution that enhances the current disclosure regime.”

You can see the full consultation here.

This is very encouraging. A disclosure regime should absolutely apply to all holders of derivatives, and not just hedge funds, and we hope that this proposed self regulatory regime will help the FSA – as it goes through forming its own ideas - to add derivatives to material positions in the DTR 5 rules.

Another false dawn for XBRL?

We have heard it so frequently and the arguments are persuasive; financials that can be analysed automatically can realign relationships between companies and the markets. Faster, easier analysis allows more coverage, of more companies, giving more time for in depth research, more time on valuing intangibles and all the rest.

And yet, XBRL has never won the degree of acceptance that its proponents would like to see. And this despite its whole hearted adoption by some regulators – and especially the SEC, who have gone so far as to rename it interactive data. (And by the way, I wonder what my old friends at the eponymous company make of that?)

However, in recent days we have seen a number of pronouncements which may indicate progress.

First, we have seen the announcement of the completion of all necessary tagging for analysis of US GAAP. This milestone means that public companies can more easily tag their financials, and simplifies both automated financial reporting to the SEC, and the wider use of financial information by investors.

Added to this, the SEC announced the launch of the source code for analysing reports prepared under XBRL. This is very important as it will enhance the chances of analysts on both sell and buy sides, getting value from the work an issuer does in preparing its financial information in XBRL.

Next, the number of companies participating has doubled in recent months. OK, so its still less than 1% of US public companies, but as the news release points out, they are very large ones. Their combined market cap is over $2 trillion.

And finally, NYSE Euronext voted with its feet for XBRL, by filing its own 10Q in that format.
So lots of excitement in recent days. Will it however lead to a tide of voluntary filers? Probably not; after all FD’s are still implementing other changes, but it’s another small step in the right direction of more easily understood financials. And anything that enhances transparency gets my vote.