UN EP FI Principles for Responsible Investing; Kofi Annan's long farewell, Water

What should the PRI do next?
1. Engage companies & policy makers. Achieving goals, challenges, low-hanging fruit.

The PRI has the most to gain by building strong content and loyal membership over the next six-month period. Developing content articulating the PRI to both private sector and policy makers must be the primary goal. While personal speaking engagements may be best for developing the real relationships in influential networks, written materials have the longer half-life in the marketplace for thought leadership in order to institutionalize and generate a longer tail of activity. From my experience in institutional money management, and the development of SRI, I think intersections of academic, foundations and investment industry life must be pinpointed and exploited to maximize the impact. While the project milestones provide the framework, I also expect that the PRI will benefit where it dynamically seizes situational opportunities, for example the interest in “universal ownership” following the conference at St. Mary’s in California. Engagement is the outcome, but activities and outputs may be measured to determine sufficient flow is being created, and the impact measured against the goal. Beyond the effort, the ultimate metric is the number of policymakers and companies that subscribe to the PRI. In order to harvest the “low-hanging fruit”, I believe the lessons from other network and membership organizations are instructive and should form the basis for action: develop content, and incentivize membership.

1. Develop content
Multi-stakeholder projects face many challenges, including failure where they are perceived as intellectually lightweight. The PRI needs solid content delivered via a compelling virtual home online. As a global project, and with intellectual thinking and ideas as a basis, the PRI must be well represented. Using the resources of the UN and the brand of UNEP FI, I would build the web presence beyond the approach currently at www.unpri.org to leverage all current multi-media approaches, using a style that emphasizes simplicity and ease of navigation. The virtual home needs to serve the multiple audiences for the PRI, thinking strategically about what “influencers” when given the best information, will help push the PRI to the tipping point. The website must deliver multi-media [text, graphics explaining the approach, video and audio of speeches and/or events, possible a podcast]. An investor relations approach delivering media packs is a key component, making available chunks of PRI content to be ripped from the site by time-poor, information-hungry media. Other targets include key constituencies within firms, graduate students and academics. Web-measurement metrics must be included in PRI reporting internally, and if positive, in external profiling.

The PRI should also use the mechanism of an online speaker database as a self-nominating approach to maximizing interest in the subject matter, as well as raising the profile amongst peers. From this database, the PRI can increase the pool of available voices, while reducing risk of dispersion of opinions by maintaining ownership of the message through providing talking points and developed slide decks. Audio and video capture for the resources center on the website will also act as an accountability mechanism.

2. Incentivize membership
Choosing membership in organizations is the sum of a risk/return algorithm for any reputation. In order to build the membership, existing members’ decision should be supported and positively reinforced, creating a loyal base. Adopting the old B2B sales mantra, one satisfied institution makes an introduction to many more. The PRI must work through existing signatories to encourage membership, incentivizing existing members to recruit peers. Incentives include profile and reputation rewards, starting with public attribution and using www.pri.org. Critical questions include: are each of the 10 major brands in institutional money manager or investment consulting in each target market signed up, and if not, how can PRI change that? Are the 10 major GLOBAL financial services brands actively engaged, and acting across all their regions to implement the PRI? By using the powerful clusters as influencers, building from the loyal based, the PRI can maximize sustainable relationships invested in the project over the long term.

2. Measurement of PRI implementation. Challenges.
Measurement for this project may rely on the cross-sector approach to measurement, adopting the philanthropy model of input > activity > output > outcome > goal alignment. Measuring the seeding of ideas is more difficult, but the PRI will have to decide carefully how to measure each of these five components.

The primary challenge is mapping back to members’ expectations, established at signing, and their resource commitment and institutional energy devoted to the project. In signing on to the PRI, the list of “possible actions” has left opportunity for the proactive participants to scope out new areas for action, and ambiguity for the passive members to be inactive. Linking to my recommendation regarding the primary importance of content, I believe encouraging content will act as a real-time and longitudinal gauge of effort and effectiveness. The role of the PRI must be to assert the need for frequent information from members, and to remove barriers to action by smoothing the collection, collation and analysis of activity. Activity levels are easily measured, and suggest self-evaluation. Within each of the principles are many examples that lend themselves to content collection and collation, for example policies and their implementation, or developing collaborative initiatives. The online and international nature of the PRI presents some language and information management challenges, but these have been solved elsewhere and may be adapted for use by PRI.

A meaningful framework for assessment must incorporate elements that private sector actors are familiar with: competition, rewards, and sanctions. Competition – whether implicit or explicit – presents a “race to the top” where companies can stretch to achieve better implementation of the PRI. Obviously, some firms will weigh the calculus for success and temper their efforts accordingly. But focusing on the influential actors, especially those with strong brands, may have a multiplier effect. For example, advocating ESG training internally by industry majors is valuable. The PRI benefits when winners are easily measured. Rewards to members who meet or exceed the defined expectations for the PRI across the six principles and action areas should be firstly at a personal level [the effort relies so heavily on networks and relationships], secondly at the corporate level. Understanding the cultural differences in approach to recognition and rewards, diplomacy must be applied to skillfully deal with managing the personal ambitions and the corporate egos. Profiling members [personal and corporate] is an easy, and uncontroversial, approach, for example, the website in a section highlighting “member profiles” with a monthly calendar rotation. The PRI needs teeth. Sanctions must be applied within the membership to at least one outlier in the first review period. I believe the signaling effect is powerful, and immediately establishes the measurement program as being material, with consequences having impact. The degree of sanction and delivery of messages will depend on the dynamics of the situation and the defined metrics established, but the process is critical. A fine line must be trodden between offending members, and keeping their “feet to the fire” as Warren Buffet would say.

Measurement for members and by members can lean on the project management framework of being specific, measurable, actionable, reasonable and time-specific. With multiple actors with different corporate cultures, revenue bases and geographic challenges, as well as the tiered member structure, the performance review I recommend should be driven by PRI members themselves, with relative accountability to appropriate peer groups. Anticipating some inertia at start-up, I think the measurement needs to offer generous timelines, but the specific targets per time period [for example, requesting X companies to apply ESG factors in Y number of conversations over period X]. With new relationships in this “start-up” network, and looking to empower peer-driven assessments, I strongly encourage maximizing face-to-face interactions of members in the early stages, rolling over to web-based video/audio over time [to reduce costs and maximize ease of capture for the PRI content stored on the platform]. The PRI will succeed where influential, smart and ambitious people are committed to its vision, and lead their organizations and professional peers in the direction of the Global Compact and making ESG issues important in investment decisions.

Three weeks from Kofi Annan’s resignation, it was poignant to hear him field questions at the Truman Library in Missouri today, a slight deference, some defiance in his eyes, and a very clear idea that so much needs to be done. There is not much chance the goals for water will be met, but others have better chances of success. The investment case for water keeps growing, even as the US West Coast girds for a snowless winter in the Sierras, and the prospect of a long dry summer [see http://www.gemi.org/water/module4.htm]. Time to review the water investment opportunities for US investors, beyond the exploration by my friends at Generation IM, Goldman Sachs and the odd hedge fund in NYC. See also post at http://plentymag.com/features/2006/12/liquid_assets.php.

Victoria's Secret Trims Pulping the Boreal

Chainsaws down! Millions of men in the 18-35 demographic are relieved: Limited Brands just helped them reduce the size of their environmental footprint, and prevented the 2007 version of the The Victoria's Secret Fashion Show 2006 being greened out. Victoria's Dirty Secret is safe [see also SRI Extra, Monday, February 12, 2007]. After fumbling along without a leader in the C-suite on sustainability issues, it seems Limited Brands has empowered the SVP of Community and Philanthropy to help it get its head in the game. It is not clear on the power dynmaics, or where this will be in 2 years time. Any investor would worry a little about the poor reputation strategy management, especially for a FMCG firm, yes?! Or was that arrogance that LTD/VS could build a brand like Victoria's Secret on the basics of brand management, but the same laws would never apply to it? It is actually the VS sister company, Victoria's Secret Direct, that mails more than 400 million of its sexy catalogs per year, offering intimate apparel, women's clothing, and footwear. At somewhere between 20-32 pages, that’s a lot of bright shiny, ink-covered pages, many of which last about a week or hour until they are trashed.

While the announcement in San Francisco, Dec. 7, 2006 by ForestEthics of their pact on environmental stewardship with Victoria's Secret is good news, it will probably require ForestEthics keep the target companies feet to the fire. Annual checkups like Banktrack.org has done supported by WWF, RAN and FOE on lending practices after the Equator Principles is a good idea, and wherever possible, making the business case in laymen’s terms, for their motto after all is “because protecting the forest is everyone’s business”. An environmental impact scorecard or index like we covered for the Business Ethics 100 at KLD, perhaps in partnership with major media, will keep the trend toward more sustainable forest and paper policies in the news regularly, and cover all those moving forward like Patagonia, but also raise awkward questions in board rooms which have surprisingly shown stubborn resistance particularly endangered forests like some of the US industry's largest companies, including Sears and Lands' End.

The ForestEthics and Limited Brands, parent company of Victoria's Secret, announcement of a “new forest protection policy” included “several landmark environmental measures and ensures that the pulp for the company's catalog paper will not come from endangered forests” [I have a visceral dislike when corporate-speak trots out terms like “landmark”, “benchmark” and innovative”. Do you too?].

"We consider environmental stewardship to be an essential part of our values, and we're proud to take a leadership role," was the PR by SVP Tom Katzenmeyer, but one had to wonder where that “leadership” had been lurking the previous two or ten years… No word on whether Dan Howells, Paper Campaign Director for ForestEthics, smiled, grimaced or fidgeted when these words were spoken.

ForestEthics had been advocating with the catalog industry for several years to reduce their environmental impact on the Canadian Boreal leading two years ago launching a campaign against Limited Brands/Victoria's Secret, and deftly beginning “discussions” with the company. In June 2006 in St. Louis, MO they led local and national activists to rally at the Victoria's Secret store at the St. Louis Galleria, with Unitarian Universalist activists, Young Religious Unitarian Universalists (YRUU), the Missouri Forest Alliance, the Boston Coalition for Sustainable Logging, and other local activists. Those discussions must have been fun...! ForestEthics’ campaign has been about the impact of catalog production on Canada's Great Boreal Forest. ForestEthics statistics are alarming:

Stretching from Alaska to Canada's Atlantic coast, the Boreal contains 25% of the intact, roadless forest remaining in the world and is a key regulator of global climate, providing one of our first lines of defense against global warming. It is critical habitat for many species, including endangered caribou and half of North America's songbirds, and provides $93.2 billion a year in ecosystem services like air and water filtration. Currently, the Boreal is being logged at a rate of two acres per minute, 24 hours a day, and paper production accounts for nearly 50% of that logging.

Extractive industries had been targeted long before firms down the pulp and paper supply chain, as the WSJ reported back in 2001 [not on the editorial pages] Wall Street Journal -- Big Firms, Environmentalists Join To Save Canada's Boreal Forests by Christopher J. Chipello. They adopted the classic regulatory route, calling for government action not positively establishing their own private sector standards for the 10% not in government hands, including chunks in company leaseholds. Of the four big natural-resources companies that announced they will join with a coalition of environmental and native groups to persuade the Canadian government to protect much of the country's vast boreal-forest region, according to officials involved in the effort, only one firm, pulp producer Alberta-Pacific Forest Industries Inc., was expected to make a commitment to have its forestry practices certified by the Forest Stewardship Council [FSC], the leading standards organization. Of course, Gary Larson's Far Side would surely cartoon the irony of a oil sands firm calling for forest protections [does that include unpolluted groundwater from mining operations?], Suncor Energy Inc. extracts oil from the massive oil-sands deposits in northern Alberta.

The measures make for interesting reading on what a leading NGO had been able to negotiate with an industry major, based on willingness to negotiate and how material the impact may be:

1. Limited Brands will partner with its primary paper supplier to eliminate all pulp supplied from the Boreal Forest (Alberta's Rocky Mountain Foothills) and British Columbia (Inland Temperate Rainforest).
2. Shifting its catalogs to either 10% PCW or at least 10% Forest Stewardship Council (FSC) content during 2007.
3. A preference for FSC certification, the only credible certification for sustainable logging. Limited Brands has partnered with one of its principal suppliers to shift four of its mills to FSC.
4. Overall catalog paper reduction.
5. A commitment to continual improvement on environmental attributes of catalog paper and paper use. Progress will be audited by an independent third party and made public.
6. A commitment to phase out of endangered forests.
7. One million dollars committed to research and advocacy to protect endangered forests and ensure leadership in the catalog industry [is this the cheapest marketing spend ever for a billion-dollar consumer brand with a sustainability themes problem?].

No word on what the CFO had to say. When will the case be put in compelling business terms, explicitly linking damaging the natural resource bases irreparably as a cost to society and therefore to business? Fortune's Marc Gunther had in September covered the Canadian forest issue in Are Kleenex tissues wiping out forests? referencing Kimberly-Clark being targeted by Greenpeace and other environmental groups for misleading the public on its sustainability practices and reports, the unfortunately common practice of “greenwashing”, referencing the Domini work on FSC sourcing. Kimberly-Clark Corporation (NYSE:KMB) is a US$16 billion a year forest products firm whose brands include Kleenex, Huggies, Scott, Pull-Ups, Cottonelle, Viva, Kotex and Depend. Greenwashing is a business characteristic that will perpetually offer ratings firms like KLD, Innovest, EIRIS and GES a daily wage. I will be watching for what the Forest Service Employess for Environmental Ethics has had t say. FSEEE is made up of those public servants and retired workers who actually care about what they did at the environment service and its forest philosophy, although I am sure same little in-fights happen along the way. I still think the whistle-blower is the most powerful component of any corporate governance or ethics protocol.

Victoria’s Secret has been a phenomenon and a shining star for LTD. Lingerie, especially VS's expensive lingerie has along with conspicuous luxury items like handbags for Coach [NYSE:COH] been a strong consumer trend in affordable luxury segment – you need more than one, right, Dara?! The branding masterstroke was to use the annual fashion show as a TV event, like SI’s annual swimsuit edition [although the latter suffers withholding from fathers and librarians who are getting increasingly nervous]. I'm still waiting to be invited, and will let all know as usual on the EVENTS page! It really would be a sad understatement to regard the photos from the VS catalogue like the cataloguing of equipment in say Runner's World or Chainsaws Monthly, yes? Never having heard of VS before coming to America in Feb. 2002, I often wondered how the prudish American TV sensibilities allowed the dressed up lingerie to wiggle through onto primetime TV like at The Victoria's Secret Fashion Show 2006.

No word yet on greening the fashion show for 2007, using wind turbines driven by all the hot flushes, perhaps…