EU law will compel firms to come clean on ethics

Investors looking for companies with good environmental, social, and governance track records will find the job easier after European politicians ruled that thousands of firms must reveal their performance as corporate citizens.

EU law will compel firms to come clean on  ethics

Trillions of dollars of pension fund, insurer, and mutual fund money is already invested in firms that are screened for a range of ethical criteria because of evidence that such firms tend to be more profitable in the long-term.

Until now, the release of information has been patchy. The new legislation, though watered down from initial proposals, will compel around 6,000 mostly listed firms across the EU to provide details on how they tackle issues such as bribery and human rights.

The legislation, which still needs to be approved by EU member states, will require companies to disclose information on environmental, social, employee, human rights, corruption and bribery matters in their management reports.

Matthew Doyle, the director of Hermes Equity Ownership Services, said the rules would “start important new developments in corporate reporting” and enable investors to access “materially important” information that would help them to better evaluate the sustainability of companies’ operations.

A January report by fund manager Hermes found that well governed firms had outperformed returns on the poorly governed by an average of over 30 basis points over the past five years.

Total global environmental, social and governance assets under management amounted to at least $13.6tn (€9.85tn) at the end of 2011, with Europe accounting for 49%, according to The Global Sustainable Investment Alliance, a group of membership-based investing organisations.

“We’re very, very pleased with the outcome; we think it will make a big difference,” said Steve Waygood, chief responsible investment officer at Aviva Investors, the fund management arm of the insurance group.

“We believe that in many cases, as a business, doing the right thing over the long term pays shareholders because of things like regulation, fines, your brand and so on.”

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