Sandfire attack raises question: is it time to legislate sustainability reporting?

On 13th November 2014 Sandfire Resources announced that it had filed proceedings in the Federal Court against ESG researcher Centre for Australian Ethical Research (CAER) in regards to research profiles that CAER had provided to ANU.

In taking legal action Sandfire Resources has not just focused on the output of ESG researchers but has drawn attention to the gap between the information companies provide and what investors need to make informed decisions.

One of the foundations of responsible investment has been the idea that investors should engage with companies. But what do we do with companies that do not respond to engagement requests?

Sandfire Resources may be upset at CAER’s review, but responsible investors have long been frustrated that listed companies willingly choose to ignore requests for information.

In 2008, I approached the Australian Council of Superannuation Investors with a proposal to develop a benchmark of sustainability reporting practices of ASX 100 companies. My argument to ACSI was that whilst there were good examples of sustainability reporting in the Australian market, many companies either did not report in any way on sustainability, or reported in a way that was of limited value to investors.

As responsible investment develops a key question for investors is how to address the impediments that exist to implementing environmental, social and governance (ESG) practices in the market.

How can investors who are trying to integrate ESG factors into portfolios do so if they don’t have relevant information from all players in the market?

By creating a benchmark of sustainability reporting this provided a mechanism for investors to review the sustainability reporting practices of companies over time.

ACSI’s first benchmark of sustainability reporting practices in 2008 found that sustainability reporting was distributed according to a bell shaped curve with outliers being best practice reporters (16%) and companies that provided no reporting (17%).

ACSI has now been producing an annual report on sustainability reporting for seven years. This year’s report found that 85% of ASX200 companies provide some level of reporting on sustainability factors. Interpreted another way, there are 15% of companies that still provide no reporting at all.

Frustrated at the lack of response from laggard companies, last year ACSI publicly disclosed the names of 8 companies that had been rated at ‘No Reporting’ for four or more consecutive years. In 2014, 5 of those companies now provide some level of sustainability reporting.

If companies such as Sandfire Resources take legal action when they are not happy with the output from an ESG researcher, should investors be taking legal action when they get no response from a company to their information requests?

A better way than institutionalising legal conflict could be to legislate sustainability reporting. This would be far more efficient. It would remove any debate about what information a company should provide. Legislation could simply require that all companies report according to the Global Reporting Initiative. Other countries have already gone down this path.

By taking legal action Sandfire Resources has opened up the debate on sustainability reporting. The way Sandfire has done this may not be optimal but it will put a spotlight on sustainability reporting. This is something that investors have been seeking for the last seven years.

Whatever the outcome of the legal action, we can guarantee that the bar on sustainability reporting will be raised in coming years. This may either be through companies voluntarily lifting their reporting standards, or through legislation.

Links

ACSI Sustainability Reporting Journey 2014
http://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/Sustainability%20Reporting%20Journey%202014.Jul%2014.pdf

ACSI Sustainability Reporting Journey 2008 – first report
http://www.acsi.org.au/documents/Sustainability%20Reporting%20(website).pdf

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Wall Street’s Cell Phone Litigation Problem

It is 1987 and Gordon Gekko stands on a windswept beach with a cell phone to his ear. He is talking on the world’s first mobile phone – the Motorola DynaTac 8000X. It wasn’t cheap back then costing $3,995 – which in today’s terms is close to $9,000. Not surprising only the wealthiest could afford these phones, and Wall Street was the epicentre of an industry that became a global phenomenon over the next decades.

Wall Street execs were the first to use cell phones. They have used them the longest and the most intensively. They were the first to upgrade to more powerful units. It is perhaps not surprising therefore that it is Wall Street firms that are the ‘canary in the mine’ in terms of litigation around the health impacts of long term cell phone use.

The links between brain tumours and cell phones are hotly contested. As telcos fight a growing public relations battle that is flaring through social media, a little known legal case has continued to make its way through US courts.

On 8th August 2014 Judge Frederick H. Weisberg issued a judgement in the Superior Court for the District of Columbia in a long running case alleging that brain tumours of the litigants were caused by cell phone use.

Weisberg did not make a judgement on whether cell phones cause cancer. What he was examining is whether the evidence that was being presented by trial lawyers was permissible under the Court’s rules. To do this he went through an exhaustive process under the Dyas/Frye test which is essentially about whether an expert uses a methodology that is generally accepted in the relevant scientific community to arrive at his opinion.

Weisberg ruled that a number of expert witnesses were permitted to present evidence in the next stage of the trial. But he also made some thought provoking comments:

“If there is even a reasonable possibility that cell phone radiation is carcinogenic, the time for action in the public health and regulatory sectors is upon us. Even though the financial and social cost of restricting such devices would be significant, those costs pale in comparison to the cost in human lives from doing nothing, only to discover thirty or forty years from now that the early signs were pointing in the right direction. If the probability of carcinogenicity is low, but the magnitude of the potential harm is high, good public policy dictates that the risk should not be ignored.”

The significance of Weisberg’s judgement is that he has inadvertently provided an independent verification of research. The research that he has admitted to the next stage of the court process will no doubt be challenged, but the methodology that the researchers have used has been accepted by the Court.

One of the problems that medical researchers in the radiation field have found is that their work is criticised by parties with strong commercial self interests. Weisberg has no such pressures. He is simply a judge doing his job.

The question for investors is what does this all mean?

In the heated discussion about whether cell phones can cause cancer it will be litigation that will ultimately determine the issue. The insurance industry understands this.

In 2010 Lloyds of London produced a paper, Electro-magnetic fields from mobile phones: recent developments, which discussed the potential for litigation. Lloyds stated:

“If EMF is proved to cause an increased risk of brain cancer it is likely the insurance industry will see claims under product liability policies for bodily injury….The issue of asbestos and its implications is widely known throughout the insurance industry, and many comparisons can be drawn with EMF – the initial impression that it was a ‘wonder product’ coupled with potential very long-term serious health issues not understood at the start of its use. Like asbestos any EMF litigation will probably be long and complex – similar issues could occur such as the definition of an actionable injury, policy triggers and apportioning liability….Should EMF prove to cause brain cancer, or any other adverse health effects, it is likely the main effect on the insurance industry will concern product liability claims for bodily injury.”

Lloyds concluded their report stating “With regards to the implication to insurance, as the current scientific evidence stands, it is unlikely that insurers will be liable for compensation for bodily injury on product liability policies. However, as asbestos has shown, new scientific developments coupled with a small number of key legal cases can change the situation very rapidly.”

Insurers have already taken Lloyds’ advice to heart by excluding coverage of radiation risks from insurance contracts.

In the meantime the debate will continue. New evidence is coming out on a regular basis demonstrating the links between cell phone use and cancer. A recent French study for example that came out in May 2014 (see links) found a positive association that was statistically significant for heavy users of cell phones considering life-long cumulative duration.

Whilst the telco industry may fight to the wall on litigation it may be employers that will ultimately bear the brunt of litigation claims.

A significant question for Wall Street firms is how they will manage this risk. Currently Wall Street firms supply and pay cell phone bills for their employees. Work is structured in such a way that it is impossible for an employee to work without a phone.

If a court determines that there is a link between cell phones and cancer we can expect that, because Wall Street has the greatest exposure, it will be first to be hit. Compensation, which would most likely be based on lost earnings, would be significant for an industry that routinely pays out multi-million dollar bonuses.

The question is whether Wall Street is already experiencing claims? There have been high profile Wall Street executives that have passed away in recent years from aggressive brain cancers. Wall Street firms are unlikely to want to proactively disclose litigation but it is a question that should be asked.

Wall Street firms also have some tough decisions to make about managing future risk. If we were to see a change of behaviour in the way firms manage their employees’ cell phones then this may be an indication that they are aware of the problem. At least one Wall Street firm has recently moved to no longer paying cell phone bills for its employees. Employees that have been spoken to believe that this is part of a cost cutting exercise, but wider factors may be at play.

What would Gordon Gekko be doing in these circumstances? The way he was smoking those cigars he may not have made it this far to worry about it. But if he did he would no doubt be shorting his own company.

Links:

Dariusz Leszczynski – molecular biology scientist who has advised The World Health Organisation. Dariusz is currently visiting Australia giving public lectures. See his blog for details:
https://betweenrockandhardplace.wordpress.com/

Reuters: Are wireless phones linked with brain cancer risk?
http://www.reuters.com/article/2014/11/11/us-brain-cancer-mobilephone-idUSKCN0IV26Y20141111

Transcript of Judge Frederick H. Weisberg judgement on expert witness in telco / brain tumour case:
http://ehtrust.org/wp-content/uploads/2014/08/Expert-Order.pdf

Gordon Gekko’s cell phone:
http://www.slate.com/blogs/browbeat/2010/09/23/gordon_gekko_s_cell_phone.html

Gaëlle Coureau, et al., Mobile phone use and brain tumours in the CERENAT case-control study,Occupational & Envtl. Med., May 9, 2014 (available at http://oem.bmj.com/content/early/2014/05/09/oemed-2013-101754.abstract

The transformational power of the Internet of Transparency

The phrase the Internet of Things has quickly become part of the lexicon but it is not gadgets that will drive transformational change, but transparency.

At a Transparency International seminar recently, China experts discussed that country’s crackdown on corruption. One of the experts at the seminar commented that the internet was largely responsible for this.

Since the rise of China’s President Xi, there has been a high profile focus on corruption. In July, China’s press agency Xinhua announced Operation Fox Hunt to “block the last route of retreat” for corrupt officials. In the last week, Xinhua announced that after the Chinese Government had sent 20 teams across Asia it had made 180 arrests.

China is believed to have found more than 13,000 officials guilty of corruption in the first nine months of 2014.

Corruption in China has been endemic across the dynasties. In recent years, China’s problem has been the rise of ‘princelings’ – the sons and daughters of Chinese officials who were living lavish lifestyles. The anger at princelings has surfaced on a number of occasions and has surprised China’s communist hierarchy.

China’s censoring of the internet is well known. Even so, there has been a massive rise of social media. The conclusion of China experts is that whilst there is a political element behind the corruption crackdown, there is also a realisation in the upper echelons of the Communist Party that they are unable to stop chatter about the corruption of local officials. The fear is that anger at this corruption has the capacity to create the kinds of responses that were seen in the Spring Revolution in North Africa.

In short, China’s Communist Party has come to the realisation that its hold on power will be determined by the way they handle corruption.

The transformational power of the internet has been most evident in developing countries, but change is also occuring in the developed world.

One of the most significant aspects of the digital revolution is the way that it has changed access to the internet.

According to the Pew Centre, in the United States the rise of smart phones has led to a shift in the way the internet is accessed. Nearly two-thirds (63%) of cell phone owners now use their phone to go online. According to the Pew Centre, because 91% of all Americans now own a cell phone, this means that 57% of all American adults are cell internet users. The proportion of cell owners who use their phone to go online has doubled since 2009.

Given that smart phones have only been around for a short time, it is hard to predict how they might drive change. They will of course be used for day to communication through channels such as Facebook. But even the way Facebook is used is changing, evolving beyond being just a ‘person to person’ communication channel.

Politicians now use Facebook – and if they don’t, they probably won’t stay elected for long. Institutions, including corporations also use Facebook, to varying degrees of success. For business it is important to understand that in this new world, every engagement, no matter how small, has the capacity to be shared to a wide audience. Successful businesses are those that know social media is not about appointing a couple of 21 year old kids to run a Twitter account. It is about making sure every aspect of a business can withstand scrutiny – particularly the way you handle customer complaints.

Other sectors that are evolving in their use of the internet are activist groups. It has never been easier to create a group – which is a lesson for established institutions. But there are new rules around the way groups work. There is no autocratic structure. There are no ‘minutes of the last meeting.’ Successful activist groups are those that are collaborative and share – not just amongst local peers but globally.

Examples of this are the activist campaigns on coal divestment that are popping up in campuses across the globe. There is no hierarchy behind these groups. The internet provides the ability for a group to communicate with its members but also with other campaigns across the globe. Success in one campaign is quickly adapted into the campaign tactics of another campaign.

We are in the middle of a transmogrification. How the internet will definitively shape business and institutions will only become clear over time.

But what is clear now is that the transformational power of the digital revolution is not about creating the Internet of Things but about the Internet of Transparency.