Integrated Governance - UNEP FI

Integration of ESG issues in the business strategy. .... the responsibility of any sustainability projects lies with small isolated teams. ..... around energy efficiency programs and reduction of carbon emissions, this .... Accountants (ACCA) has recently become the first global accountancy body to introduce integrated reporting.
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Integrated Governance

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A NEW MODEL OF GOVERNANCE FOR SUSTAINABILITY

A report by the Asset Management Working Group of the United Nations Environment Programme Finance Initiative June 2014

DISCLAIMER The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the United Nations Environment Programme concerning the legal status of any country, territory, city or area or of its authorities, or concerning delimitation of its frontiers or boundaries. Moreover, the views expressed do not necessarily represent the decision or the stated policy of the United Nations Environment Programme, nor does citing of trade names or commercial processes constitute endorsement.

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UNEP promotes environmentally sound practices globally and in its own activities. This publication is printed on 100 per cent recycled paper, using vegetable-based inks and other eco-friendly practices. Our distribution policy aims to reduce UNEP’s carbon footprint UNEP FI Asset Management Working Group report · INTEGRATED GOVERNANCE · A NEW MODEL OF GOVERNANCE FOR SUSTAINABILITY 2

TABLE OF CONTENTS Message from the UNEP FI Asset Management Working Group

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Executive Summary

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The Large Corporation Today 2.1 Concentration of economic activity 2.2 The socioeconomic ecosystem 2.3 The role of governance 2.4 The value creation process

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Enabling a Sustainable Strategy 3.1 Integration of ESG issues in the business strategy. Does it pay off? 3.2 Effectively implementing a sustainable strategy 3.3 Board committees and their link to sustainability 3.4 Promoting effective corporate governance practices

13 13 14 15 23

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Current State of Governance 4.1 Are current governance practices adequate?

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5 Integrated Governance 5.1 The Integrated Governance Framework 5.2 Board independence at the individual level 5.2.1 Expertise 5.2.2 Time spent governing 5.2.3 Business ethics 5.2.4 No affiliation 5.3 Board independence at the group level 5.3.1 Size of the Board 5.3.2 Diversity 5.4 Aligning interests 5.4.1 Compensation Structure 5.4.2 Long-term compensation structure 5.4.3 Ratcheting and the use of compensation consultants 5.5 Investor Activism in Executive Compensation 5.6 Long term Active Ownership 5.7 Conclusions

35 35 39 39 41 42 42 43 43 44 45 45 46 47 48 49 52

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Responses from Proxy Voting Agencies 6.1 Glass Lewis 6.2 ISS 6.3 Proxinvest

References

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Endnotes

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Acknowledgments

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INTEGRATED GOVERNANCE · A NEW MODEL OF GOVERNANCE FOR SUSTAINABILITY · UNEP FI Asset Management Working Group report 3

MESSAGE FROM THE UNEP FI ASSET MANAGEMENT WORKING GROUP There once was a debate over whether sustainability could be considered financially material. That debate has been fading from view as evidence becomes clear that the parameters of sustainability have a significant role to play in the financial performance of companies. There are now well over 200 academic reports establishing positive an