Thank you for the opportunity to present today.

As Head of Sustainability Research at Aviva Investors, I am speaking on behalf of the twentieth largest fund manager in the world, with over 300 billion Euros under management.

Aviva would warmly welcome an EU legislative proposal aimed at improving transparency, comparability and the relevance of non-financial information.

We also recognise the clear business need to ensure adequate flexibility and avoid undue administrative burden on companies.

It is perhaps unusual for a company to support an increase in legislation.

So why are we?

The Need for Legislation

For the simple reason that in the vast majority of cases, the companies we analyse fail to disclose the non-financial data that we need to properly evaluate a company and its prospects.

Progressive companies around the world understand that long term value is enhanced by embedding long-term sustainability into their business strategy…and by fully disclosing their progress to investors.

If companies do not provide an assessment of the broader Environmental, Social and Governance - or ESG - risks and opportunities to which their business model is exposed, then how can the market assess the sustainability of that company's growth?

Markets are driven by information. If the information they receive is short term and thin then these characteristics will define our markets.

Short-term and less well-informed markets will be less stable, more volatile and – ultimately – less valuable. As a long-term asset manager representing a long-term asset owner, this is of course of strategic concern.

Progress

I should say that we recognise and support the considerable progress that has been made over the last decade.

The progress in company policy – for example, since its launch in 2000, over 8,700 companies have signed up to The United Nations Global Compact, which covers the areas of human rights, labour, environment, and anti-corruption.

Progress in company management systems – with now well over 50 thousand separate certifications of corporate operational sites to the Environmental Management System ISO 14001.

Progress in guidance for companies from Governments – for example, the recent further strengthening of the OECD guidelines for multinational enterprises.

And progress by investors – more than 900 institutional investors from 48 countries with over $30 trillion in assets signed up to the United Nations-backed Principles for Responsible Investment. They were launched just five years ago. All of these investors recognise that that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios.

The Transparency and Accountability Gap

However, despite this progress, we are still a very long way indeed from the ultimate aim of transparency, comparability, and relevance of corporate non-financial information.

In other words, these progressive voluntary initiatives have not been enough.

How do we know this?

For the past few years, Bloomberg has added ESG issues to the financial data that we can source from their terminals.

Bloomberg's terminals are in wide use by fund managers and analysts around the world.

Their inclusion of ESG data enables us to analyse at a global macro country level the quantity and quality of non-financial data disclosed by companies. Analysing the data last week, less than one in four of the companies that Bloomberg has looked at to source ESG data published even just one of the data points that Bloomberg look for in their sector. I should emphasise that their focus is numerical data rather than narrative reporting which is more broadly available.

Put more precisely, just 23.6 per cent of the 19,641 companies that Bloomberg researched for ESG data had published any at data all. The quality score assigned by Bloomberg to that disclosure that did exist was just 27.16 per cent.

In other words, only roughly a quarter of the companies published only about a quarter of the data points that Bloomberg was looking for. This highlights an enormous gap.

It is also possible to compare countries on the quality and quantity of the disclosure by the companies that are listed in their jurisdiction. While countries of the EU do perform relatively well on a global basis, their absolute disclosure scores remain very low. There can be absolutely no room for complacency.

So, having set out why we support legislation and why we need the data, I will turn now to our specific position on four key questions:

Questions for discussion

1. General Approach

i. Would a principles-based international reference framework be an appropriate tool, or should legislation envisage the adoption of more detailed reporting requirements (i.e., Key Performance Indicators)?

Yes - a principles-based international reference framework would be an appropriate tool. We believe in four principles:

Corporate Principles

First - Transparency - we recommend that all companies should be required to integrate a sustainability strategy into their report and accounts – or to explain to the market why they cannot do this

Second - Accountability - This integrated report and accounts - or the explanation as to why it could not be produced - should be put to an investor vote. This vote should encourage investors to read the information, form an opinion, and provide feedback to the company.

Third - Responsibility - Board duties should explicitly include setting the company’s values and standards and ensuring that its obligations to its shareholders and other stakeholders are understood and met.

Fourth - Incentives - Companies should state in remuneration reports whether the remuneration committee is able to consider corporate performance on environmental, social, and corporate governance (ESG) issues when setting remuneration of executive directors.

Institutional Investor Principles

Of course, these principles should also apply to institutional investors in their relationships with their own clients.

In fact, in my view, it is critical that the EC takes a systemic approach to the supply chain of capital, ensuring transparency and comparability up the capital supply chain. For example:

Fund managers should be transparent to society about how they have voted at company AGMs.

Institutional investors should be able to hold their fund managers to account for how they have embedded non-financial issues into their client’s investment portfolios.

Institutional investors should also accept their responsibilities of engagement with companies on these issues, supporting good practice and challenging poor performance – and share their own performance in this regard with clients.

And Institutional Investors should ensure their fund managers are sanctioned and rewarded depending on their performance in this area.

Key Performance Indicators

Separately, I know that some are advocating a mandatory broad set of Key Performance Indicators. However, beyond a relatively limited sub-set of KPIs, we think it would be a profound mistake to attempt to create a one-size-fits-all approach to KPIs.

The principal reason for this is that it would obviate the need for boards to consider the issues - which is one of the key benefits we think a “comply or explain” report that is put to a vote would create.

We recommend instead sector specific guidance, supported by the “comply or explain” provision. Such Guidance should also reference existing guidance such as the Global Reporting Initiative, the International Integrated Reporting Committee, the UN Global Compact, and the various international norms including the OECD Guidelines for Multinational Enterprises.

The relatively limited subset of mandatory measures may include customer satisfaction, employee retention, health and safety data, Green House Gas emissions data, and regulatory fines, because these are sufficiently business relevant often too to warrant a generic approach.

ii. Should any new reporting requirement apply only to large companies?

A mandatory reporting requirement should apply to large and listed companies.

As investors, we are primarily interested in listed companies that approach us for equity investments and large non-listed companies that issue debt instruments in which we can invest.

However, there are two main reasons why we support all large companies, not simply those that seek equity or debt financing being required to disclose.

First, we accept and understand the public interest case behind disclosure by all large and listed companies.

Second, we are keen to ensure that there are no unintended consequences that dissuade companies from listing.

Regarding the separate category of Small and Medium-sized Enterprises, we believe they should be allowed, but not required, to opt in to the reporting framework.

2. Business Accountability

What kind of legislative requirement regarding non-financial disclosure would have the greatest impact in terms of increasing the accountability of companies and building trust in business?

I have already referred to:

An expansion of directors’ duties,

A requirement that remuneration committees disclose whether they can consider ESG incentives within executive director pay,

And the need for a systemic approach considering transparency and incentives up the capital supply chain.

However, I recognise the implied legislative challenge of this broad scope of proposals.

So, as a first step, Aviva is proposing the following comply or explain legislative measure:

We believe that large and listed companies should be required to produce an Annual Report and Accounts that integrates material sustainability issues throughout.

We are also advocating that the quality of the integration of sustainability - or the explanation for its absence - be put to an advisory vote at the AGM.

Investors should also disclose how they have voted.

How would this work?

Corporate boards will have to consider the future sustainability of the firm that they govern. They will have to consider where they need to integrate these issues into their report and accounts – for example, in audit, risk, remuneration or – in particular –in their strategy.

The sustainability strategy should include performance targets, recent trend data, and perhaps, some level of external assurance. I would expect the strategy to consider factors such as: use of natural resources, levels of workforce training, impact on local communities, the business model, and the regulatory context.

Companies will also have the option of publishing the explanation as to why the board considers such a strategy to be unnecessary.

Companies should then present the quality of the integration of sustainability within the report and accounts - or the explanation for its absence - to a separate advisory vote at its annual general meeting (AGM).

The main purpose of this vote would be to create the right kind of discussions within boardrooms, throughout the business, and between the company and its shareholders - encouraging investors to think about the sustainability of the firm. Through the oversight and accountability mechanism of the AGM, and the feedback of engaged responsible investors that benchmark the performance of similar companies, over time disclosure would become focused on the relevant ESG issues that are material, become more comparable, and be better integrated into the business. This would clearly support the aims here of improving transparency, comparability, and the relevance of non-financial information.

With the production of guidelines, a “comply or explain” provision, and the harnessing of the long term influence of the views of owners, we also believe this strikes the balance of adequate flexibility and avoiding undue administrative burdens on companies.

Aviva was the first company in the UK, and the first financial services company in the world, to put its corporate responsibility report to a separate shareholder vote at its AGM in 2010. So, we know exactly how much of a burden it really is.

It would be possible for civil society to establish how engaged investors really are, by monitoring their votes at company AGM's. Voting in favour of everything all the time would suggest a lack of analytical rigour and a stance verging on the supine.

Importantly, this initiative is a market-based “comply or explain” mechanism that promotes enhanced self-regulation within the market.

3. Companies' Performances

To what extent would mandatory disclosures lead companies to better integrate social and environmental aspects into their business operations and strategies, and have greatest positive impact on their long-term financial performance?

There are two parts to this question.

The first part is what evidence is there that non-financial reporting helps companies to better integrate social and environmental issues into business operations and strategies?

The most recent reference here is “The Consequences of Mandatory Corporate Sustainability Reporting” by Ioannou (London Business School) and Serafeim (Harvard Business School). They concluded that for companies that produced reports, “both sustainable development and employee training become a higher priority for companies, and that corporate governance improves. Furthermore [they] find that companies implement more ethical practices…”

The second part of the question is whether this has a positive impact on their long-term financial performance.

There are hundreds, perhaps thousands, of academic papers looking into this question, broadly concluding that these issues are relevant to firm-level performance and support long-term risk management and value creation. For our part, we believe that a systematic approach to reviewing the standards, values, and sustainability risks and opportunities of the business, and ensuring that the business knows what is expected, helps define and maintain a healthy long-term organisational culture, where people have pride in their business, care for their customers, and are highly motivated at their work. Understanding the potential impacts on the firm from diminishing access to raw materials is also important to the long-term health of the business.

More generally, if this were not the case, then how could the UN Principles for Responsible Investment have received the endorsement of around 20 per cent of the capital on the world’s stock exchange?

4. Capital Markets

What kind of legislative requirement regarding non-financial disclosure would most help investors to better build relevant non-financial information into their valuation models and decision-making?

There are vast swathes of institutional investors domiciled in the EU but investing globally. As a result, we must ensure that progress is made on a global footing.

In order that we can better access the data we need on a global basis…

We are collectively proposing that the United Nations member states at the 2012 Earth Summit commit to develop a global framework requiring companies to produce an Annual Report and Accounts that integrates material sustainability issues throughout.

We are also advocating that the quality of the integration of sustainability - or the explanation - be put to an advisory vote at the AGM.

This is, of course, the legislative proposal that I set out earlier in answering the second question, but aimed at the international stage.

For our part, we have committed to integrate ESG data into our buy, sell, and hold investment decisions, into the feedback we transmit to the companies that invest in, and into our voting at company AGMs.

We believe that there is an opportunity for the EU to lead the Earth Summit conference agenda next year. We would be proud to work with you to develop a non-financial reporting proposal that you support and sets out how Global capital markets can be better harnessed for the creation of a sustainable future.

I look forward to the discussion and would be happy to take any questions in due course.

Thank you for listening.

Dr. Steve Waygood is Head of Sustainability Research and Engagement at Aviva Investors