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July 27, 2004
Book Review--Raising the Bar: Creating Value with the United Nations Global Compact
by William Baue
Primarily a guidebook for companies to navigate Global Compact participation, the book also reports
on a study suggesting a Global Compact market premium.
SocialFunds.com --
For executives and managers of corporations considering joining the Global Compact (a voluntary
sustainability initiative) or starting to implement its principles, Raising the Bar: Creating Value with the United Nations Global
Compact is necessary reading. The book summarizes the nine principles (a tenth principle
addressing corruption slated for addition later this year is also discussed), then "deconstructs"
the Compact into ten elements (from vision to processes and innovation to reporting) to ease
understanding. Simple symbols direct readers to numerous case studies (a magnifying glass), tools
(a wrench), and information sources (an "i").
 Socially responsible investment (SRI) practitioners,
however, will want to skip to the last chapter, "Performance and Value Creation," written by Claude
Fussler of the World Business Council for Sustainable Development (WBCSD), before reading
the rest. It discusses a study the Global Compact commissioned from Sustainable Asset Management
(SAM) on the market
performance of Global Compact signatories. SAM conducts research and ratings for the Dow Jones
Sustainability Index (DJSI),
gathering information via a questionnaire that is "as comprehensive as the Global Reporting
Initiative (GRI) guidelines,"
according to Mr. Fussler.
Of the 99 Global Compact signatories evaluated in SAM's
assessment of 2003 corporate sustainability performance, 76 Global Compact signatories (referred to
as the GCS76) made it into the DJSI. Comparing the stock performance of the GCS76 to the Morgan
Stanley Capital Index (MSCI) from January 2002
to January 2004 reveals 3.4 percent outperformance by the former, as the GCS76 gained 11.6 percent
while the MCSI rose 8.2 percent.
The study also finds that the risk, or the degree of
uncertainty of return on equity, was 26.43 percent for the GCS76 compared to 20.99 percent for the
MCSI for this two-year period.
"This is an extremely interesting risk profile for an
investor," said Colin le Duc, SAM's former head of research operations. "One would usually expect
a much higher risk for such a small selection of companies."
"Thus a broad conclusion is
that Global Compact Signatories and members of the DJSI create premium shareholder value at
acceptable risk levels," added Mr. le Duc. "They definitely do not carry a handicap for
shareholders relative to the mainstream market."
These results suggest the possibility of
a Global Compact market premium, though "[w]e have yet to understand why," Mr. Fussler admits. He
dismisses the notion that Global Compact participation is a "magic wand that boosts stock appeal,"
pointing out that socially responsible investors may be the only ones specifically considering
Global Compact membership in investment decisions. He also points out that examining performance
over different time periods (such as the year 2000 bursting of the technology bubble) might not
support the Global Compact market premium hypothesis. Readers must also remember that this is one
limited study.
Mr. Fussler interrogatively posits a correlation between Global Compact
participation and general management excellence: "Are the Global Compact signatories, then, better
at strategy than others? We think so; at least we believe that they continue to be better than
many others," he writes.
A graph comparing sustainability performance by Global Compact
signatories to the total number of companies that made it into the DJSI and the overall sample of
companies considered by SAM for DJSI inclusion is revealing. A significantly higher percentage of
Global Compact signatories scored performed well across a broad spectrum of sustainability
parameters.
"In the long run we believe that strategies and actions consistent with the
principles of the Global Compact exercise and enhance a number of intangible assets that drive
value," Mr. Fussler writes, though he admits that "causality is hard to prove . . . "
With
this in mind, SRI advocates can now flip back to the beginning of the book to assess the value of
the Global Compact. The book does a very thorough job of revealing the positive benefits of the
Global Compact, though it devotes less attention to potential negative aspects or limitations. For
example, the book does not list sexual orientation amongst the discrimination issues addressed by
the Global Compact, nor does it discuss the role of free and prior informed consent for communities
affected by corporate projects.
Ultimately, however, it may prove beyond the scope of
any such book to quiet skeptics on either side of the fence--neither corporatists who doubt the
value of sustainability nor social and environmental activists suspicious of corporate motives.
©
SRI World Group, Inc. All Rights Reserved.
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