Engagement: KLD and the Companies It Researches

           In April, I participated in two panels for the Conference Board. My topic was the mirror image of one I often talk on: How can investors engage companies?

           This time, most in the audience worked for corporations KLD reports on. Since I was asked more than once whether our researchers would talk with companies about our reports, I realized we had a communications problem.

           Hence, my topic this month: Why should and how can companies engage KLD?

Who KLD Represents and How

           KLD has over 300 clients, all of whom are institutional investors, money managers, investment advisers and academics. Among their clients and beneficiaries are over a million -- a very conservative estimate since one alone has over 400,000 investors -- who apply environmental, social or governance criteria in their investment decision-making.

           KLD supplies the information about corporate securities issuers on which those decisions are made. So, it is in a company's interest to do what it can to see that KLD supplies correct data to its clients.

           We rely on four classes of information:

• public documents including regulatory filings and corporate reports and publications;

• government databases including the Department of Labor, EPA and OSHA data;

• published reports of all types from academic papers to NGO reports to news stories; and

• direct communications with the company ranging from survey responses to dialogues around our research reports to visits by company representatives to KLD.

The order here is significant. It is the order in which we do our research and the ranking of our sources in terms of where we garner information.

Regulatory Filings and Corporate Publications

           Because of the consequences to the filer of supplying incorrect information, we rely to a considerable extent on regulatory filings. They are our primary sources.

           We read what companies publish in areas relating to environmental, social and governance issues. The less obviously self-serving a publication or release is, the more likely we are to take it seriously.

           KLD uses the voluntary corporate reports assembled by organizations such as One Report, the Global Reporting Initiative and the Carbon Disclosure Project. However, we amplify them through surveys and dialogue, as I discuss below.

Third-Party Reports

           KLD relies on third party sources for the detail in its reports.

           Every day, we do database and internet trawls on the companies on which we report. Our analysts review the catch for relevance. We also review dozens of publications in hard copy.

           Noteworthy information immediately gets added to a company's profile. Examples have included: the announcement of a boycott by an important NGO, resolution of a civil case involving an environmental issue and a company's major civic initiative in a community.

           For a description of the rating process that flows out of our data gathering, please go to our website http://www.kld.com/research/methodology.html

Verification and Dialogue

           One lawyer for a Fortune 100 company heard me say we relied on third party reports. She reacted with horror: the press prints things that aren't true about our company. Do we have a chance to respond?

           Absolutely. And we encourage dialogue and communication with us.

           Each year KLD sends a copy of its report on a company to our contact at a company, or if we don't have one, to the investor relations officer. A cover letter invites the company to review and respond to the report. It directs the company to KLD's analyst who researches the company. (In our continuous updating process, if we encounter a significant issue that appears especially controversial, we immediately contact the company.)

           Companies should want to look at what we write since upwards of ten percent of shareholders do some form of SRI. Our report may affect a decision to buy, sell or hold the company's shares.

           Our reason for asking companies to check our work is simple: we want to eliminate errors in what goes to our clients. The number who respond increases every year. However, we would like to have 100 percent. I think it is in their interest as well as ours.

           A number of companies regularly visit KLD in Boston. We welcome these visits, and we are happy to explain our research processes and introduce our team.

Terms of Engagement

           There are limits on KLD's willingness to engage with the companies it reports on or might report on.

           For example, we regularly get questions about what a company must do to get on our social indexes. We point them to our screens which appear on our website and in our pocket guide to social investing. We do not provide company-specific advice to companies we might rate.

           In short, we want to talk with the companies we research but only in a context that does not compromise our research team's objectivity.

An Invitation

           KLD encourages publicly traded companies to tell us to whom to direct our inquiries and reports. Please contact our Research Director, Eric Fernald.