Why should companies engage KLD? What are KLD’s boundaries in talking with the companies we research about environmental, social and governance (ESG) issues? These questions – more than any others – come up when we talk to companies. They have come increasingly from the media and the public.

KLD’s position on engaging with companies has changed very little since its founding in 1988. We began by being clear about:

• whose interests we represented – social investors and their fiduciaries and agents;

• KLD’s purposes in obtaining data and publishing information; and

• the difficulties of maintaining objectivity about companies and their representatives whom we would come to know.

These continue today to guide our interaction with the companies we research.

Who KLD Represents & How We Represent Them

KLD has over 375 clients, all of whom are institutional investors or investment advisers. Among their clients and beneficiaries are over a million investors who apply ESG criteria in their investment decision-making. That estimate is very conservative since one client has over 400,000 socially responsible investors.

KLD supplies its clients information about publicly traded companies on which ESG 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. It is also very much in KLD’s clients’ interest for KLD to encourage a company’s careful review of what we propose to publish.

KLD’s Sources of Information

We rely on four classes of information:

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

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

• third-party data; and

• direct communications with the company ranging from survey responses to dialogues about 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 how we garner and verify information.

Regulatory Filings & 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 take seriously what companies publish in areas relating to environmental, social and governance issues. We verify the information and then evaluate it in the context of the companies’ past performance.

KLD uses the voluntary corporate reports assembled by organizations such as One Report, the Global Reporting Initiative and the Carbon Disclosure Project. We amplify them through dialogue with corporations and very occasional, focused surveys, as I discuss below.

Third-Party Reports

KLD relies on third party sources for much of the detail in its reports. These sources include a large number of non-governmental organizations and specialized research providers whom experience has shown to be reliable and reputable. But no matter their past performance or their reputation, we verify what they tell us – not least importantly, with the companies they write about.

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, after verification, 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 at http://www.kld.com/research/methodology.html.

Verification & 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.

We want dialogue with the companies we research; we urge them to communicate with us. When we cannot resolve a dispute over facts, we usually publish both sides in our commentary. Our ratings will reflect our estimation of the situation.

Reviewing KLD’s Work. 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.

(As noted earlier, we continuously update our research. If we encounter an issue that appears especially controversial and/or one that may affect – positively or negatively – a KLD rating for the company, we immediately contact the company.)

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

We ask companies to check our work because there are few better ways to minimize errors in what goes to our clients. The number of companies who respond increases every year. However, we would like to have 100 percent. It is in the companies’ interest as well as ours.

Visiting KLD. A number of companies KLD researches come see us in Boston. We welcome these visits. We are happy to explain our research processes and introduce our team.

On rare occasions, KLD researchers will visit companies or, somewhat less rarely, attend company-sponsored presentations. We limit these contacts in order to maintain objectivity. In addition we’ve found over the past 19 years that they rarely add much to the information and analysis that our clients expect from us.

Terms of Engagement – Lobbying

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

For example, we regularly get questions about what a company must do to get on our social indexes or get back on them. Advising a company on how to appeal to social investors while rating the same company on its ESG performance is a clear conflict of interest. Since its founding in 1988, KLD has maintained a strict policy of not advising or consulting to the companies on which we report.

We point companies that want to know how to get on one of our indexes to KLD’s ratings indicators, our screens, which appear on our website. We will sell companies the same research database that we sell institutional investors, so they can evaluate their ESG performance against their peers.

But, we do not provide company-specific advice to companies we might rate. Lobbying to get on an index raises our suspicions.

KLD’s Publishing of Research & Ratings

And what about KLD’s evaluations of companies? Who sees them? How does KLD publicize them?

KLD’s ratings and analyses of companies go to its clients via its research products: research databases, compliance lists (based primarily on ratings and data in the databases) and indexes. For more information on the nature of our products, please go to our website.

Only KLD’s clients and occasionally reporters have access to KLD’s published databases, such as SOCRATES. Only clients see compliance feeds.

Index Companies.

Indexes we treat differently. We do make the constituents – or representative lists drawn from them – available on request. KLD clients who base funds on our indexes periodically publish lists of the funds’ holdings.

We have published a monthly release that lists additions and deletions from our family of six indexes. We briefly describe the reasons for the changes. With those dropped for ESG performance reasons, we note the fact in the release.

Once every few years, KLD decides to drop a company from an index in a context that requires a public explanation for the action. The most notable of these was the decision to drop Wal-Mart in 1999.

KLD is criticized on the one hand for not routinely ‘naming and shaming’ companies dropped for ESG reasons and on the other for not advancing index companies as ‘socially responsible’. Neither course of action serves the indexes’ purpose: to identify companies that comprise either a benchmark universe or an investment strategy for social investors.

An Invitation

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