Recognizing the ESG element in investors' concerns

Apr 14, 2015
<p>Impending regulations in Europe and anticipated guidance from stock exchanges will force US firms to step up their sustainability reporting</p>

Investor interest in non-financial reporting continues to grow, as evidenced by the growth of shareholder proposals filed this proxy season requesting increased disclosure about one ESG issue or another.

The vast majority of this year’s 43 shareholder proposals related to sustainability are requests for companies to publish sustainability reports (28 proposals, down from 32 in 2014), with 11 proposals asking companies to link executive pay to sustainability metrics, up from one such proposal last year, according to data provided by the Sustainable Investments Institute. The Conference Board’s recent Sustainability Practices 2015 report states that 31 percent of S&P 500 companies referenced GRI guidelines in their sustainability reports in 2014, compared with 25 percent the previous year.

Although sustainability reporting is done voluntarily in the US, ‘an isolationist action policy’ will no longer work once a directive requiring such reporting, recently approved by the European Parliament, is adopted by European Union member states. That’s the view of Evan Harvey, director of corporate responsibility at NASDAQ, aired in a recent webinar, ‘Modern due diligence: how financial markets are analyzing and incorporating non-financial corporate performance data’, hosted by NASDAQ and BrownFlynn, a consulting firm that specializes in sustainability and CSR reporting. The directive will apply to any US-based multinationals operating in Europe.

Stock exchanges such as those in Johannesburg and Brazil now require listed companies to report non-financial data, and last year the World Federation of Exchanges (WFE) formed a Sustainability Working Group to build consensus on the role of ESG data, the Conference Board reports. By the end of 2015 the WFE is expected to start issuing guidance regarding the kind of disclosure it believes listed companies should be making as an element of governance best practice. ‘The goal is to come up with a guidance document that will lay out certain metrics or data points as most informative. Companies should be, if not internalizing and managing that data, disclosing it,’ Harvey said.

Citing the need to harmonize the ESG metrics called for by various reporting frameworks, he added that the WFE’s effort could accomplish that: ‘The exchange asking for something or giving guidance on something will sort out some of the debris from the frameworks and provide companies with a clear understanding of what we think is most important for them.’

Currently, many companies are trying to determine whether to answer two new unscored questions included in the 2015 CDP Climate Change questionnaire. Based on BrownFlynn’s calculations, 405 ‒ or 39 percent ‒ of the Russell 1000 companies reported to CDP in 2014 or 2013. CDP, formerly the Carbon Disclosure Project, is asking responding organizations whether they have an internal price on carbon and whether their board of directors would support an international agreement between governments on climate change. BrownFlynn consultants Cora Lee Mooney and Sarah Corrigan make a case for answering these questions in a recent article on the GreenBiz website.

Companies such as Exxon Mobil, Bank of America and Google have developed an internal carbon price partly to enhance their strategic planning and risk management, write Mooney and Corrigan, quoting the CDP report. They add that ‘companies could achieve this desired price certainty through a global agreement on climate change, specifically the type of agreement that will be sought during the United Nations Framework Convention on Climate Change in Paris later this year. CDP asserts that a global agreement would enable clear carbon pricing and alleviate regulatory uncertainty.’

While the global investor statement on climate change explicitly declares the interest investors have in increasing low-carbon and climate-resilient investments, companies should understand that many investors’ questions relate to sustainability despite not being articulated as ESG issues.

Portfolio managers are constantly assessing the merits of the approach executives take to manage their companies, said Michelle Edkins, managing director and global head of corporate governance and responsible investment at BlackRock, on the NASDAQ/BrownFlynn webinar. For firms with significant exposures either in their environmental impacts or social factors, these include practices concerning employees, reputation in the communities in which they operate and their relationships with regulators. If portfolio managers hear that a regulatory relationship has turned sour and substantial fines are imminent, they will ask what’s happened to their dividend, not about ESG.

‘We’ve got to be careful about presuming that just because the question isn’t framed in an ESG context it doesn’t have some element of that in it,’ Edkins explained.

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