Governance and investor relations professionals recently gathered at the ESG Integration Forum – Winter in New York, hosted by Governance Intelligence and IR Magazine, for detailed discussions on the state of and prospects for ESG issues affecting companies.
Panelists and attendees tackled – and gave advice on – issues such as impending regulations, ESG data management and disclosures, the upcoming proxy season and getting boards to take the risks from climate change seriously. Below are some takeaways from the event.
Regulations around the corner – and here
Despite the impression some institutional investors may suggest publicly, audience members indicated that they continue to pepper companies with questions about ESG-related regulations. In an informal poll at the forum, more than 80 percent of attendees said investors have in the last six months asked their company about the SEC’s long-awaited climate change risk-disclosure rule.
Around 60 percent said they had been asked about the European Sustainability Reporting Standards (ESRS) or the Corporate Sustainability Reporting Directive (CSRD) during that time, and 28 percent said they had been asked about California’s recently adopted climate disclosure laws.
Sandra Peters, senior head of global advocacy at CFA Institute and a member of the SEC’s investor advisory committee, noted a lack of awareness among US companies and investors about the ESRS, including whether companies fall under its scope.
She reminded attendees that the standards do not simply apply to climate issues; that they also include assurance requirements; and that they will take effect in EU countries as they adopt them. In the meantime, she said, companies should check whether they fall under the ESRS/CSRD and keep an eye on the implementation timeline.
Getting to grips with data management
John Truzzolino, director of business development at Donnelley Financial Solutions, noted that with incoming regulations companies will be shifting to sustainability reporting in a mandatory, standardized, digitized and audited format. That shift, he explained, will lead to higher expectations about the data models companies use in the area, posing questions about who owns the data, where is it collected from and what the responsibility lines are.
Many companies lack a coherent approach to sustainability data management, compared with their handling of financial data, according to Truzzolino. But he pointed to COSO’s internal control for sustainability reporting framework and the Data Capability Assessment Model framework as providing guidance teams can use to start creating a foundation for talking to other senior management and boards about the ownership of data. For example, the COSO framework discusses directors’ responsibilities on data oversight.
Such a foundation can be used to prepare for the data audits that are coming, Truzzolino advised. He added that his firm has worked with companies this year to update their governance and policies, as outlined in their proxy statements, around oversight of data from the board’s level.
To disclose or not to disclose?
For some companies there continues to be a struggle between concerns over greenwashing, which investors and the SEC are paying attention to, and the lure of green-hushing, or limiting corporate disclosures around sustainability matters. In terms of green-hushing, Daniel Labovitz, co-founder and CEO of Green Impact Exchange, noted that in the absence of regulatory requirements many companies don’t see a benefit to making disclosures. Regulatory clarity would resolve that, he said.
The pending SEC rule and the California legislation will create a level of accountability that drives companies to make disclosures without the concern that those will be viewed as promotional materials, Labovitz said, adding that there are rewards to making these types of disclosures, such as potentially lower costs of capital.
Proxy season prep
Proxy season is coming and a poll of attendees found that most view proxy advisers’ voting policies and their own shareholder engagement to be the best resources for preparing. These were followed by looking at the voting policies of institutional investors and trends in previous years’ shareholder proposals.
Recent proxy seasons have seen growing numbers of ESG-related shareholder resolutions filed with companies, particularly on E and S issues. Last year average support for these measures declined for the first time in the past few years, a trend most observers attribute largely to many proposals being more prescriptive.
That does not appear to be deterring proponents ahead of 2024, according to Gregory Reppucci, senior director for sustainability and corporate governance at Morrrow Sodali. The number of filings is relatively consistent with 2023, he said, and topics covered are in many cases familiar. They include racial equity audits, environmental justice, political contributions, reproductive rights, pay equity, animal rights, termination pay and biodiversity, while anti-ESG proposals also continue to be filed.
Reppucci noted that amid a backlash in some quarters against ESG, some major investors have veered from using the term ESG, such as in their open letters to CEOs. BlackRock, for example, has shifted from using ESG toward the formulation ‘material sustainability-related risks and opportunities’. Reppucci commented that although the language used may have changed, investors’ strategies have not altered as much as might be thought, with a continuing focus on long-term value creation.
Fellow panelist Michael Rouvina, assistant general counsel for corporate governance and securities with Lumen Technologies, said ESG is still an area of interest to investors that arises during his engagement – even if investors are not talking about those issues in public.
On the theme of engagement, Wesley Gee, chief sustainability officer and principal at Works Design, told attendees later in the day that companies have an opportunity to use their websites and social media not only to tell investors and other stakeholders about their approach to ESG but also to learn from them.
Gee said it is important for companies to bear in mind that people may not be focused on ESG as a whole but can still be very passionate about a specific issue or issues. Despite this, it is helpful to present a company’s ESG information in one place to make it easier for outsiders to find and navigate, he said. In addition, it is important for a company to avoid boasting too much about its achievements and to acknowledge that it is on a journey toward its goals.
Ready for climate risks?
Climate change poses risks to everyone, but some companies face more immediate and material physical risks than others. Alexandra Higgins, managing director with Okapi Partners, pointed out that these risks can be acute, such as with hurricanes and floods, or chronic, such as with declining water supplies and rising sea levels.
Industries including agriculture, utilities and infrastructure are particularly exposed and companies need to have transition – or adaptation – plans to deal with these risks. But there are companies where the board and management are yet to assess their physical risks from climate change, Higgins noted.
Asked how corporate secretaries and other governance professionals can try to get their board to act and develop a plan, Higgins suggested they look within the company for information that is already available. A good starting point, she said, is the risk factors section of the Form 10K, which can highlight dangers facing the company that may not have been presented to the board. Professionals should also talk to different teams, such as enterprise risk management and disaster response, and make sure the board is updated regularly on the relevant issues, she added.