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May 09, 2018

Tackling ESG: Investors’ messages for governance teams

A new three-part series presents research highlighting key themes for governance and IR teams handling ESG issues

Evidence of the links between returns on investment and companies’ CSR/ESG efforts is mounting exponentially, and it’s now clear: ESG is no longer just a fad. We’ve seen increasing research that outlines asset managers’ expectations of issuers, as well as data demonstrating the effectiveness of a robust CSR program and its positive impact on consumers, investors and other constituencies.

We’ve also seen that enhanced shareholder scrutiny of corporate ESG programs has led to increased investor questions, lawsuits against companies for misstatements and ESG shareholder proposals. Experts predict there will be more ESG proposals on boards’ agendas than ever before, becoming the proxy access of 2018.

As governance and investor relations professionals seek the best ways to handle these trends, our new research finds that – among other things – asset managers don’t agree on a definition of sustainability, there is a need for companies to determine what they believe is most material for disclosure purposes and that IR is often the initial venue for investors seeking ESG-related information.

From December 2017 through March 2018, Curley Global IR (CGIR) conducted interviews with portfolio managers involved in SRI decisions and/or their corporate governance counterparts. Despite robust conversations, CGIR elected to expand the dataset by incorporating public statements into this research.

This secondary research data was derived from press interviews and/or directly from public statements. Twenty-four asset management firms are included in the dataset, with 14 investors having been interviewed and the remainder derived from secondary research. These 24 firms represent $17.1 trillion in assets under management.

CGIR asked nine questions of participants relating to trends, internal resource allocation, engagement approach and use of indices/data aggregators. Our goal was to identify whether ESG is as widespread an issue as articles and shareholder proposals would indicate, or whether it was a case of a ‘vocal minority.’

What emerged from the data were five key – and we believe new – insights, which we explore in this three-part article:

  • There is no single definition of sustainability, although asset managers use similar language and all include ‘long term’
  • Asset management firms are investing heavily in SRI, adding personnel, enhancing training and dedicating budget dollars
  • There is a deep need for companies to outline what they believe is most material, but this is coupled with a fear of over-regulation from the SEC
  • Investor relations is clearly the first point – and in many instances, the preferred point – of contact for asset managers with ESG-related questions
  • There is a strong desire for clarity and consistency in measuring metrics, but that producing a ‘puppies and flowers’ CSR report is nearly a worse decision than issuing none at all.

In the first of this three-part series, we will address the definition of sustainability and the investments asset managers are making in SRI.

Various constituents have different perspectives on sustainability. Asset managers look through one lens, issuers another and environmental specialists yet another. No single definition of sustainability has been widely and completely adopted, but all touch upon a single thread: long-term benefits.

One of the verbatim comments from CGIR’s research includes:

‘We believe we were the first firm to use the term sustainability as opposed to ESG. Our view of sustainability is how the company sustains its business model and cash flows into the foreseeable future for the long term. To me, it’s a matter of the concept of how management is running its business. ESG is a backward-looking kind of measurement. Sustainability is more future-focused.’

The increased levels of ESG activity reinforce the need for conclusive insights to help understand ESG principles and practices, which have moved into the mainstream. Who would have imagined the role social media would play within the global investor and corporate community in driving growth in ESG disclosure?

Today, portfolio managers, institutional investors, corporations, consulting firms and other national and international organizations have learned to use social media to advance their approaches to ESG trends and initiatives. Reports and studies are launched on Twitter, LinkedIn and YouTube before they even have a chance to reach more traditional publication methods.

In 2018 one could attend an ESG conference or seminar every month. One Twitter hashtag, #ESG, is used by CIOs, national organizations and professionals who post content to be tweeted and retweeted hundreds of times each day. On YouTube, more than 57,000 videos of seminars, conferences and interviews can be viewed on ESG-related topics. One LinkedIn group, of many, has more than 15,500 members.

All this outreach, communication activity and awareness force us to ask the question: are we really all talking about the same subject? ‘ESG’ is widely used, but can mean something different to many of us who work in the governance domain. How can investors feel confident they are managing their assets to capture the most effective value for the funds? How will companies sift through the multiple approaches and find what works best for their shareholders?

Principles or standards have been promulgated over the past two years to ensure a more common translation among all stakeholders. As written, they provide concrete language on ESG definitions and tangible steps to ensure roles and responsibilities of companies and investors are understood.

Both the International Corporate Governance Network and the Council of Institutional Investors have adopted policies to address ESG-related interests. The Sustainability Accounting Standards Board has recognized that ‘sustainability has no one-size-fits-all definition. Rather, each industry has its own unique sustainability profile.’

A verbatim remark from CGIR’s research voices a similar understanding:

‘We don’t use [the terms] interchangeably. We look at sustainability from a big picture standpoint – the longevity of a company. Sustainability applies to the way in which operations are conducted. Management succession planning, board refreshment; these all play into our big-picture view of sustainability and longevity, and our investment as long-term institutional investors. We look at ESG [factors] as they pertain to material risks to the company. We look at how it is managing environmental risks and, ultimately in the lens of that, broader sustainability. The same goes with the S and G.’

CGIR’s data shows a significant commitment of human and financial resources made by investment institutions related to ESG, and deciphering materiality as it relates to the asset manager’s investments. The institutions’ collective focus as fiduciaries is perhaps the biggest sign of ESG’s longevity.

In fact, nearly all asset managers have continued to heavily emphasize ESG when investing, and/or have substantially increased SRI-focused internal resources. Several US-based firms indicate they have named a new head of sustainable investing in the past 12 months.

In addition, it became clear through CGIR’s conversations that asset owners are asking asset managers to increase their focus on ESG initiatives. Nearly all use avoidance or ‘negative’ screening in some manner. As a few investment firms put it:

‘Yes, we’ve staffed up, but there is no specific head of sustainability, our head of governance covers this. Clients are asking for ESG now and we’re in ramp-up mode.’

‘We have a large sophisticated group that’s been staffed up… ESG is very important to us.’

Some asset managers have even incorporated ESG across the firm:

‘The responsibility is carried out by all investment professionals. More of a firm-wide as opposed to a public-speaking person.’

Some have developed proprietary, sophisticated models:

‘The team has developed a proprietary ESG scoring system… to assess current and projected ESG conditions in various countries, and to facilitate macroeconomic country comparisons around the world.’

The ESG acronym should be thought of as three unique factors – environmental, social and governance – that help to drive sustainability, defined as the long-term growth of an organization. CGIR’s research shows companies should, therefore, be careful to avoid interchangeability of the terms ‘responsibility’ and ‘sustainability’, just as they should be careful not to equate ‘sustainability’ purely with ‘environmental’ factors. The same issue should be true for investors.

If companies and investors can use a similar definition and perspective on what ESG means, we believe it will help them have meaningful discussions about areas of common interest, provide a clearer focus on where the real differences of opinion lie and support a constructive dialogue on long-term strategies. It should also help avoid time-consuming and costly discussions at the beginning of these engagements when the parties are beginning to talk.

Sally Curley, IRC, is founder and CEO of Curley Global IR. Carol Nolan Drake, Esq, is president and CEO of Carlow Consulting