Corporate commitment increasingly helps determines capital support.
Socially responsible investing has been a growing trend among institutions for decades. However, the array of related initiatives now in play, including those seeking detailed disclosures in financial statements, suggest that to diversify or even maintain existing sources of capital corporate issuers must proactively commit to investors’ increasing expectations.
Socially responsible investing involves environmental, social and governance (ESG ) issues, the first of which was given an extra boost of recognition by United Nation’s Paris Climate Conference in December.
“Generally speaking, these initiatives are coalescing to drive more and better information coming out of issuers, both qualitatively and quantitatively, on how they are managing ESG risk as well as how they’re capitalizing on some of the opportunities,” said Doug Morrow, associate director of thematic research at Sustainanalytics, a research firm servicing investors and financial institutions. “So the bar is being raised.”
In fact, one such initiative was launched at the Paris conference by the Financial Stability Board, the international body that monitors and makes recommendations about the global financial system. Called the Task Force on Climate-related Financial Disclosures and chaired by Michael Bloomberg, the task force of representatives from financial data users and preparers plans to issue its scope and high-level objectives by the end of March. By year-end it anticipates releasing more specific recommendations for voluntary disclosure principals and leading practices.
The high profile task force’s efforts are bound to bolster other initiatives well underway, such as those by the Sustainable Accounting Standards Board (SASB) in the US and the International Integrated Reporting Council (IIRC). SASB is taking a highly prescriptive approach, establishing detailed ESG-related disclosures by sector, and the IIRC’s is more principles-based. But both organizations’ members represent leading institutions.
“What distinguishes this new paradigm is the fact that it’s coming from the mainstream investor world,” said Stephen Hine, deputy CEO at Eiris, a long-time ESG research firm that services major institutional investors around the world.
In fact, numerous stock exchanges around the world are already requiring ESG disclosures from the issuers they list. The Johannesburg Stock Exchange has been a pioneer on this front, and numerous other exchanges in developing countries such as India and Brazil also require ESG reporting for listings and provide guidance and training to issuers, according to the UN’s Sustainable Stock Exchange Initiative (SSEI). Several others have committed to providing guidance.
Mr. Hine said that the stock exchanges are doing it in part to address local issues, such as inequality and environmental challenges. “But they’re also doing it because they believe it’s a way to entice capital from abroad to invest in companies listed on their exchanges, since they’ll be more transparent on issues that are of increasing importance to investors,” he said.
Interestingly, those institutional investors tend to be based in jurisdictions where the stock exchanges have taken fewer ESG-related steps. The SSEI states that Euronext and Deutsche Borse don’t require ESG reporting, although they do offer guidance or training. The two listing exchanges in the US, Nasdaq and the New York Stock Exchange, have no ESG related requirements and offer no guidance or training.
Nevertheless, companies listed on those exchanges will feel plenty of ESG pressure from institutional investors in those regions, if they haven’t already. Just over 300 asset-owners and nearly 1,000 asset managers have signed on to the Principles for Responsible Investment, another UN vehicle that seeks to put six principles of responsible investment into practice. Many of the signatories are European, especially from northern European countries, and major US pension funds such as CalPERs and CalSTERS have signed on as well as BlackRock, which manages more than $4 trillion in assets.
A major challenge, however, is that there’s little standardization today in terms of how issuers measure and report their ESG efforts, and investors tend to measure and interpret that information differently. Plus, while different industry sectors and subsectors hold some ESG issues in common, they often are very different. The SASB and IIRC aim to bring some order to the ESG realm, and there are other initiatives that currently or soon plan to bring more measurement tools to bear on the ESG equation.
BNY Mellon, for example, already consults with non-U.S. companies issuing American depository receipts (ADRs) about where they stand in ESG terms and how to position themselves vis-a-vis investors. In April 2015 it announced an agreement with Sustainanalytics to make available a range of ESG data to clients.
“We can sit down with a company and say, ‘This is where you’re scoring in your sector for ESG, and this is how you compare with other companies in your sector or region,” said Guy Gresham, head of global IR Advisory at BNY Mellon’s depository receipts business. “We look for key trends in the marketplace and help companies position themselves and really engage with more investors. It’s an opportunity for companies to potentially attract more investment, or for that matter avoid being screened out by investors.”
Mr. Gresham said BNY Mellon is also engaged in a research project with the University of Cambridge in which the partners are talking to corporate issuers, asset owners and institutional investors to gauge how they’re measuring ESG, with the aim of mapping out commonalities
Paul Hilton, a partner at Trillium Asset Management, which has applied ESG as a key element of its investment strategy since its start in 1982, said the larger MNCs have issued reports on the ESG issues for a decade, and in the last few years those reports have become more regular and now virtually all sizable companies bring ESG into their discussions with current and potential investors. He noted that in the early days companies often took an adversarial approach to talking to ESG investors, and now many view it as a learning opportunity.
The management of companies, especially those in developing countries, is keen on showing their ESG commitment in order to improve their access to capital in the US and Europe, Mr. Hilton said. He added that the perception of large environmental, social and governance risks can put virtually any company at risk of seeing its access to capital diminish.
And those risks are always changing. Trillium recently discussed the issue of bee-colony collapse with home retailer Lowes, which committed to stop using bee-killing pesticides, and more recently the environmental protection agency began exploring potential regulation in this area. The asset manager just filed its first shareholder proposal with Whole Foods on the issue of food waste, which was hardly recognized as an issue five years ago but now is viewed as a major contributor to carbon emissions globally.
“When a company like Whole Foods moves on this type of issue, it has implications for the rest of food retailers, because it’s a leader in this space and there tends to be a ripple effect,” Mr. Hilton said.