Can companies and investors see eye to eye on ESG?
Last week, at the GreenBiz 19 conference, we convened our first GreenFin Summit, a half-day working session that brought together about 100 sustainability and investment professionals. Their charge: Assess what it would take to align corporate reporting with investor needs in order to accelerate investments in sustainable and low-carbon solutions.
It was, to be sure, an audacious goal for a four-hour event, but that’s the gist of our summit series — to get the right people in the room to take on big questions. In this case, the "right people" were executives from pension funds and other institutional investors, investment banks, asset managers, ratings agencies and publicly traded corporations.
Speaking as someone with only a cursory background in finance, it was a fascinating and enlightening conversation. Among other things, it unearthed the misalignment between what companies are reporting and what investors actually need to make risk-based asset-allocation decisions.
The summit, presented by GreenBiz in partnership with Trucost, part of S&P Global, opened with a panel aimed at setting the stage. It included a major public-employee pension fund, three bank executives with trillions under management and a major tech company that has been a leader in sustainability reporting. (The event was conducted under the Chatham House Rule, meaning that the information discussed may be shared, but not the names of the individuals or organizations present.)
The panel confirmed what we’ve been seeing for the past year or so: Corporate reporting on environmental, social and governance, or ESG, issues has moved from the margins to the mainstream. It sits squarely on Wall Street, where it is being factored into a growing number of investment managers’ portfolios.
Indeed, ESG data is getting a lot of attention. Last fall, a sizable group of institutional investors and asset managers, state treasurers and ESG advocates petitioned the U.S. Securities and Exchange Commission to mandate standardized disclosure of ESG information by publicly traded companies. Credit raters have been exploring ways to incorporate ESG factors into their ratings. S&P Global Ratings, Moody’s Investor Service and Fitch Ratings, among other credit rating agencies, have signed onto the United Nations-led Principles for Responsible Investment’s ESG In Credit Ratings Initiative, which aims to standardize ESG issues in fixed-income markets. Meanwhile, the European Commission has proposed regulations asking institutional investors and money managers to demonstrate how their investments align with ESG factors.
All of this is a radical change from just a couple years ago, when corporate sustainability executives lamented that mainstream investors simply didn’t care about ESG issues and rarely brought them up in investor meetings or quarterly earnings calls. Today, a growing number of investors equate high ESG ratings with well-run, lower-risk companies, and studies show that ESG leadership can better mitigate downside risks, capture investor interest and create long-term value.
Most of the summit was spent in smaller groups, exploring two questions: If companies and investors were to align perfectly on ESG data, what would happen as a result? And what are the biggest obstacles to this happening?
The discussions surfaced more problems than solutions. For example, there was broad agreement in the absence of a clear understanding of ESG topics by corporate boards. Some of that stems from the lack of standards and definitions, and from the failure to translate sustainability issues into the language of finance: risks; costs; competitive advantage; and the like.
Another investor ax to grind: Many companies treat ESG reporting as a check-the-box activity, with companies seeming to lose sight of why they’re even bothering to report. Time lags are yet another issue — while financial reporting is fairly current, sustainability metrics are often a year or two old before being disclosed, creating limited value for investors.
And companies have not done a good job of integrating ESG metrics into their key performance indicators, or KPIs. For example, few know whether high ESG ratings make investors more inclined to buy their stock or employees more likely to want to work there. (However, there are indications that high-ESG-performing companies may receive more favorable terms when borrowing from capital markets, as Libby Bernick writes.)
All of which suggests a long road ahead before companies and investors can speak the same language on ESG issues and do so in a way that’s "decision-useful," as investors call it, meaning comparable, standardized data on increasingly significant ESG risks and opportunities. Even when that alignment comes, it may take a while before such data allows for the longitudinal backtesting that investors frequently use to assess investment theses with a basket of stocks.
More on that in future GreenFin Summits.
For now, it’s a start to unearth the key issues and to have a frank and open conversation, which attendees seemed to appreciate. No one present was under the illusion that changing financial reporting will be quick or painless.
As the vice president of a major U.S. bank put it: "Financial ratings took 60 years, and we’re only just now getting aligned." So maybe there’s hope.