Talking the Walk of ESG with Investors

Speakers

• Curtis Ravenel, Global Head, Sustainability Group, Bloomberg L.P.
• Anne Simpson, Senior Portfolio Manager for Investments, California Public Employees’ Retirement System (CalPERS)
• Laura Commike Gitman, Managing Director, Advisory Services, BSR (Moderator)

Highlights

• Environmental, social, and corporate governance (ESG) reporting is becoming increasingly important to investors and other stakeholders. Companies would be well served to get ahead of the trend now, rather than be forced to address it later.

• While European investors have traditionally driven the ESG agenda, U.S. investors are increasingly including ESG data in their analysis. This trend will likely increase as stakeholders continue to demand that an ESG lens be applied to their investments.

• Investors are increasingly looking to partner on sustainability, as they see the benefits of ESG providing significant returns on investment.

Memorable Quotes

“The NGO community has really led the ESG agenda. Increasingly, however, investors are on board. Now it’s the companies who are trailing. As such, it’s an especially important time for companies to take ownership of this agenda.” —Curtis Ravenel, Bloomberg L.P.

“One of the most critical things at this stage is how can we ensure that companies doing the right thing are getting rewards in terms of access to capital.” —Anne Simpson, California Public Employees’ Retirement System (CalPERS)

“Investors and companies are on the same side, and too often it is put forward as an adversarial relationship.” —Anne Simpson, California Public Employees’ Retirement System (CalPERS)

Overview

BSR’s Gitman opened up the session by highlighting the importance of investor perspectives for publicly traded companies. Revealing that investors are increasingly concerned with incorporating ESG data into their analysis, Gitman discussed the need to appropriately report and partner with investors on these issues.

Ravenel revealed that in 2008 Bloomberg decided to collect ESG data for its clients. Looking back at the company’s history, Ravenel was shocked to notice that while in 2005 only 700 to 800 firms reported on ESG, now there are more than 6,000. This significant increase in data has been followed by a 54-percent increase in Carbon Disclosure responders, and a 38-percent increase in reporting to the Global Reporting Initiative (GRI), among the companies that Bloomberg reports on. While these improvements are significant, Ravenel warned of two key challenges: 1) the qualitative nature of the data; and 2) the lack of comprehensive data. These factors make it difficult for analysts to use the data in a meaningful way, while they also provide opportunity for companies to deepen their tracking and reporting.

Next, Simpson spoke of the need for companies to recognize that shareholders do not all fit into one box. Instead, she urged companies to see three distinct groups of shareholders:

1. Shareowners: This group, made up of pension funds, sovereign wealth funds, and foundations, see themselves as long-term owners who are invested in companies for more than 50 years.

2. Traders: Including mutual funds and 401ks, this group looks beyond the 90-day corporate reporting period with a focus on long-term benefits.

3. Raiders: Made up of algorithmic traders, this group focuses solely on short-term gains even at the expense of long-term benefits, and they are often especially vocal if companies prioritize their long-term sustainability over their short-term gains.

After laying out these three categories, Simpson urged investors to listen to the quieter voices coming from the shareowners and traders, whose priorities are better aligned with long-term sustainability. To assist in this, CalPERS joined with other large investors to create a framework to help investors and companies focus their efforts. This framework highlights three key areas:

1. Priorities: While the numbers of ESG initiatives (such as the Carbon Disclosure Project) are laudable, the plethora of initiatives has diffused their impact. As such, CalPERS argues that companies should focus on climate change, human capital development, and aligning interests throughout the company (e.g., through executive pay being tied to ESG).

2. Performance: The first step for communicating ESG performance should be integrating ESG reporting into financial reports. This reporting on ESG metrics should be both qualitative and quantitative.

3. Procurement: CalPERS argues that there needs to be standard terms and conditions for fund manager contracts, so fund managers understand that they have a fiduciary role and that their ultimate beneficiary is the owner.

Gitman then followed up by asking the speakers what they would like companies to do differently. Ravenel responded that he would like to see more data and deeper integration of sustainability throughout the company, from the Sustainability Officer to the CEO. Simpson concurred that deeper integration was needed and said one way to achieve this is through better incentive structures to ensure alignment.

Next, Mike Wallace from GRI asked whether investors are hoping not only for increased data, but also increased quality in reporting. Ravenel responded by challenging companies to take ownership of their sustainability agenda, recognizing that Bloomberg does not hire auditors to check reported data. Following on Wallace’s question, Diana Lyon from IBM asked about the level of qualitative data required and the importance of relationships with company representatives. Simpson responded that both quantitative and qualitative data are important, with neither being an adequate substitute for the other.

Wrapping the session up, Gitman reiterated the importance of not only integrating ESG in financial reporting, but also integrating it throughout the company.

For more information, including slides from the session, please email BSR Managing Director Laura Gitman at lgitman@bsr.org.