Henry (Hank) Boerner, chairman and chief executive officer of Governance & Accountability Institute (G&A Institute), has served as board member and chair of the Issues Management Council, a global professional membership organization for people whose work is focused on managing issues and for advancing the issue management process, used to align organizational activities and stakeholder expectations. He publishes in professional and trade, including “Corporate Finance Review” (Thomson-Reuters), Investor Relations Newsletter, the monthly “NIRI IR Update” and other business publications.
Louis Coppola is Executive Vice President and head of research and Information Technology at G&A Institute. He is the primary coordinator of sustainability and corporate responsibility research, monitoring and information delivery systems related to the Global Reporting Initiative (GRI). He directs the G&A “GRI Organizational Stakeholder” (OS) activities and is certified in the GRI reporting process. Louis is the lead advisor and consultant in the planning and reporting process for corporate sustainability and responsibility reporting.
Christopher Skroupa: In the recent months, there has been increasing chatter about the recognition of importance of corporate “ESG” strategies and performance to the investment community. What is at the core of these discussions?
Hank Boerner and Lou Coppola: Over the past decade the US corporate community has been focusing on corporate governance issues, and the importance of effective governance as it relates to measurement and management of environmental affairs and the enterprise’s position on “social” or societal affairs – the “ESG” focus. Stakeholders, including investors, are increasingly focusing on the “ESG” strategies, practices, initiatives, achievements, and third party recognitions of corporations.
And so, corporate executives and managers have been responding by focusing on their company’s ESG strategies and performance and program implementation that makes them more “sustainable” in so many ways. And. that signals their recognition of the importance of meeting stakeholder and stockholder expectations.
In our monitoring and analysis, we see the manifestations of this rising interest among stakeholders and stockholders, and the corporate response. Companies are reducing risk, achieving broad cost savings in operations, creating clear competitive advantage, engaging with key stakeholders who can advance the reputation and valuation of the enterprise, and more. We see corporate sustainability leaders achieving alpha vs. their industry peers, and the investment community is increasingly recognizing that this information is material to a company’s long-term ability to operate and compete in today’s global market.
Skroupa: How do asset owners, their managers, and financial analysts factor corporate ESG performance into their valuations and decision-making?
Boerner and Coppola: We could say that sustainable & responsible investing (S&R) is at a tipping point when well-known mainstream houses such as Goldman Sachs, MSCI, BlackRock, Morgan Stanley and a host of others are adopting ESG analytic and portfolio management ESG strategies. There are numerous sources for ESG data and analytics. One of the largest and most important when it comes to financial analysts is the Bloomberg ESG dashboard now available on every Bloomberg terminal. Many investors have easy access to a Bloomberg and most have multiple terminals, some with 6+ screens! The ESG dashboard now contains key metrics on over 4,000 companies and is growing. This data can be used in the same way that financial metrics are used to create ratios, screens and other tools used by analysts. Financial analysts are discovering new ways to look at this data by creating innovative ratios combining ESG data with traditional data.
Skroupa: Which companies are leading in their “sustainability journeys,” and appealing to investors with their strategies, programs, engagements and achievements? What makes them leaders?
Boerner and Coppola: We are the exclusive data partners for the USA, UK and Ireland for the Global Reporting Initiative (GRI), which provides the most widely-used disclosure and reporting framework for corporations to use for their ESG “story telling.” Last year we reported that 72 percent of the S&P 500 companies were reporting on their sustainability journey, up from 53 percent the year before and only 20 percent in our 2011 analysis. These large-cap leaders are setting the pace in their industry/sector.
As we analyze these corporate reports, we see leaders in most industries, especially among companies with complex operations. The story-telling involves all aspects of “environmental, social and governance” strategies and performance.
Unilever is an outstanding example globally, and Clorox, Intel and Jet Blue are some examples of US sustainability leaders in their industry, and overall. It is hard to select just a handful of companies as an example as the number of companies maturing in their Sustainability journeys has grown exponentially over the just the last few years.
Skroupa: If you are a corporate executive, and want to follow the example of leaders in sustainability, what systems, or methods, or standards might you follow to achieve success?
Boerner and Coppola: The GRI framework is the best place to start. The fourth generation of the guidelines was finalized and released in 2013 after a two-year period of development through various stages of global multi-stakeholder feedback and exposure drafts. Companies were given a two-year grace period to move to the new “G4”.
In January 2016 all companies reporting using GRI will need to report using the G4 to be considered a GRI compliant report. There is a group of leadership companies that have realized the benefits of the new framework and decided to report earlier then the deadline. The GRI just hit 1,000 G4 reports as a milestone, and we are conducting in-depth research on these reports to determine the indicators that matter most, to be released later this year.
The Sustainability Accounting Standards Board (SASB) is a newer approach, which is USA-centric and focused on the material aspects of industries and their sectors and what could or should be reported by companies going forward. There is momentum building for “integrated” reporting, which would consider important “capitals,” such as financial, human, natural resources and so on.
Two other important standards for boards and managers to be aware of include the Carbon Disclosure Project (CDP), and the United Nations Global Compact (UNGC), which are currently, along with GRI, the most widely-used reporting standards in the world.
Skroupa: Are there examples of asset managers leveraging this emerging trend in the corporate community – the embrace of sustainability – to gain alpha in their own investment strategies?
Boerner and Coppola: This is an important question and the answers shape the future of “corporate sustainability” and “ESG analytics.” A growing number of academics, analytics firms, asset owners, and asset management firms are looking for “evidence” of outperformance of corporate sustainability leaders. There are now dozens of peer-reviewed studies pointing to a “yes” answer, and the recognition by third parties of ESG corporate performance and achievement is an amazing, growing body of work.
Skroupa: What about “risk?” Boards are charged with oversight of risk, and managements work to reduce or mitigate risk to protect the enterprise. How does risk management factor in to the embrace of sustainability by companies and investors?
Boerner and Coppola: There are numerous issues in the E, S and G categories that boards and C-Suite take into consideration when they are overseeing enterprise risk. The “S” is a growing category. Think about risks in the global supply chain. Do you really know what is going on 4,000 miles away at a contractor factory? Can a crisis there affect your brand? With globalization, American companies are bumping against local customs, cultures, laws, regulations and so on. The US SEC reminded boards of their obligation to oversee risk, and that includes “climate change” risks and opportunities. This is an example of ESG as an approach. Effective G (governance) is a critical element of risk management of the E and the S.
Skroupa: What advice would you offer to senior managements, to boards, based on your monitoring of corporate sustainability, and the disclosure and reporting practices of American companies?
Boerner and Coppola: First, if you are not incorporating ESG into your company’s strategy-setting then it’s imperative that you get started right away. Every day it is becoming more and more of a risk to be ignoring the demands of customers, investors, employees and other important stakeholders who have a material impact on the ability for your company to succeed and be competitive in the long-term.
The GRI framework is a good place to start. The framework will help you to get familiarized with the various issues that make up the ESG buckets. In some companies, the drive for sustainability originates as a bottom-up approach and the “top” finally “gets it” at some point – often after a crisis-type of event occurs with a customer, investor, or in the courtroom of public opinion. The most effective sustainability programs are top-down in this respect: Boards are involved, and many companies are now changing committee charters to reflect that. Involving all levels of the business, all functions and business units, all employees, can assure greater success in the sustainability journey.
And this broad effort and success in implementation should create more confidence in the asset management community that the company is serious about the journey. Will the sustainable enterprise create greater ROI? Leverage the journey for competitive advantage? Will cost of capital or even access to capital be affected (positively)? Will talent attraction and retention be affected? Young professionals state they want to work for a sustainable company in surveys.
Also consider, can energy costs be reduced on a per unit produced or per employee basis? Will the supply chain be more transparent and vetted to avoid blow ups in distant lands that affect brand value for customers? Will the company be a more attractive supplier to large customers who are embarked on their own sustainability journies?
Investors are asking these questions these days. So are customers of their supply chain partners. Sustainability is the “new, new normal” for the corporate sector. We think it will be a defining characteristic of the most successful enterprises in the years ahead.
On June 19th, 2015, Skytop Strategies will present, “ESG Summit,” hosted at Nasdaq’s MarketSite in Times Square, New York. Continue the discussion with Hank Boerner and Lou Coppola of G&A Institute and 150 institutional shareholders, public company managers and capital markets experts at this full-day conference, designed to explore new ways of factoring ESG performance into cost of capital and company ratings. To inquire about attending, contact Victoria Billman at firstname.lastname@example.org.