Keir Gumbs is a partner in Washington, D.C. and vice chair of the Securities and Capital Markets Practice Group. Before Covington, Gumbs spent six years at the Securities and Exchange Commission (SEC) where he held numerous positions, including as counsel to an SEC Commissioner. Gumbs is recognized as a leading authority on securities regulation and corporate governance who represents a cross-section of constituencies, including Fortune 500 companies, venture-backed firms, public pension funds, hedge funds, faith-based investors and trade associations.
At Covington, Gumbs’s practice is equally distributed into the following three categories:
- Advising companies, investors and regulated entities with respect to ongoing securities regulatory compliance – including preparing SEC filings, as well as compliance with FINRA, national stock exchange, Dodd-Frank and Sarbanes-Oxley requirements;
- Advising boards and investors with respect to corporate governance developments – regarding matters such as board and committee independence, cyber security, internal controls, shareholder proposals, proxy access, enhancing political spending disclosures and similar matters;
- Advising companies and investors on a variety of transactional matters, including securities offerings, crowdfunding, IPOs, mergers, tender offers, share repurchase programs and similar matters.
Christopher P. Skroupa: How can the development of environmental, social and governance (ESG) rating analytics come to fruition so that there are common metrics across the playing field?
Keir Gumbs: It would be really useful if there was one standard-setting body that could take ownership of ESG rating metrics. For example, if the Sustainability Accounting Standards Board (SASB) were able to get critical mass in terms of acceptance among public companies, investors and regulators, some of the standards that it has developed could be used as metrics by companies across the board. This could happen in a number of ways.
For example, a national securities exchange could adopt a listing standard that requires or suggests the use of one particular set of standards. Along similar lines, a regulator like the SEC could choose to adopt rules requiring or encouraging disclosure by companies using a widely accepted sustainability or ESG standard. Without a body like the SEC or an exchange establishing a standard that companies have to use, I think it is highly unlikely that any particular standard or metric will gain widespread market acceptance.
Skroupa: What metrics would be important, and what would decide their importance?
Gumbs: This is really hard to say, because it depends very much on the industry. There are some metrics that apply across industries, but they also have different levels of importance depending on the industry in which the metric is being used. For example anti-corruption-related metrics are ones that could conceivably apply across industries. For some industries, particularly those with an international reach, or those that are in high-risk corruption areas, such a metric would be of particular importance.
Along similar lines, environmental-related metrics are relevant to every company. However companies with operations that directly impact the environment, such as companies in the extractive industries, are likely to have environmental-related metrics that are much more important and relevant to their current and future strategy and business operations.
I think a much more important question is the question of materiality. In other words, what information is material to a particular company, and how traditional concepts of materiality play into that analysis. To me, this is where the current debate regarding sustainability and ESG reporting really comes into play.
I would say most companies and investors agree that sustainability and aspects of ESG are relevant to most companies, but I think companies, shareholders and interest groups disagree regarding how ESG metrics and similar information should be viewed when compared against traditional financial reporting measures. To me, this is the most crucial question relating to ESG reporting and the future of sustainability disclosures.
Until this question is resolved, I don’t think we can resolve questions regarding what metrics to use, what standards to use, and the places in which those pieces of information should be disclosed.
Skroupa: How can those metrics be tracked to show investors that there is value in ESG investing?
Gumbs: I think that if you were to pose that question to funds that are organized around the use of ESG in their investment analysis, they would say that these metrics are already there. For example, Domini Investments and Calvert Asset Management, have been successfully using ESG-related considerations in their investment decision making for decades. And I think in both cases those funds would say that they have achieved success using those metrics of ESG and sustainability.
So, after they use those funds as investments, I think they would say the traditional measures of performance can be applied to track performance of companies that have strong records based on ESG metrics.
Skroupa: How can ESG metrics show the value in an ESG investment strategy as a hard proposal, instead of a soft one? Is that effort worth it?
Gumbs: This can happen in the same way that an investor proves any investment thesis. Identify the attribute that the investor thinks has the most impact on value, identify companies that have the attribute and other companies that don’t, and compare the performance of those companies against each other. I think the financial performance of companies that perform well using ESG metrics is the strongest case that can be built for why ESG metrics matter.
There will be a live interview on the Rise of ESG Engagement: ESG Data as a Challenge for Company Defense at the Shareholder Activism conference in New York City on Jan. 25, 2018. Conducted by Andrea Vittorio, Staff Reporter, Bloomberg Law, she will be interviewing Courteney Keatinge, Director, Environmental, Social & Governance Research at Glass Lewis, an organization which helps institutional investors understand and connect with the companies in which they invest.
Because ESG is a topic that is gaining momental traction in investor attention, this conversation will be particularly unique in that it will discuss current trends are seeing shareholder movement towards ESG integration. Activists are engaging with companies in an effort to drive them towards ESG.