As Managing Director, Mike Wallace is responsible for expanding BrownFlynn’s market penetration across North America, developing new and existing strategic partnerships, providing innovative corporate responsibility and governance solutions to clients and helping shape the strategic direction of the Firm. Having helped establish and then direct Global Reporting Initiative (GRI) North American operations from 2009 to 2014, Mike was instrumental in driving sustainability reporting across the North American economy.
Christopher P. Skroupa: What are the biggest mistakes companies make when it comes to the environmental, social, governance (ESG) ratings and rankings industry?
Mike Wallace: The biggest mistake is when the Investor Relations Officer (IRO) is not fully aware of the ecosystem that is informing and influencing their largest shareholders. The ‘responsible investor,’ ‘ESG’ or ‘socially responsible investment’ industry is no longer just small boutique activist groups, there is now an entire network of mainstream players who are fully engaged on very material ESG issues. According to the Forum for Sustainable and Responsible Investment (U.S. SIF), “ESG incorporation” by institutional investors increased by more than 60 percent between 2012 and 2014. These investors are doing extensive due diligence in regard to corporate performance which increasingly includes ESG factors. In addition to these investors, there is an entire industry of speciality research firms, as well as mainstream financial research firms now providing tailored ESG research. Within this broad ecosystem, you have your large, well-known state pension plans like CalPERS and CalSTRS, institutions like TIAA-CREF–The Teachers Insurance and Annuity Association–and university endowments who have suppliers like BlackRock, Goldman Sachs, Morgan Stanley and JPMorgan that provide them with investment and ESG research expertise. An entire community is now examining entire indices on ESG performance metrics, as well detailed analysis of specific industries and individual companies. They are using unique and robust proprietary research firms like Bloomberg, MSCI and Thomson Reuters, as well as specialists like Sustainalytics, Trucost, RobecoSAM and RepRisk. Asset owners and asset managers are actively utilizing these networks, analytical tools and subscriptions services to integrate ESG into investment decisions. They are most definitely making more informed, more responsible and more sustainable investment decisions, whether the IRO realizes it or not.
Skroupa: Do investors really care about these rankings? What information is utilized to engage companies when making active investment decisions?
Wallace: Investors do care. According to a CFA Institute survey in June 2015, nearly 75 percent of respondents said they incorporate environmental, social and governance criteria into their investment process. Long-term consideration of these ESG factors has disrupted mainstream asset managers and asset owners in their usual approach, The National Investor Relations Institute (NIRI) recently published a report focused on this shifting evaluation. In the new digital age, a plethora of analytical tools are now a click away, however the ESG field in investment activity has been around for awhile. The Interfaith Center for Corporate Responsibility (ICCR) has been focused on sustainability issues for more than forty years. A quick look at the membership list enlightens you to the type of institutions and individuals who are interested in responsible and sustainable investment. The company names and shareholder resolutions listed are available for everyone to see. These resolutions address a broad range of issues, spanning from human rights, to greenhouse gas emissions, to executive compensation, to board diversity. Every IRO should realize that this list is in the public domain and that this group of faith based investors has been actively engaging on ESG issues for decades. This is a public list where a company does not want its name.
Go back a decade and you’ll see the creation of an investor led initiative, the Carbon Disclosure Project (CDP), consisting of over 820 investors, representing about US$95 trillion in capital. These members are part of the ecosystem mentioned earlier. CDP’s list of signatories is comprised of asset owners, asset managers and specialized research firms, all working together to help understand the investment risks in portfolios, industries, geo-political regions and the risks at the individual company level. Detailed research is also available on this site, providing capabilities to look into the corporate activities occurring within specific industries on a regional and national level. Shortly after CDP formed and gained traction, the Principles for Responsible Investment (PRI) was established. This is an even broader initiative reaching across all aspects of the sustainability equation, representing more than 1,400 signatories from over 50 countries and representing close to $60 trillion in assets. CDP and PRI are the two largest and most influential initiatives to consider if you are a Corporate Secretary, CFO and/or IRO. These investors are actively engaged; they have made a public commitment to examine these issues for their customers and are doing extensive ESG due diligence on thousands of publicly traded companies. As a public company seeking investors, you can actively engage and inform this growing body of investors, or you can ignore their interests and avoid disclosure. This leaves investors and other stakeholders room to interpret the lack of ESG information, the lack of transparency, in their own way. This is becoming more complicated as a growing majority of the Fortune 500 and the S&P 500 report and have thereby set expectations on the level and type of ESG transparency coming from global companies.