Michael Muyot, president and founder of CRD Analytics, a leading provider of independent sustainability investment analytics, is an acknowledged leader in sustainable investing. He has developed a unique set of tools that are helping to drive the industry, including the SmartView 360 Platform, which powers sustainability indexes, rankings and research reports. These include the NASDAQ CRD Global Sustainability Index (QCRD), the SeaCrest Global Clean Energy Index; and, the Southeastern Corporate Sustainability Rankings.
A founding partner of The Analyst Desk, Michael co-anchoredSDROI TV, a business news program for the corporate and financial communities focused on global sustainability exchanges, indexes and rankings. He serves as a board member of the Real Medicine Foundation, and as a Global Advisory Council Member for Cornerstone Capital Group. He is a founding SASB Ambassador for the Sustainability Accounting Standards Board, and a Fellow at the Governance & Accountability Institute.
Christopher Skroupa: How are investors and executives using ESG (environmental, social, and governance) integration to unlock value?
Michael Muyot: SRIs or Socially Responsible Investors have been using ESG information since the ‘80s to screen the companies they invest in. Today it comes in dozens of strategies and complex financial models all looking to maximize returns for their clients. Large trillion dollar asset managers such as Blackrock, UBS, Allianz and State Street all have allocated considerable human and financial resources to integrate ESG data into optimizing their risk-adjusted returns. Large banks such as JPMorgan, Citibank, Deutsche Bank and numerous others have invested heavily in what they deem to be sustainable projects that will produce positive net impacts for society and the environment for many decades into the future. The primary catalysts are client demands and reputational expectations. At the nexus of this evolution are public companies facing increasing pressure to report, operate and invest in the most sustainable and innovative business model for the next 100 years. With the ever increasing liquidity of financial capital, the stakes have never been higher for companies to find the right balance for these priorities.
Skroupa: What type of financial models integrated with ESG data have you built to calculate ROI for public companies?
Muyot: I typically build a customized financial model to best fit the needs of our clients. We focus on four sets of ESG filters: Negative Impacts, Positive Performance, Economic ROI and Reputational Risk. All of the investment clients we work with are looking to screen out companies that have the obvious negative impacts on society which include products like military-grade weapons, harmful chemicals, conflict minerals, excessive fossil fuel dependency, etc. – those are the Negative Impact Screens. Positive Performance is baked into everything we do. Companies that are leaders in transparent disclosure and outperform in our universe tend to have very favorable financial returns, especially over longer time horizons. The third screen is for companies that can articulate their tangible economic impacts both directly and indirectly. The very ability to produce that on a global corporate level is the result of strategic and operational leadership. This tends to come from organizations with progressive CEOs and a diversified board. Lastly, Reputational Risk has to be a priority for public companies as it affects their fiduciary responsibility to protect and enhance shareholder value. When companies are consistently in the news for environmental disasters, corruption, health and safety violations and unfair treatment of their employees, it is destructive to the company’s reputation and will negatively impact shareholder value over the long run. This may come in the denial of the license to operate in international regions, boycotts of certain products, lengthy and expensive legal battles or loss of their top executives and technical workforce.
Skroupa: Can any company start to apply the integration of ESG performance data or is this only for more operationally-mature enterprises?
Muyot: There is clearly an operational maturity curve for the implementation of ESG measurement and management across a global organization. So the sooner a company gets started the better. It often takes three to five years to really gain traction once the initial growing pains are overcome. We group companies into Laggards, Intermediate Adopters, Experts, Leaders and Innovators based on a robust set of algorithms and filters discussed above. Depending on where the company is in their strategic and operational maturity level, that would dictate what the best recommended practices would be. It also depends heavily on other factors, such as their industry, whether they are B2B (Business-to-Business) or B2C (Business-to-Consumer) and what regions they are headquartered in, as well as where the bulk of the operations are located.
Working with the right frameworks and guidelines can be very helpful, as they allow companies to focus on the most material and important issues for their internal and external stakeholders. We recommend the Integrated Reporting framework and the Global Reporting Initiative G4 guidelines as the best guidelines to get started. They both can be custom tailored to the maturity level and operational characteristics of the organization.
Skroupa: What are some of the optimal results a company can expect if they are successful with their ESG integration?
Muyot: Right upfront, it will be ideal for each company to define what success looks like. We’ve worked with hundreds of investors and companies and the biggest driver for success is leadership; it has to be a top-down effort to gain any sustainable traction. It also has to have a single internal champion who will herd the cats, so to speak. There is a very well-defined process that must include buy-in from key stakeholders both internally and externally, and unless that is a C-Suite priority, it will most likely fail.
On the other hand, when done right, the rewards can be many and fruitful. Here are just a few: higher levels of workforce engagement, as employees are drawn to a purpose-driven company; increased productivity as operational performance is improved across departments, divisions and regions; and better profit margins resulting from more efficient use of raw materials, energy and human/physical resources. All of these factors will lead to improved financial performance and enhanced reputation if communicated properly to investors, employees and the media. When done well, this creates shared value across the company’s reputation, stock price, natural resources, society at large and the workforce.
Skroupa: What is your vision five to ten years down the road – will ESG integration just be table stakes for all public companies?
Muyot: I believe, as with all paradigm shifts, there will be winners and there will be losers. You can already see many of the industry leaders who are starting to pull away from the pack: Tesla, Solar City, NRG Energy, IBM, State Street, BMW and Unilever to name just a few. ESG integration is really just the beginning. The required hard work and monumental improvements are still yet to come. The political gridlock and hydrocarbon-based obfuscation really has to be dealt with and eliminated here in the US for unobstructed progress to happen. Imagine what it would look like if the entire country was united to invest in our physical infrastructure, a tech-based educational system, an innovative clean energy network and a cutting edge IT-based commerce system built to last for the next 100 years. Unless we are moving towards those unified goals, another region is going to surpass us and we will have to play catch up. Americans really don’t like coming in second place in anything. But that is where we are heading on our current path, due to a system of well-designed chaos with the goal of using distraction to serve an outdated way of doing business – a way riddled with corruption and unsustainable economic inequality.
On June 19th, 2015, Skytop Strategies will present, “ESG Summit,” hosted at Nasdaq’s MarketSite in Times Square, New York. Continue the discussion with Michael Muyot 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.