What Investors Want: ESG and Reporting Frameworks

ESG
September 29, 2020

There is a major rise in executive emphasis on ESG.

“As investors increasingly coalesce around the notion that ESG factors can influence long-term financial performance, demand has grown for ESG information that is useful to investment decision-making, proxy voting, engagement or a combination of all three,” says Rhonda Brauer, president and founder of RLB Governance LLC.

In a recent webinar by ISS Corporate Solutions, a separate, wholly-owned subsidiary of the Institutional Shareholder Services, panelists suggest that the pandemic may have helped consumers and businesses “reset” priorities.

Many now understand just how easy it is for an event on one side of the globe to have a definitive impact on the other, raising the bar on the need for transparent environmental and sustainability practices, as well as shared information.

“The S (especially) is a large focus of … the types of issues that I am hearing about as I’m collaborating with investors on some of their initiatives for the coming year,” says Brauer.

Mary Morris, Investment Officer within the Sustainability Investment and Stewardship Strategies (SISS) with the California State Teachers’ Retirement System (CalSTRS), agrees.

Her organization looks at three pillars for their investments: stewardship, portfolio management and strategic relations. ESG reports are a big factor in determining how to invest their $32 trillion assets.

“We ask that our investment management partners consider risk factors and integrate climate change into their investment processes,” she says.

Enter the Frameworks

In light of this renewed emphasis, the ISS Webinar panelists discussed the relevance of the most commonly cited ESG reporting frameworks:

  1. Carbon Disclosure Project (CDP)
  2. Global Reporting Initiative (GRI)
  3. Sustainability Accounting Standards Board (SASB)
  4. Task Force on Climate-related Financial Disclosures (TCFD)

Morris said that her organization uses a mixture of all of these.

But What Is the Difference?

The CDP is a non-profit organization that aims to study the implications of climate change for the world’s principal publicly-traded companies, cities, states, and regions. The group developed a set of online questionnaires where businesses can access and report on their status based on a company’s environmental impact related to climate change, water security, and forests, with a separate supplier questionnaire. Companies can decide whether or not to make their info public

According to CDP’s co-founder and executive chair, Paul Dickinson, climate change will threaten humanity for the next 100 years at least.

And because “what gets measured gets managed,” according to CDP advisor Adair Turner, reporting standards are essential for businesses, investors, stakeholders and consumers as corporations are asked for greater transparency.

GRI is the original international reporting framework, founded in 1997. It developed a set of modular, interrelated structure reporting standards that are broken down into environmental, social, and economic standards.

The most recent framework, SASB, developed a set of reporting standards for 77 industries across 11 sectors that focus on five dimensions: the environment, human capital, social capital, business model and innovation, and leadership and governance.

TCFD is a set of recommendations for reporting climate change regulations which can be done using any of the above frameworks. It has four areas of focus (governance, strategy, risk management, and metrics and targets), and recommends using different climate related scenarios to show the resilience of a company’s strategies.

Audience

Target audience is slightly different within the frameworks. While CDP and GRI focus on a company’s impact on a broad range of stakeholders with attention to the environment and society, SASB and TCFD focus on the relevance of ESG on investors and other financial market participants, and consider how external conditions impact a company’s future economic performance.

TCFD has also moved away from requiring the disclosure of mainstream financial filings and instead accepts the practice of having the formats in sustainability reports.

Materiality

In terms of materiality, SASB and TCFD adhere to the accountant standards of financial materiality to investors over the long term.

SASB offers a Materiality Map that maps the financial material issues over 77 industries, and notes which accounting metrics they recommend reporting out for each of the issues.

GRI relies on companies to determine on their own material issues that may have an impact on society. GRI companies generally include the information in their CSR reports with the GRI index tied to the standards that the companies have selected based on their own materiality assessments. The data goes into a database that GRI makes free to the public.

Timing Matters

Brauer noted that history has played an important role in how these frameworks are currently viewed. GRI and CDP had a greater head start in the US and in terms of global market penetration as they’ve been around for more than two decades.

SASB and TCFD are newcomers, but they’re quickly gaining momentum with both companies and investors in the US and abroad. “That’s evidenced by the more global participation in the investor advisory group that SASB has, as well as their work with other reporting frameworks,” says Brauer.

Other Investment Considerations

In addition to the environment, Morris could not emphasis enough the importance of the human capital piece for investment decisions. Especially with regards to wellness and safety, and diversity. Morris says that it isn’t just what is on a company’s diversity report that is important, but how they are ensuring that people have the opportunity to move up. “Then you know companies are walking the talk,” she says. Are companies providing training opportunities to help people move up, for example?

Investors are also looking at compensation plans. Investors want the metrics to match with the company ESG actions, for example.

Other investment considerations include bringing employee voices into the boardroom, more paid sick leave, PE ratio, and gender and racial equality issues.

Bringing it Back to the Environment

Then there is also a demand for environmental justice, says Morris. How are companies impacting the communities in which they are operating or which they are bordering?

“The environmental issues are still just as important, and I think that the pandemic has really highlighted the importance of what something on one part of the Earth can do and how it can have an impact throughout the planet,” Brauer said.

For that reason, there are increased requests for TCFD disclosures, particularly scenario analysis. There is also a focus on political lobbying and whether a company’s political activities and spending are consistent with the public statements that they are making about the Paris Climate Accord, for example.

The COVID Reset

COVID-19 has helped us reset, says Morris. “It has offered investors a time to think through how can we really make some changes happen and to work more collaboratively with our companies.”

Investors are no longer ready to settle on one item on their request, she continues, but are looking to be sure that companies are implementing requests in a robust way.

For this reason, there is a need for companies to continue to educate themselves about the various frameworks. Executives should reach out to their stakeholders and find out what is important to them; what are they looking for in terms of disclosure and engagement.

The panelists agree that this is a big moment in history. The world is seeing great societal change and creativity. Investors and stakeholders are trying to think outside the box to obtain better and greener solutions. And they expect companies to take a big role in this.

“I think it’s critical to be thinking along those lines,” says Brauer, “because…we can see significant things happening that we couldn’t have imagined as recently as six months ago.”

“We want our companies to succeed,” says Morris. “It’s all about being sustainable.”

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Laurie Toupin