The State of Sustainable / ESG Investment in 2018: The State of Corporate Sustainability Reporting & How We Got Here

by Hank Boerner – Chair & Chief Strategist, G&A Institute

In this issue of our weekly newsletter we brought you two important Top Stories that capture the state of sustainable investing from varying points-of-view. 

We selected these research efforts for their value to both corporate managers and investment professionals.

  • Corporate staff can use the findings to “make the case” upward to C-suite and boardroom using both documents.
  • Investors not yet on board with Sustainable / ESG investing can gain valuable insights from both reports.

First is the report by Guido Giese and Zoltan Nagy at MSCI – “How Markets Price ESG” – addressing the question “have changes in ESG scores affected market prices?”

MSCI examines the changes in companies ESG scores, “ESG momentum” — either strong or negative for the companies being rated. Using the firm’s model, the research showed that markets reacted “most sensitively” to improvements in a public company’s characteristics rather than to declines in ESG performance, among many other takeaways in the full report.

The takeaway is that changes in ESG profiles of companies certainly affect company valuations.  The change in ESG characteristics showed the strongest move in equity pricing over a one-year horizon compared to shorter or longer time frames.  The report contains a well designed, thorough methodology which clearly demonstrates the importance of a public company’s ESG profile.

The MSCI score, the authors point out, is a proxy for the ESG-related information that the market is processing. (All MSCI ESG scores are updated at least once a year.)  There’s good information for both corporate managers and investment professionals in the 25-page report.

The second report is a snapshot of the “State of Integrated and Sustainability Reporting 2018” — issued by the Investor Responsibility Research Institute (IRRCI)Sol Kwon of the Sustainable Investments Institute (Si2) is the author and colleague Heidi Welsh is editor.  (IRRCI and Si2 regularly publish research reports together.)

The report charts the evolution of corporate sustainability reporting, which got off to a modest start in the 1980s – then on to the 1990s when corporate sustainability reports as we know them today as investors and companies adopted ESG or Triple Bottom Line approaches.

Key:  Another transition is underway, writes author Kwon, the “value creation” (a/k/a shared value) which should lead to more holistic reporting of inputs and outputs…and the emergence of the integrated report.

In 2013, IRRCI had Si2 look at the state of integrated reporting among the S&P 500® companies and examined practices again for this year’s report.  (The earlier work focused on what companies were reporting without regard to status as “mandated” or “voluntary” disclosure.)  Much progress has been made – for one thing, investor attention on ESG matters is much higher today…making corporate sustainability reporting ripe for the next phase.

The details are set out for you in the IRRCI report including trends and examples in use of reporting frameworks (GRI, SASB, IIRC), Quality, Alignment with SDGs, Inclusion of Sustainability in Financial Reports, Investor Engagement / Awareness, Board Oversight, Incentives, and many other important trends.

This an important comprehensive read for both corporate managers and investment professionals, with a sweep of developments presented in an easy-to-read format.

Example:  What drives ESG integration into investment strategy?  The drivers are identified and presented in a graphic for you.

Important note for you regarding IRRCI:  in 2019 the organization’s intellectual properties will be assumed by the Weinberg Center at the University of Delaware.  The center conducts research and holds conferences on corporate governance and related issues and is headed by Charles Elson, one of the most highly-regarded thought leaders on corporate governance in the U.S.

Important Study on ESG Momentum by MSCI: 
https://www.msci.com/www/research-paper/how-markets-price-esg-have/01159646451

State of Integrated and Sustainability Reporting 2018:
https://irrcinstitute.org/wp-content/uploads/2018/11/2018-SP-500-Integrated-Reporting-FINAL-November-2018.pdf

Attention Boards & CEOs: The Conference Board Has Important Insights to Share To Help Your Company…Survive and Succeed!

by Hank Boerner – Chairman, G&A Institute

The Conference Board is one of the most prestigious and important (for corporate managements) of our membership business associations, as well as credible research think tank on management issues and topics. The Board has long had corporate governance in focus and has been a major factor in helping to advance effective, responsive, accountable governance in the USA.

The Conference Board was one of the early organizations serving boards, C-suite and key functional managers to expand the governance research and advisory services to include social and environmental issues & topics: ESG is on the of the agenda for many aspects of Board operations.

Members of boards and CEOs and C-suite-ers receive Director Notes on key topics and issues with practical advice needed to improve performance and better serve society.

Today’s issue of Director Notes is worthy of close reading — and re-reading — by sustainability professionals: “Navigating the Sustainability Transformation.” The introduction is bold:

“CEOs and Directors making key business decisions regarding the company’s strategy for the year ahead and beyond would be well-advised to change the current boardroom conversation. Driven by factors tied to sustainability, over the next 15 years, every company in every industry sector will need to transform itself to survive and succeed. Board members, CEOs and he executives advising them need to ask: “How should we plan for this major transformation?” (emphasis mine)

The report describes a four-stage model for companies to progress from engaging initially with sustainability to accelerating, leading, and ultimately transforming their business.”

Addressing the practical aspects of corporate sustainability (board style), the report focuses attention on a host of corporations that are embracing sustainable strategies, actions, programs, engagements.  These include “new brands” such as Airbnb, Google, Tesla, and Uber — all of which have disrupted old business models and achieved leadership – fast! — in their categories (Airbnb vs. the hotel business, Tesla vs. old line auto manufacturers, etc.).

Established companies — some dating back a century or more — are featured in the report, with explanations of how they have achieved success (and frankly, heartily survived) in a business environment (and investment mindset) where disruption is prized over proven models.  These old-line companies have succeeded by being transformation, often disrupting their own cash cows!

Examples include:  3M; General Electric (with its Eco-magination); BMW; DuPont; Dow; Unilever; Michelin; HP; SC Johnson; Nike; Kimberly Clark; McDonalds; Wal-mart Stores; Starbucks; NRG Energy; Newmont Mining; Coca-Cola Company; IKEA; Interface; Sony; BT; Tesco; Azko Nobel; Xcel Energy; and Waste Management;.

Waste Management’s transformation from a traditional waste hauler to strategy and service provider to corporate customers is one highlight of the report.

Sustainability professionals will want to read The Conference Board report’ views on the 4 stages of progression for companies. I think this could become a top-of-agenda discussion in board rooms and C-suites in the weeks ahead.

The stages are (1) engagement with sustainability; (2) accelerating progress; (3) leading (sector, industry, peers, etc); (4) transforming.  There are many companies at stages 1 and 2, a few moving on to 3, and very few to point to as stage 4 (yet).  Many companies exhibit characteristics of stages 1 and 2 — these are examples in the report.

Moving into the transformation stage is challenging, of course. Given the dramatic upheaval in so many businesses, in such a short period of time, will make looking ahead 10 or 15 years to the critical period to 2030 and beyond…daunting, for sure.

But there are practical, realistic things going on in our world that make such exercise ( closely examining where your company is in the 4 stages of sustainability) necessary.  Natural resources (“natural capital to many) grows more scarce in many parts of the world.  It looks like there will be stranded assets on many corporate balance sheets (and in investment portfolios) as we shift away from fossil fuels. (We won’t always have plentiful, easy-to-access USD$48 crude oil available!)

The Conference Board report found a few examples of what could pass for stage 4 companies: “Few companies today are solidly at 4, but a growing number of leaders have one or more stage 4 attributes.  Airbnb, Google and Uber are ‘sharing economy’ companies; DuPont, Novelis, Unilever, and Waste Management are examples of long-established enterprises…”:

The 4-Stage Model is explained in the report.  We can see this having a powerful impact, similar to Professor Michael Porter’s work with Mark Kramer: “Creating Shared Value” (Harvard Business Review, January 2011).

the Conference Board makes the report(s) available for your reading — information is at:  https://www.conference-board.org/publications/publicationdetail.cfm?publicationid=2885

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The Director Notes are a series of publications the Board engages experts from various disciplines to contribute to, including experts in leadership, corporate governance, risk oversight, and sustainability.

The current issue was authored by Gilbert (Gib) Hedstrom, principal of Hedstrom Associates.  Content includes excerpts from his coming book, “The Sustainability Scorecard TM Handbook/”  Hedstrom is director of the Conference Board’s Sustainability Council.  He invited me to be guest presenter on corporate sustainability reporting and related topics at a recent Council meeting in Washington, D.C.

Matteo Tonello is managing director for corporate governance at The Conference Board; he is editor of the Director Notes series.

Melissa Aguilar is a researcher in the corporate leadership department of the board and is executive editor of the series.

Conference Board information is at: http://www.conference-board.org/