Corporate Sustainability – A Converging Opportunity to Simultaneously Reduce Carbon Emissions and Optimize Multi-Tier Supply Chain Risk?

April 2021

by Pam Styles – Fellow, G&A Institute and Principal & Founder of Next Level Investor Relations LLC

There may be a converging opportunity for companies to accelerate total carbon emissions reductions (Scopes 1, 2 and 3) in collaboration with critical efforts to better understand and mitigate multi-tier supply chain risks that were revealed by the COVID-19 pandemic.

Expansive coverage of emerging trends supporting this thesis is presented in the Resource Paper, The Carbon Key: Transcending ESG Disclosure Frameworks Consolidation and Accelerating Supply Chain Awareness, newly published on the Governance & Accountability Institute website.

HIGHTLIGHTS

✔  A noticeable increase in the number of new articles combining observations about CO2 and supply chain, including articles from the World Economic Forum, The Wall Street Journal and CDP, formerly known as the Carbon Disclosure Project.

✔  Articles supporting the idea that conditions may already exist for the commercial business sector to make real and lasting emissions reductions on its own – sooner and better – than to wait for geo-political negotiations and distant reduction target dates.

✔  Introduction to complementary opportunities for individual companies and the commercial business sector to focus on supply chain CO2 contributors and reductions that are material.

✔  A challenge to imagine if carbon emissions disclosure and performance tracking were prerequisites to resume sourcing from pre-Covid suppliers.

Thinking of these trends from an Investor Relations and ESG communications vantage, with some rudimentary optimization modeling exposure, it is suddenly compelling to take a look at Scope 3.

SCOPE 3 – “THE CARBON KEY”

Scope 3 CO2 emissions include both upstream and downstream categories.

Using guidelines published by the Global Reporting Initiative (GRI) for layman’s interpretation, Scope 1 (direct) and Scope 2 (indirect) CO2 emissions are defined as coming from sources owned or controlled by an organization; Scope 3 CO2 emissions are a consequence of an organization’s activities, but occur from sources not owned or controlled by the organization.

An excerpt from the Scope 3 guidelines points to, “The reporting organization can identify other indirect (Scope 3) emissions by assessing which of its activities’ emissions… contribute to climate change-related risks, such as financial, regulatory, supply chain, product and customer … “

Upstream categories, at least the first four listed below, could be constructive additions to supply chain optimization models. In this way, companies could assess Scope 3 emissions improvement performance indicators for each potential supplier in a similar way as cost inputs are compared for low-cost sourcing optimization in supply chain modeling and actual procurement decision-making.

SCOPE 3 – CO2 EMISSIONS

Upstream categories

Downstream categories

1. Purchased goods and services

1. Downstream transportation and distribution

2. Capital goods

2. Processing of sold products

3. Fuel- and energy-related activities (not included in Scope 1 or Scope 2)

3. Use of sold products

4. Upstream transportation and distribution

4. End-of-life treatment of sold products

5. Waste generated in operations

5. Downstream leased assets

6. Business travel

6. Franchises

7. Employee commuting

7. Investments

8. Upstream leased assets

Other downstream

Other upstream

 

Source: Global Reporting Initiative Standards GRI KPI 305 – Emissions

CONTEMPLATE & CONSIDER
The Carbon Key article introduces several questions and things to contemplate:

  1. How might companies quickly re-evaluate their supply chain optimization decisions in the immediate post-Covid recovery?

  2. Imagine how different management decisions might be if all layers of CO2 emissions were factored into the total cost of ownership (TCO) in supply chain decisions and risk mitigation.

  3. Notice similarities between companies’ struggle to capture and report Scope 3 CO2 emissions and of supply chain tiers mapping challenges.

    A recent study found, that while 91% of companies can identify the physical location of most or all of their Tier 1 supplier facilities, only 17% could do so of their Tier 3 supplier facilities.

  4. Companies’ leadership and understanding of its complete carbon footprint may be rapidly put to the test as capital markets and respective raters’ increase their attention on this issue.


The ESG/Sustainability field has been quietly maturing in the business sector, while the U.S. and global government sector has been distracted by the pandemic.

✔  The latest annual trends tracking conducted by the Governance & Accountability Institute shows 90% of S&P 500 and 65% of Russell 1000 companies produced sustainability reports as of 2019.

✔  In September 2020, five of the most globally recognized ESG voluntary reporting frameworks – GRI – CDP – SASB – IIRC – TCFD – announced they have pledged to work together in harmonizing ESG framework guidelines.

✔  As these five entities attempt to harmonize guidelines, other entities and collaborations have recently announced development of new ESG disclosure frameworks, i.e., CFA, the Big Four accounting firms, International Business Council (IBC).

✔  ESG-related data suppliers and aggregators continue to assert influence with frequent announcements of new ESG ratings and syndication arrangements to meet the growing information demand.

✔  Carbon emissions is one topic that transcends differences across most of the major voluntary ESG reporting frameworks. No matter which framework guideline(s) a company chooses to use, Scope 1, 2, or 3 CO2 emissions guidelines generally refer to the globally accepted methodology referred to as the Greenhouse Gas (GHG) Protocol. The carbon key can unlock interconnections to aid ESG framework harmonization.

CLOSING THOUGHTS
Talk to each other! Forget about internal silos and collaborate between teams.

There is every reason to believe that company experts can look at the carbon key to find faster, focused and efficient ways to mesh two seemingly different challenges – supply chain tiers risk and Scope 3 CO2 emissions reduction – for optimization that delivers real return on investment.


Pamela Styles – Fellow, G&A Institute – is Principal and Founder of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.

 

On Corporate Risk Strategy, Sustainable Actions & Outcomes – What’s the Best Ways to Report on ESG to Stakeholders?

April 2021

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

Buzz… Buzzz… Buzzzzz! The current buzz among key stakeholders – investors, corporate boards & management, NGOs, government regulators, stock exchanges, ESG raters & rankers, ESG corporate disclosure standards and frameworks managers – is centered on “Quo Vadis”…where do we go from here!

The good news is that the lively discussions underway appear to be indicating progress in the global drive to achieve more holistic, meaningful, accurate, comparable, understandable corporate ESG disclosure approaches.

One, to help publicly-traded company managements understand and provide transparency for the data sets, metrics and narratives that asset owners and their managers, and (2) to help creators of sustainable investing products in their expanding analysis of companies of all market cap sizes.

Influential players are part of the discussion.

Example: The World Economic Forum (WEF) published a White Paper in January 2020 to set out a framework to bring sustainable reporting frameworks & standards into a common and consistent system of metrics. This, to help investors and companies attain sustainable value creation and accurately disclose on same. WEF suggests a set of 22 Core metrics and a range of Expanded metrics to start with.

At the same time the “Big Five” of the global corporate sustainability disclosure and reporting frameworks and standards organizations are collaborating and recently published a shared vision of the elements necessary for achieving more comprehensive and holistic corporate sustainability reporting.

The five organizations are: CDP; the Climate Disclosure Standards Board (CDSB); Global Reporting Initiative (GRI); International Integrated Reporting Council (IIRC); Sustainability Accounting Standards Board (SASB). Plus TCFD, the Task Force for Climate Related Financial Disclosure, created by the Financial Stability Board (FSB), a G20 nations organization.

Joining the effort: The European Commission; IOSCO (global government securities regulators organization); WEF’s International Business Council; and IFRS.

Each issue of the G&A Sustainability Highlights newsletter we bring you information about the above and much more related to the increasing tempo of the buzzzzz on corporate sustainability disclosure and reporting.

The discussions are taking place worldwide as leadership in public sector, private (business/corporate) sector and social sector address a widening range of ESG issues that will over time determine what kind of world we’ll live in.

See: meeting the challenges of climate change multiple issues, diversity & inclusion, populations deciding on democracy or authoritarianism, having ample food supplies or facing starvation, providing equality of opportunities & outcomes, pandemics to come, rapidly disappearing natural resources, political financing, a range of labor/workforce challenges…and more.

The content silos in our newsletter are designed to help you scan and select the news and perspectives we gather for you each issue.

The G&A Institute’s “Sustainability Headquarters” (SHQ) web platform has many more items selected by our editorial team led by EVP Ken Cynar for you. He’s assisted in these efforts by G&A’s Amy Gallagher, Reilly Sakai, Julia Nehring, Elizabeth Peterson, Lucas Alvarez, Lou Coppola, and Hank Boerner. All of this is team effort! Check the expanded related contents not in the newsletter on SHQ!

We constantly monitor all of the above issues — the global ESG disclosure buzz! — and participate in certain of the conversations as guiding the ESG disclosure and reporting of our corporate clients is at the core of the G&A Institute mission.

TOP STORIES

Eyes on Financial Accounting and Reporting Standards – IASB & FASB Consider “Convergence” and Separate Actions

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

March 2021

Investors Call For More Non-Financial Standards for Corporate Reporting, Less Confusion in “Voluntary” Disclosure.

Should there be more clarity in the rules for corporate sustainability accounting and reporting as many more investors embrace ESG/Sustainable analysis and portfolio management approaches?

Many investors around the world think so and have called for less confusion, more comparability, more credible and complete corporate disclosure for ESG matters.

Accounting firms are part of the chorus of supporters for global non-financial disclosure standards development.

Where and how might such rules be developed? There are two major financial accounting/reporting organizations whose work investors and stakeholder rely on: The International Accounting Standards Board (IASB) and in the United States of America, the Financial Accounting Standards Board (FASB). Both organizations develop financial reporting standards for publicly traded companies.

There are similarities and significant differences in their work. The US system is “rules-based” while the IASB’s approach has been more “principles-based” The differences have been diminishing to some degree with the US Securities & Exchange Commission more recently embracing some principles-based reporting.

By acts of the US Congress, FASB (a not-for-profit) was created and has governmental authority to impose new accounting rules — while the IASB rules are more voluntary.

The US system has “GAAP” – Generally Accepted Accounting Principles for guidance in disclosure. The adoption of IFRS is up to individual countries around the world (144 nations have adopted IFRS).

The IASB standards are global; these are the “IFRS” (International Financial Reporting Standards) issued by the IASB.

The FASB standards are used by US-based companies. For years, the two organizations have tried to better align their work to achieve a global financial reporting standard – “convergence”.

The IFRS Foundation is based in the United States and has the mission of developing a single set of “high-quality, understandable, enforceable and globally-accepted accounting standards (the IFRS), which are set by IASB.

In 2022 IASB and FASB will have a joint conference (“Accounting in an Ever-Changing World”) in New York City to “…strengthen connections between the academic and standard-setting communities…” and explore differences and similarities between US GAAP and IFRS Standards.

Consider that the Financial Stability Board (FSB), which launched the TCFD, is on record in support of a single set of high-quality global accounting standards.

Convergence. In the USA, the “whole of government” approach to the climate crisis by the Biden-Harris Administration may result in encouragement, perhaps even rules for, corporate ESG disclosure. The IASB is not waiting.

The IFRS Foundation Trustees are conducting analysis to see whether or not to create another board that would issue global standards for sustainability accounting and reporting.

A proposal will come by the time of the UN Climate Change Conference this fall. Should the IFRS foundation play a role? The International Federation of Accountants (IFAC) thinks so.

Many questions remain for IASB and FASB to address, of course. This is a complex situation, and we bring you some relevant news in the newsletter this week.

TOP STORIES

Here’s an update from the IFRS Foundation and what is being considered:

Meanwhile, the European Commission separately is exploring how to strengthen “non-financial” reporting – there’s the possibility that there could be EU standards developed:

Helpful information about the FASB-IASB differences:

Expanding Public Debates About the “What” & “How” of Corporate ESG Disclosure

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

March 2, 2021

Corporate sustainability / ESG reporting — What to disclose? How to frame the disclosures (context matters!)? What frameworks or standards to use?  Questions, questions, and more questions for corporate managers to consider as ESG disclosures steadily expand.

We are tuning in now to many more lively discussions going on about corporate ESG / sustainability et al public disclosures and structured reporting practices — and the growing complexity of all this disclosure effort, resulting often in disclosure fatigue for corporate practitioners!

Corporate managers ponder the important question:  which of the growing number of ESG frameworks or standards to use for disclosures? (The World Economic Forum (WEF) describes some 600 ESG guidelines, 600 reporting frameworks and 360 accounting standards that companies could use for reporting.  These do vary in scope, quantity, and quality of metrics.)

In deciding the what and how for their reporting, public companies consider then the specifics of relevant metrics and the all-important accompanying narrative to be shared to meet users’ rising information needs…in this era of emergent “stakeholder capitalism”.

Of course, there is the question for most companies of which or what existing or anticipated public sector reporting mandates will have to be met in various geographies, for various sectors and industries, for which stakeholders.

We here questions such as — how to get ahead of anticipated mandates in the United States if the Securities & Exchange Commission (SEC) does move ahead with adoption of new rules or at least strong guidance for corporate (and investor) sustainability reporting.

The European Union is today ahead in this area, but we can reasonably expect the USA to make important moves in the “Biden Climate Administration” era.  (The accounting standards boards are important players here as well as regulatory agencies in the sovereign states.)

Company boards, executive committees, professional staff, sustainability team managers wrestle with this complex environmental (for ESG disclosure) as their enterprises develop strategies, organize data flows, set in place data measurement protocols, and assemble the ESG-related content for public disclosure. (And, for expanded “private sharing” with ESG ratings agencies, credit risk agencies, benchmark/index managers, to meet customer ESG data requests, and more).

The list of issues and topics of “what” to disclose is constantly expanding, especially as institutional investors (asset owners and their managers) develop their “asks” of companies.

Climate change topics disclosure is at the top of most investor lists for 2021. Human Capital Management issues have been steadily rising in importance as the COVID-19 pandemic (and spread of variants) affects many business enterprises around the globe.

In the USA, SEC has new guidance for corporate HCM disclosures.  Political unrest is an issue for companies.  Anti-corruption measures are being closely examined.

Diversity & Inclusion (including in the board room and C-suite) is growing in importance to investors.

Also, physical risk to corporate assets in the era of superstorms and changing weather patterns – what are companies examining and then reporting on?  Exec compensation with metrics tied to performance in ESG issues is an area of growing interest.

We are monitoring and/or involved in multiple discussions and organized initiatives in the quest to develop more global, uniform, comparable, reliable, timely, complete, and assured corporate sustainability metrics, and accompanying narrative.  And, to provide the all-important context (of reported data) – what does the data mean?  It’s a complicated journey for all involved!

This week we devote the content of this week’s Highlights newsletter to various elements of the public discussions about the many aspects of the journey.

Here at G&A Institute, our team’s recommended best practice:  use multiple frameworks & standards that are relevant to the business and meet user needs; these are typically then disclosed in hybridized report where multiple standards are harmonized and customized for the relevant industries and sectors of the specific company’s operations and reflect the progress (or even lack of) of the enterprise toward leadership in sustainability matters.

This approach helps to reduce disclosure fatigue for internal corporate teams challenged to choose “which” framework or standard and the gathering of data and other content for this year’s and next year’s ESG disclosures.

We shared our thoughts in a special issue of NIRI IR Update, published by the National Investor Relations Institute, the important organization for corporate investor relations officers:


Here are our top selections in the content silos for this week that reflect the complexity of even the public debates about corporate ESG disclosure and where we are in early-2021.

TOP STORIES

The ever-evolving world of ESG investing from a few different points of view. What are the providers of capital examining today for their portfolio or investable product decision-making?  Here are some shared perspectives:

Watching the Major Stock Indexes – For Strong ESG Signals from the Corporate Sector

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

October 2020

Indexes – Indices – Benchmarks – these are very important financial analysis and portfolio management tools for asset owners and their internal and external managers.

We can think of them as a sort of report card; fiduciaries can track their performance against the benchmark for the funds they manage; financial sector players can develop products for investment (mutual funds, Exchange Traded Funds, separate accounts and so on) to market to investors using the appropriate benchmark.

If the investable products are focused on the available equities of the largest market cap companies for investment, the most widely-used indexes will likely be the S&P 500®, created back in March 1957 by Standard & Poor’s and the Russell 1000®, created in 1984 by the Frank Russell Company.

Today the S&P 500 Index is managed by the S&P Global organization.  The Russell 1000 is managed by FTSE Russell, a unit of the LSE Group (London Stock Exchange Group).

There are more or less 500 corporate entities in the S&P 500 Index that measures the equity performance of these companies (those listed on major exchanges).

There are other important indexes by S&P for investors to track:  The S&P Global 1200, S&P MidCap 400, and S&P SmallCap 600, and many more.

Russell 1000® is a subset of the Russell 3000®; it is comprised of the 1000 largest market cap companies in the USA. The R1000 represents more than 90% of the USA’s top publicly-traded companies in the large-cap category.  Both indexes are very important tools for professional investment managers and send strong trending signals to the capital markets.

The G&A Institute team closely tracks the ESG and sustainability  disclosure & reporting practices and each year; since 2010 we’ve published research on the trends, first with the S&P 500, and for 2019 and 2020, we expanded our research into to the larger Russell 1000 index. (The top half of the 1000 roughly mirrors the S&P 500.)

The 500 and 1000 companies are important bellwethers in tracking the amazing expansion of corporate sustainability reporting over the past decade.  Yes, there were excellent choices of select benchmarks for sustainable and responsible investors going back several decades – such as the Domini 400, going back to 1990 — and we tracked those as well.  (The “400” was renamed the MSCI KLD 400 Social Index in 2010).

But once major publicly-traded companies in the United States began escalating the pace of sustainability and ESG reporting, many more investors paid attention.  And media tuned in.  And then the ESG indexes proliferated like springtime blooms!

Those bigger customers (the large cap companies) of other firms began expanding their  ESG “footprint” and considering the supply and sourcing partners to be part of their ESG profile.  So, customers are now queried regularly on their ESG performance and outcomes.

Once the critical mass — 90% of large-cap U.S. companies reporting in our latest S&P 500 research – how long will it be for many more mid-caps, small-caps, privately-owned enterprises to follow the example?  Very soon, we think.  And we’re closely watching!  (And will bring the news to you.)

If you have not reviewed the results of the G&A Institute research on the ESG reporting of the S&P 500 and the Russell 1000 for 2019, here are the links:

Note:  Click here for more helpful background on the S&P 500 and the Russell 1000 large equities/stock indexes, here is Investopedia’s explanation.

Excellent Wrap up From GreenBiz:
At last, corporate sustainability reporting is hitting its stride

Corporate Sustainability Reporting: Changes in the Global Landscape – What Might 2021 Bring?

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

Change is a-coming – quite quickly now – for corporate sustainability reporting frameworks and standards organizations.  And the universe of report users.

Before the disastrous October 1929 stock market crash, there was little in the way of disclosure and reporting requirements for companies with public stockholders. The State of New York had The Martin Act, passed in 1921, a “blue sky law” that regulates the sales and trades of public companies to address fraud issues.  That was about it for protecting those buying shares of public companies of the day.

Under the 100 year old Act, the elected New York State Attorney General is the “Sheriff of Wall Street — and this statute is still in effect. (See: AG Eliot Spitzer and his prosecution of the 10 large asset managers for analyst shenanigans.)

President Franklin Delano Roosevelt, elected two-term governor of NY before his election to the highest office in November 1932, brought along a “brains trust” to Washington and these colleagues shaped the historic 1933 Securities Act and 1934 Securities Exchange Act to regulate corporate disclosure and Wall Street activities.

Story goes there was so much to put in these sweeping regulations for stock exchanges, brokerage houses, investor protection measures and corporate reporting requirements that it took two different years of congressional action for passage into law in the days when Congress met only briefly and then hastened home to avoid the Washington DC summer humidity and heat.

The Martin Act was a powerful influence on the development of foundational federal statutes that are regularly updated to keep pace with new developments (Sarbanes-Oxley, 2002, updated many portions of the 1934 Act).

What was to be disclosed and how? Guidance was needed by the corporate boards and executives they hired to run the company in terms of information for the company’s investors. And so, in a relatively short time “Generally Applied Accounting Principles” began to evolve. These became “commonly accepted” rules of the road for corporate accounting and financial reporting.

There were a number of organizations contributing to GAAP including the AICPA. The guiding principles were and are all about materiality, consistency, prudence (or moderation) and objectivity like auditor independence verifying results.

Now – apply all of this (the existing requirements to the Wild West of the 1920s leading up to the 1929 financial crash that harmed many investors — and it reminds one of the situations today with corporate ESG, sustainability, CR, citizenship reporting.  No generally applied principles that all can agree to, a wide range of standards and frameworks and guidance and “demands” to choose from, and for U.S. companies much of what is disclosed is on a voluntary basis anyway.

A growing chorus of institutional investors and company leaders are calling for clear regulatory guidance and understanding of the rules of the road from the appointed Sheriffs for sustainability disclosures – especially in the USA, from the Securities & Exchange Commission…and the Financial Accounting Standards Board (FASB), now the two official keepers of GAAP.

FASB was created in the early 1970s – by action of the Congress — to be the official keeper of GAAP and the developer of accounting and reporting rules.  SOX legislation made it official; there would be two keepers of GAAP — SEC and FASB.  GAAP addressed material financial issues to be disclosed.

But today for sustainability disclosure – what is material?  How to disclose the material items?  What standards to follow?  What do investors want to know?

Today corporates and investors debate the questions:  What should be disclosed in a consistent and comparable way? The answers are important to information users. At the center of discussion: materiality everyone using corporate reports in their analysis clamors for this in corporate sustainability disclosure.

Materiality is at the heart of the SASB Standards now developed for 77 industry categories in 11 sectors. Disclosure of the material is an important part of the purpose that GAAP has served for 8-plus decades.

Yes, there is some really excellence guidance out there, the trend beginning two decades ago with the GRI Framework in 1999-2000. Publicly-traded companies have the GRI Standards available to guide their reporting on ESG/sustainability issues to investors and stakeholders.

There is the SAM Corporate Sustainability Assessment (CSA), now managed entirely by S&P Global, and available to invited companies since 1999-2000. (SAM was RobecoSAM and with Dow Jones Indexes managed the DJ Sustainability Indexes – now S&P Global does that with SAM as a unit of the firm based in Switzerland.)

Since 2000, companies have had the UN Global Compact principles to include in their reporting. Since 2015 corporate managers have had the UN Sustainable Development Goals (SDGs) to report on (and before that, the predecessor UN Millennium Development Goals, 2000-2015). And the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations were put in place in 2017.

The Securities & Exchange Commission (SEC) in February 2010 issied “guidance” to publicly-traded companies reminded corporate boards of their responsibility to oversee risk and identified climate change matters as an important risk in that context.

But all of these standards and frameworks and suggested things to voluntarily report on — this is today’s thicket to navigate, picking frameworks to be used for telling the story of the company’s sustainability journey.

Using the various frameworks to explain strategy, programs, actions taken, achievements, engagements, and more – the material items. Profiling the corporate carbon footprint in the process. But there is no GAAP to guide the company for this ESG reporting, as in the example of financial accounting and reporting.

Institutional investors have been requesting more guidance from the SEC on sustainability et al reporting.  But the commission has been reluctant to move much beyond the 2010 risk reminder guidance even as literally hundreds of publicly-traded companies expand their voluntary disclosure.  And so we rely on this voluntary disclosure on climate change, diversity & inclusion efforts, political spending, supply chain management, community support, and a host of other ESG issues. (Human Capital Management was addressed in the recent Reg S-K updating.)

We think 2021 will be an interesting year in this ongoing discussion – “what” and “how” should companies be disclosing on sustainability topics & issues.

The various providers of existing reporting frameworks and standards and those influencing the disclosures in other ways are moving ahead, with workarounds where in the USA government mandates for sustainability reporting do not yet exist.

We’ve selected a few items for you to keep up with the rapidly-changing world of corporate ESG disclosures in our Top Stories and other topic silos.

There are really important discussions!  We watch these developments intently as helping corporate clients manage their ESG / sustainability disclosures is at the heart of our team’s work and we will continue to keep sharing information with you in the Highlights newsletter.

More about this in The Wall Street Journal with comments from G&A’s Lou Coppola: Companies Could Face Pressure to Disclose More ESG Data (Source: The Wall Street Journal)
TOP STORIES

Corporate Sustainability Performance – Setting the Stage for ESG Data Analysis by Humans and AI Bots Alike

By Pam Styles, Principal and Founder, Next Level Investor Relations, and G&A Institute Fellow

There is an expansive reservoir of ESG data – a.k.a. key performance indicators (KPIs) – across growing corporate ESG disclosure and reporting, commercially advertised metrics and/or data sets subscription access, and proprietary third-party rater, ranker and data provider analytical systems.

While voluntary reporting frameworks and the various third parties jockey for dominance and survival, who is using all this data — and how?

Currently, there are too many ESG-related KPIs and data sets for companies and investors to get a handle on, respond or analyze.  It is impossible to predict how many more KPIs will enter the mix or how soon third-party relationships will naturally consolidate the number of KPI expectations, simply driven by necessity for their own business models’ sustainability.

The corporate disclosure side of this issue is explored in:
The End User Side

Just like corporations, investors have to prioritize which KPIs matter and what reporting framework KPIs, public access information sources, licensed and/or proprietary databases they can rationalize for focus.

CFA-PRI recently joined forces to survey 1100 investment professionals.  Survey results show that fixed income inclusion of ESG in investment decision-making is rapidly catching-up with equity investors.

Source: UNPRI

Analogous to portfolio diversification theory, the number of investments (in both time and money) in ESG data sources has got to naturally reach some optimal number needed to optimize risk/return. Beyond that there is an entire sustainable finance ecosystem too large to address in a simple blog post.

Data Use

There is not an honest person alive who can tell you that they can stay on top of all the current and increasing company ESG data they could analyze, germane to their investment decision-making.

Research of Value

In addition to 90% of S&P 500 companies, Governance & Accountability Institute just announced its annual research update that 65% of Russell 1000 companies also published sustainability reports in 2019 (up from 60% in 2018), including 39% by companies in the smallest half of the index (up from 34% in 2018).

Important Perspective

An article highlighting takeaways from the recent NIRI “Big I – Investor & Issuer Invitational Forum”, quoted speaker Dan Romito, SVP of Business Development & Product Strategy at Nasdaq:

“There is an explosion of non-fundamental data…especially in ESG data…The
SEC found that 90% of data now used in the capital markets has been created during the past two years.”

Artificial Intelligence

AI use as a tool to consume, filter and analyze, huge reservoirs of ESG data is increasingly valuable in investment decision-making. AI providers are jockeying for differentiation and capital.  For instance:

  • AI is being used by investors, such as BlackRock, to not only analyze ESG data that companies are disclosing, but to uncover other information, such as ESG impacts from satellite images of pollution to cars in a parking lot, voice inflection and more.
  • FactSet just announced, on October 20th, a definitive agreement to acquire TrueValue Labs. Founded in 2013, TrueValue is a pioneer in AI-driven ESG data. It applies AI-driven technology to over 100,000 unstructured text sources in 13 languages, to identify positive and negative ESG behavior. Its coverage spans over 19,000 public and private companies.
  • TrueValue LabsTM had previously announced on January 23, 2020, that it was introducing its patent-pending concept of Dynamic Materiality, indicating that every company, industry and sector has a unique materiality signature. The company head of research noted that, “Given how central materiality is to ESG investing and fiduciary duty, it is critical to understand the mechanisms by which ESG factors impact the operational and financial performance of companies.”

The Human Element

“While AI can unearth key data for investors seeking sustainable investments, discerning unreliable information will be a key challenge and humans will not be replaced any time soon.” – as stated in the article titled,  How can AI help ESG investing? –  S&P Global, Sept 2020

“AI is not a replacement for human intelligence, but rather a way to further it… The strategic value of alternative datasets, in particular ESG data, in the financial sector is becoming increasingly visible. As only relevant data has decision-making utility, supervised machine learning is emerging as the most effective mechanism to generate strategic value for businesses.” – Cutting through the noise: demystifying the buzz around artificial intelligence in financial decision-makingRepRisk, Sept 2020

The Final Word

In only the last few years, it became obvious that ESG/Sustainability had finally gone mainstream.  It took over twenty years to catch-on, since the first voluntary ESG reporting framework, GRI, was founded in 1997.  Now it is time to buckle-up for the ride… practically everything ESG/Sustainability-related is advancing at orders of magnitude faster pace than anything we’ve experienced thus far!

Pamela Styles – Fellow G&A Institute – is principal of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.

Celebrating Highlights Issue #500 – And Unveiling a New Design

October 16, 2020

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

Celebrating Highlights issue #500 – this is a landmark achievement, we will say, for this is also the tenth anniversary year of publishing the G&A Institute’s weekly newsletter (G&A Institute’s Sustainability Highlights).  As you will see in reading #500, we are also introducing an enhanced format intended to make the newsletter easier to read or scan as well.

Our G&A Institute’s Sustainability Highlights newsletter is designed to share timely, informative content in topic/issue “buckets” that we think will be of value to you, our reader. So much is happening in the sustainable investing and corporate sustainability spaces these days – and we are working hard to help you keep up to date with the important stuff!

Publishing the Sustainability Highlights newsletter is a team effort here at G&A.

Our company was formed in late 2006 and among our first efforts, Ken Cynar, then and now our Editor-in-Chief, began the daily editing of the then-new “Accountability Central” web site with shared news and opinion. The focus was (and is) on corporate governance, environmental matters, a widening range of societal and corporate-society issues, SRI investing, and more.

Two years later we created the “SustainabilityHQ” web platform – Ken manages content for both platforms today.

Back in those early days there was not the volume of ESG news or opinion pieces that we see today. Whenever we “caught” something of note the rest of the G&A team would quickly share the item with Ken.

Our team had worked together (some for a number of years) at the former Rowan & Blewitt consultancy, specialists in issue management, crisis management and strategic communications for the fortunate Fortune 500s.

That firm was acquired by Interpublic Group of Companies and after 7 years the New York City team created G&A Institute to focus on corporate sustainability, responsibility, citizenship and sustainable & responsible investing.  All of us came equipped with a strong foundation of issue management, risk management, critical issues managements, and corporate communications experience and know-how.

“ESG” had just emerged as a key topic area about the time we began our publishing efforts and soon we saw a steady flow of news, features, research reports, opinions & perspectives that we started sharing.

We had worked on many corporate engagements involving corporate governance, environmental management, a range of societal issues, public policy, and investor activism.  Here it was all coming together and so the G&A enterprise launch to serve corporate clients!

By 2010, as we emerged from the 2007-2008 financial markets debacle, then-still-small-but-solid (and rapidly expanding) areas of focus were becoming more structured for our own information needs and for our intelligence sharing, part of the basic mission of G&A from the start. And so, we created the weekly Highlights newsletter for ease of sharing news, research results, opinion & perspectives, and more.

It is interesting to recall that in the early issues there were scant numbers of corporate CSR or sustainability etc. reports that had been recently published (and so we were able to share the corporate names, brief descriptions of report contents, links of those few reports).  That trickle soon became a flood of reports.

But looking back, it was interesting to see that at the start of the newsletter and our web sites, there were so few corporate sustainability / responsibility reports being published we could actually post them as news for readers. Soon that trickle of corporate reports became a flood.

A few years in, The Global Reporting Initiative (GRI) invited G&A to be the data partner for the United States and so our growing team of ESG analysts began to help identify and analyze the rapidly-increasing flow of corporate reports to be processed into the GRI’s global reporting database.

Hank Boerner and Lou Coppola in the early days worked closely with Ken on the capturing and editing of content.  Lou designed the back end infrastructure for formatting and distribution.

Amy Gallagher managed the weekly flow of the newsletter, from drafts, to layout and then final distribution along with the coordination of a growing body of conference promotions with select partner organizations.

And now with a solid stream of content being captured today, all of this is a considerable effort here at G&A Institute.

Ken is at the helm of the editorial ship, managing the “AC” and “SHQ” web platforms where literally thousands of news and opinion are still hosted for easy access. He frames the weekly newsletter.

Today Ken’s effort is supported by our ESG analysts Reilly Sakai and Julia Nehring and senior ESG analyst Elizabeth Peterson — who help to capture original research and other content for the newsletter.

Hank and Lou are overall editors and authors and Amy still manages the weekly flow of activities from draft to distribution.  Our head of design, Lucas Alvarez, working with Amy created this new format. As you see, it is a team effort!

There is a welcome “flood” — no, a tidal wave! — of available news, research and opinion being published around the world that focuses on key topic areas: corporate sustainability, CSR, corporate citizenship, ESG disclosure & reporting, sustainable investing, and more.  We capture the most important to share in the newsletter and on our web sites.

We really are only capturing a very tiny amount of this now-considerable flow of content, of course, and present but a few select items in the categories below for your benefit.  (The target is the three most important stories or items in each category.)

Much more of the ongoing “capture effort” is always available to you immediately on the SustainabilityHQ web platform (see the “more stories” links next to each category of headlines).

We hope that you find Sustainability Highlights newsletter of value. It’s a labor of love for us at G&A, and we would like to get your thoughts and feedback …including how we can continue to improve it. Thanks for tuning in all of these years to our long-term readers!

TOP STORIES

As example of the timely news of interest for this week we offer these (two) commentaries on the Sustainability Development Goals (SDGs).  We are five years in/with 10 years in which to make real progress…where do you think we are headed?

As students and faculty head back to campus – there’s discussion about “sustainability” and “campus”:

 

Lively Discussions: The Move Toward Harmonized Corporate ESG / Sustainability Reporting

September 22 2020

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

There are lively discussions going on, centered on improving publicly-traded company disclosure and reporting – and especially ESG reporting…that is, storytelling about the company’s “non-financials” (in accounting-speak).  And the story of the corporate sustainability story for those-in-the-know!

The proliferation of ESG / sustainability reporting frameworks, standards, information platforms, industry guidance, stock exchange guidance and much more has been astounding in recent years.

We think of all this as about the organizing of the storytelling about a company’s sustainability journey and what the enterprise has accomplished. 

And why the story matters to society…to investors, employees, customers, suppliers, communities…and other stakeholders.

And it has a been a long journey to the state of today’s expanding corporate ESG disclosure.

The start of mandating of periodic financial and business mandated disclosure goes back to the 1930s with passage of landmark federal legislation & adopted implementation (compliance) rules for publicly-traded companies in the United States.

Corporate financial disclosure in concept is all about providing shareholders (and potential investors) with the information they need to make buy-sell-hold decisions.

The sturdy foundations of mandated corporate disclosure in the U.S. are the laws passed after the 1929 stock market crash – the 1933 Securities Act and 1934 Exchange Act.  These laws and the bodies of rules deriving from them have been constantly updated over the years, including with Sarbanes Oxley legislation in 2002 and Dodd Frank in 2010. These mandate or guide and otherwise provide the rules-of-the-road for financial disclosure for company managements.

Disclosure has steadily moved well beyond the numbers – Sarbanes-Oxley updated the 1930’s laws and addressed many aspects of corporate governance, for example.

Voluntary Disclosure & Reporting – ESG Issues & Topics
Over the past 40 years, beyond the financials, corporate voluntary non-financial disclosure has been steadily increasing, as investors first embraced “socially responsible investing” and moved on to sustainable & responsible & impact investing in the 21st Century.

Asset owner and asset manager (internal and external) requests for ESG information from publicly-traded companies in portfolio has steadily expanded in the depth and breadth of topic and issue areas that institutional investors are focused on – and that companies now address in significantly-expanded ESG disclosures.

Today, investor interest in ESG / sustainability and related topics areas is widespread throughout asset classes – for equities, equity-focused products such as imutual funds and ETFs, fixed-income instruments, and now credit risk, options and futures, fixed assets (such as real estate), and more.

With today’s dramatic increase in corporate sustainability & ESG reporting, the maturation of reporting frameworks and standards to help address the internal need for better organizing non-financial data and information and accompanying ESG financial disclosure.

And all of this in the context of trying to meet investor demands.  Today with expanded ESG disclosure, corporate executives find that while there are more resources available to the company, there is also more confusion in the disclosure process.   Investors agree.

Common Complaints:  Lack of Comparability, Confusion, Demand for Change
The result of increasing demand by a widening range of investors for accurate, detailed corporate ESG information and the related proliferation of reporting frameworks and standards can and has resulted in confusion among investors, stakeholders and companies as to what is important and material and what is frill.

This especially as corporate managements embrace various elements of the available frameworks and standards and industry guidance and ESG ratings for their still-voluntary ESG reporting.

So where do we go from here?  In our selection of Top Stories for you, we bring you news from important players in the ESG reporting process as they attempt to move in the direction of more uniform, comprehensive, meaningful and decision-ready corporate ESG reporting. That investors can rely on.

The news for you is coming from GRI, SASB, GSSB, IIRC, CDSB, and CDP (among others) – all working to get on the same page.

The aim: to benefit corporate reporters – and the users of the reports, especially capital market players.

Because in the end, ESG excellence is all about winning in the competition for access to capital. Accurate, timely, comprehensive comparable ESG information is key!

Top Stories

The Financial Sector and Corporate Universe – the “ESG Factors” Are Now Everywhere When Companies Seek Capital

September 8 2020

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

The roots of today’s “sustainable investing” approaches go back decades; the organizing principle often was often around  what investors viewed as “socially responsible”, “ethical”, “faith-based” and “values” investing, and by other similar titles.

“SRI” over time evolved into the more dominant sustainable or ESG investing in the 21st Century — with many more mainstream investors today embracing the approach.

And busily shaping trends, there is a universe of ESG ratings agencies and information distributors providing volumes of ESG ratings, scores, rankings and opinions to institutional investor clients and a broad base of asset managers, index creators and more.

Recently, the three major credit risk agencies increased their focus on ESG factors for their investor and lending clients.

Access to and cost of capital for companies is a more complicated situation today for financial executives  — and the steady flow of “sustainable investing” products to asset owners and asset managers increases the importance of a publicly-traded firm “being in” the sustainable product for institutional and retail investors.

Such as having the company being present in an ever-wider range of ESG indexes, benchmarks, mutual funds, exchange-traded funds, and now even options and futures.

All of this can and does increase pressures on the publicly-traded corporation’s management to develop, or enhance, and more widely promote the company’s “public ESG profile” that financial sector players will consider when investing, lending, insuring, and more.

The latest expansion / adoption of ESG approaches for investable products are from Cboe Global Markets.

The new “Cboe S&P 500 ESG Index”(r) options (trading starts September 21) will align with investor ESG preferences, says the exchange.

The traditional S&P 500 index is a broad-based equity benchmark used by thousands of investment managers and is the leading equities benchmark representing about 85% of total USA publicly-traded equities (all large-cap companies).  Availability to investment managers of the S&P 500 ESG Index is a more recent development.

The S&P 500® Index (equities) measures the stock performance of 500 large-cap companies whose issues are traded on US stock exchanges.  It was created in 1957.

The newer S&P 500 ESG Index targets the top 75% of companies in the 500 universe within their GICS® industry group.(Exclusions include tobacco, controversial weapons and UNGC non-compliance.) Asset managers link sustainability-focused products for investors to this index, including Invesco and State Street (SPDRs) for their ETFs.

Note that the S&P 500 ESG Index uses S&P DJSI ESG scores and other data to select companies for inclusion —  increasing the importance of the Corporate Sustainability Assessment (CSA) that for two decades has been used to create the Dow Jones Sustainability Indexes (“DJSI”). (The CSA is managed by SAM, now a unit of S&P Global.)

About Futures:  In November 2019 CME Group launched its CME E-mini S&P 500 ESG Index futures as a risk management tools — aligning, it pointed out, with ESG values.

About the CME Group: You probably know the Chicago-based firm by its units, the Chicago Mercantile Exchange, New York Mercantile Exchange, Chicago Board of Trade, Kansas City Board of Trade, and others.  The organization’s roots go back to 1848 as the Chicago Board of Trade was created. This is the world’s largest financial derivatives exchange trading such things as futures for energy, agriculture commodities, metals, interest rates, and stock indexes.

Investors have access to fixed-income instruments and foreign exchange trading (such as Eurodollars).  The “trading pit” with shouted orders and complicated hand signals are features many are familiar with. Of course CME has electronic platforms.

About Cboe Global Markets:  This is one of the world’s largest exchange holding companies (also based in Chicago) and offers options on more than 2,000 companies, almost two dozen exchanges and almost 150 ETFs.  You probably have known it over the years as the Chicago Board Options Exchange, established by the Chicago Board of Trade back in April 1973.  (The exchange is regulated by the SEC.)

The Cboe offers options in US and European debt and equity issues, index options, futures, and more.  The organization itself issued its own first-time ESG report for 2019 performance, “referencing” GRI, SASB, TCFD, SDGs, and the World Federation of Exchanges (WFE), Sustainable Stock Exchanges (SSE) initiatives. Now ESG is part of the mix.

Considering equities, fixed-income, stock indexes, futures, options, mutual funds, exchange-traded funds, financial sector lending, “green bonds” and “green financing” – for both publicly-traded and privately-owned companies the ESG trends are today are very much an more important part of the equation when companies are seeking capital, and for the cost of capital raisedl.

And here clearly-demonstrated and communicated corporate ESG leadership is critical to be considered for becoming a preferred ESG issuer for many more investors and lenders.

Top Stories