IRC Domain 1: IR Strategy Formation
Summary by Bess Gallanis
Panelists:
- Sarah Corrigan, Principal Consultant, BrownFlynn
- Nicolai Lundy, Director of Education and Partnerships, SASB
Moderator: Dan Romito, Global Head of Investor Analytics, Nasdaq
Key Takeaways
There’s a big disconnect between investors and third-party research, ratings and rankings vendors. A little history about the evolution of ESG information vendors explains a lot about the investment community’s dissatisfaction with third-party research.
Between 2012 and 2018, responsible investment increased 38 percent – and assets allocated to ESG strategies increased fivefold to $10 trillion. During the same period, CSR reporting also increased significantly. By 2018, a majority of S&P 500 companies were reporting CSR performance, providing researchers with new data sets to study. It was inevitable that demand for third-party research would entice new vendors into the market.
The problem with third-party research is that much of the CSR data is embedded in CSR reports, while investors are focused on SEC filings focused on business issues and financial impact rather than corporate citizenship. “Most corporate sustainability reports speak to stakeholders, rather than shareholders,” said Nicolai Lundy. This also explains the low correlation between an individual company’s ESG ratings from the various ratings firms.
Sarah Corrigan predicted that ratings will become more prominent as the rating agencies merge, reducing the number of ESG ratings to consider. ISS has made four acquisitions in as many years. Chicago-based Morningstar owns a 40 percent interest in Dutch company Sustainalytics. Earlier this year, Moody’s acquired Vigeo EIRIS, a French research and rating agency, signaling the importance of ESG factors to the debt markets. (See page 4 of Corrigan’s “ESG Factors, Rating Firms and Third-Party Validation” presentation below.)
A roadmap to the confusing landscape of ESG research, ratings and rankings. Understanding the flow of data through the ESG vendors is helpful to IROs. Corrigan pulled back the curtain and reviewed the most prominent ESG organizations. The first group of ESG researchers actively request information from companies, aggregate data and add performance ratings. A second group of high-profile names, such as MSCI, ISS ESG and Thomson Reuters’ Refinitiv, passively pull information from sustainability reports, aggregate data and add performance ratings based on their proprietary process. A third group of ESG information providers purchase data and ratings from other companies and add rankings. If you don’t like your ranking in Fortune’s 100 Best Companies to Work For, blame it on the magazine’s data source. (See page 3 of Corrigan’s “ESG Factors, Rating Firms and Third-Party Validation” presentation below.)
Tips for engaging with ratings agencies. Corrigan encouraged IROs proactively monitor and address inaccuracies in their companies’ ESG ratings. Bloomberg subscribers can download ESG data for review. (Bloomberg’s data sources are RobecoSAM/DJSI, ISS and Sustainalytics.) Request your reports from MSCI, ISS and Sustainalytics. Engage with these firms to discuss their methodologies and request corrections that you can support with publicly available information.
Strike a balance between ESG risk and reward. Corrigan expressed concern that so many third-party ratings are risk-focused. Lundy said investors see ESG performance as a signal for fundamental risk. Corrigan sees the lack of a value creation measurement to be a big gap in the current ESG ratings process. She believes that ESG performance is generated through a balance between ESG risk management and ESG opportunities that generate returns. To get there, collaborate across your company to build your ESG management and disclosure practices. Integrate both sides of the ESG performance formula into your overall business strategy for long-term value creation and protection. Lundy concluded, “As the field evolves, the financial impact of ESG is getting clearer.”
About the SASB ESG reporting framework. There is no shortage of ESG disclosure frameworks, and many companies use multiple sources to report their corporate sustainability performance. In sharp contrast to stakeholder reporting, the SASB ESG disclosure framework reflects the shift to shareholder reporting by focusing on five to six material sustainability factors for each industry that are likely to impact financial performance. Lundy illustrated evolving ESG performance reporting with a case study of JetBlue.
Should SEC filings include ESG performance reporting? The concept of separately reporting ESG factors in isolation from other business disclosures stands in stark contrast to the integrated reporting framework supported by the International Integrated Reporting Council (IIRC) in Europe. “Integrated reporting is not stapling your 10k to your sustainability report,” said Corrigan. SASB’s view has long been that all material ESG information should be disclosed in a 10-K. Lundy said SASB has since pulled back from this recommendation because inclusion of information in a 10-K versus a CSR report could create the risk of liability. This is a unique scenario to the United States, created by the limitations of GAAP accounting and the States’ litigious culture. Nasdaq opposes including ESG reporting in the 10-K, said Dan Romito. “It’s already hard enough to be a public company!”
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