IRC Domain 1: IR Strategy Formation
Summary by Bess Gallanis
Panelists:
Ross Campbell, Director of Responsible Investing, Barrow, Hanley, Mewhinney & Strauss
Dan Nielsen, FSA, Managing Director and Senior Portfolio Specialist, Great Lakes Advisors
Tara Patock, CFA, FSA, Portfolio Specialist, William Blair
Moderator: Martin Jarosick, IRC, CFA, Vice President, Investor Relations, CF Industries Holdings, Inc.
Key Takeaways
Not your father’s socially responsible investing. The buy-side panelists emphasized the differences between socially responsible investing (SRI) and environmental, social and governance (ESG) investing. SRI excludes investments that don’t align with a set of closely held personal values. Modern ESG investing identifies and assesses material risks, rewards and opportunities inherent in a company’s corporate sustainability strategy that creates – or destroys – value for investors.
The panelists use proprietary analytics developed in-house to inform their ESG investment strategies. Dan Nielsen explained that the equity fund teams at Great Lakes Advisors analyzes ESG performance for every company in their portfolios using a proprietary materiality assessment. Companies are ranked by risk, with low performers excluded and high performers considered for investment.
At William Blair, Tara Patock said core strategy analysts are responsible for ESG analytics. They use an in-house materiality framework to create a single qualitative ESG performance rating for every company in the portfolio. Additionally, every company receives a separate score for environmental performance, social performance and governance performance.
Ross Campbell said that experienced analysts with industry expertise at Barrow, Hanley, Mewhinney & Strauss are best positioned to make the ESG performance determination. His firm also views ESG performance through a materiality matrix.
To overcome the low correlation between third-party sources of ESG data, the buy-side draws from multiple sources and vendors for research inputs. All the panelists use ESG performance data from MSCI, but only to supplement their proprietary research. Direct engagement with company management provides the most useful ESG research.
Standardized frameworks for ESG are evolving. There is no shortage of ESG reporting frameworks. William Blair is a signatory to the Principles for Responsible Investment (PRI), which is a public commitment to evaluate ESG performance and impact. The Global Reporting Initiative (GRI) aims to set globally accepted standards for ESG performance reporting. Nielsen reports seeing an uptick among companies using the Sustainability Accounting Standards Board (SASB) framework since late 2018, when it issued its final industry-specific reporting standards. Patock believes using the SASB framework “simply makes sense” to preempt pressure on the SEC to require companies to disclose ESG performance. At present, corporate sustainability reporting is not required in SEC filings – which focus ESG disclosures in the risk factors section. This presents an incomplete picture of a company’s ESG performance.
Making sense of third-party ratings. ESG analysis is important to the buy-side, but a third-party standardized score isn’t relevant to a fundamental analyst, Campbell said. However, analysts can’t entirely ignore ESG ratings. MSCI and Sustainalytics send their reports to companies for review, and Nielsen urged companies to “review them for the low-hanging fruit.” A ratings vendor may have missed valuable information because it wasn’t disclosed in SEC filings. Campbell advised IROs to “lean on your investors to get you into the MSCI conversation.”
Own your narrative. The panel urged companies to overcome their aversion to ESG disclosure – tell your ESG story before someone else tells it. “You lose agency if you don’t disclose your ESG story,” said Nielsen, pointing out that analysts and ratings agencies will fill in any information gaps.
The panel’s communications advice: think through your ESG story, then engage internal stakeholders at all levels in assessing what ESG factors are important and material to your company. Start small, build out your strategy and communicate progress over time. It’s not necessary to publish a stand-alone ESG report. Use your quarterly earnings call and investor presentations to tell your story.
Think of ESG as an opportunity, said Campbell. If your company is naturally in alignment with corporate sustainability, you can become a leader in your industry.
Leaders in ESG disclosure and performance reporting. Large or global companies, companies in regulated industries, and companies that serve a large consumer audience have been most proactive in developing meaningful ESG reporting. JetBlue was the first airline and one of the first U.S. publicly traded companies to incorporate SASB disclosures in its ESG report. In its 2017 report, JetBlue was one of the first companies to incorporate climate-related disclosures recommended by the Task Force on Climate-related Financial Disclosures (TCFD).