Posts filed under ‘Wall Street’
Developing a strategy for ESG disclosure
Carol Singer Neuvelt
Thanks again to all of you who joined us in Fort Lauderdale for the “Measuring Sustainability” conference this week. From my perspective, we had a successful day, in that we increased awareness of the issues and we shared ideas for improving the environmental, social and governance (ESG) reporting process.
The conference also highlighted some practical advice you can use to build a business case for publicly communicating your sustainability story:
- Understand the value of disclosure to your business:Today, nearly one out of every eight dollars under professional management in the U.S. is involved with some strategy of socially responsible investment (SRI), according to the Social Investment Forum. Since 2005, SRI assets have increased by more than 34 percent to $3.07 trillion. ESG research firms are therefore asking more questions because their clients (investors) are asking them for that information. As the lead survey responder within your company, it’s important to take the time to discuss the value of disclosure with your C-Suite and with your internal teams.
- Create a process for vetting requests: Assemble a committee representing all those involved with responding to outside requests. Understand how much time and transparency your company is willing to commit. Then figure out how to collect the information and who will take the lead in managing the request. Remember that if the information request has an enterprise-wide impact, corporate communications MUST be involved.
- Do your research, too: When you receive a survey, learn as much about the requesting entity as you can. Are they shareholders? Are they investment managers? Are they research firms? Also find out how the information is used, who the audience is and the influence the resulting products have. If possible, ask members of your network to learn about their experience with working with that firm.
- Be strategic: While it’s important to be responsive to your stakeholders and investors, you don’t have to be all things to all people. Identify which audiences most matter to your business and participate in the surveys that reach that audience. For some companies, investors may be the most important audience; for those with strong consumer brands, on the other hand, the more mainstream (published) rankings might matter more.
- Build relationships: Dialogues are always better than surveys. ESG firms want to understand how your business operates, so if there’s something you think they’ve misunderstood, don’t be afraid to pick up the phone. And if you think they’re asking the wrong questions, tell them why. They want to know which metrics are material to your business, but they need your input.
- Be consistent: Remember that you’re in this for the long-haul, so develop a solid strategy and stick with it.
What advice would you add to this list? What strategies have you developed to manage the external requests for information?
When it comes to ESG metrics, materiality matters
As one of the first employees of Ceres and a leader in developing the Global Reporting Initiative, Mark Tulay has been involved with socially responsible investing for 20 years. His latest project is the Global Initiative for Sustainability Ratings, an effort to identify the most material metrics for measuring a company’s sustainability performance. We caught up with him this week to learn more about the landscape today and the role the GISR will play in the future of sustainability analytics.
GT: When Ceres started out, it was one of the first attempts to use metrics as a foil against environmental disaster. Why did you think that data could help prevent another oil spill?
MT: Around the time of the Valdez oil spill, it was unheard of to have a conversation about environmental performance at the board level. One of the things this effort at transparency did was take accountability to the highest level of the company. You can never tell how many disasters transparency prevents but when you have that disclosure, you have accountability and if you have accountability, you have an effort at performance and a strive for a common goal. And before Ceres, we didn’t have that.
GT: GRI was a game-changer, but a decade later, many publicly traded companies still don’t disclose environment, social and governance (ESG) information. Do you think this will change? If so, why?
MT: More has happened in the last three years than in the previous twenty, combined. When I started twenty years ago, less than one in every $20 of assets under management looked at environmental performance. Now, with the proliferation of investment vehicles such as the Dow Jones Sustainability Index, one of every 10 dollars in the U.S. is associated with at least one component of integrating ESG performance.
One out of ten is significant and many feel this is kind of a tipping point for closer evaluation of these metrics. So that’s the opportunity. These investors are sticky; they’re longer-term, they’re the kind of investors that IR folks usually covet. Until now, the investor relations folks didn’t ask the questions about sustainability or ESG, but now they’re starting to do that. Companies are starting to understand that pension funds are interested in this and if you can find investors that are good, long-term investors, it’s a very profitable endeavor.
It’s amazing to watch where this is going and the impact it’s having.
GT: How well does the current ESG analysis system work? Do you think it needs reform?
MT: I used to work for a research provider so I sort of know this from experience, but the tendency is for research providers to go a mile-wide to collect as much information as possible. That makes sense, it’s important. But there’s a need to go a mile-deep.
What we really need help with is this question of materiality and prioritizing the metrics; looking through all the disclosure and assessing what are the 10-20 key performance indicators that matter most?
GT: What changes would you like to see to the system?
MT: We have all this disclosure, but there’s overload now, so investors don’t know what to do with it. How do they rate things? How do they rank things? Investors, I think, need a standard framework. And so that’s what this initiative called the Global Initiative for Sustainability Ratings will address. It will show investors what to pay attention to and why.
It’s developed as a non-profit and the framework, the output will be free, publicly available and non-commercial. This organization will not try to monetize it. And then we’ll put it out there and invite others to tell us what’s missing and then we’ll strengthen it. It will be an annual process of reviewing and expanding the tent of partners.
It’s amazing to me if I look back over the past 20 years, is the meaningful results that come from through multi-stakeholder collaborations.
GT: What impact do you think this will have?
MT: Right now, there’s a feeling that much of disclosure goes into a black hole. And there’s little transparency, rigor or consistently in how sustainability performance is measured. There’s more than 300 ratings systems and 300 assessments systems and they all do things in different ways and we think that by putting up a standard framework, we can bring convergence to some of these groups and reward the companies that are truly committed and excelling.
The other thing it will seek to do is infuse sustainability content into other ratings, like bond ratings. There’s a feeling that this should be a standard part of due diligence, to look at these environmental and social metrics. We think that just like GRI, certain organizations will pick it up and have their own take on these ratings. We think pension funds will take on these criteria and use them as a way to select managers. And if they select managers by that, then by extension, companies will benefit from following these or reviewing the metrics and seeing how they align. We want them to be consistent and align with what GRI is achieving so that disclosure can be rewarded.
GT: But wouldn’t an ESG research firm object to a standard? After all, it’s the secret sauce…Why would they want to use a single framework if it means eroding their proprietary edge?
MT: If the pension funds, the asset owners, say ‘We want research that’s aligned with the framework,’ then the research companies are likely to embrace that. And we’re not trying to say there’s one way to do it; maybe there’s 15 ways to evaluate companies. Everyone has their own qualitative best practice as to how to do this. The reason we’re calling it a framework is because it provides direction, it provides specificity, but it doesn’t say, ‘This is the only way to do it.’ So I think it’s going to provide the compass and others will find ways to do it and create businesses around it.
GT: Who will be participating?
MT:We’ll reveal the full list of stakeholders at our launch in Washington, D.C. on June 9, but I can tell you that it’s a partnership between Ceres and the Tellus Institute, and that we’ll be joined by asset managers, pension funds and companies stakeholders as well.
Mark Tulay is founder and CEO of Sustainability Risk Advisors and a leader in the Global Initiative for Sustainability Ratings. He will be joining NAEM as part of the ‘Measuring Corporate Sustainability’ stakeholder dialogue on May 4 in Fort Lauderdale, Fla.
The method behind the NASDQ CRD Index
Michael Muyot
What does a company’s environmental, social and governance (ESG) metrics say about its future performance? A lot, according to CRD Analytics’ Michael Muyot. Creator of the NASDQ CRD Index, Muyot says the group of 1200 companies it tracks outperforms the norm. We caught up with him last week to learn more about the origins and methodology behind the index.
GT: How did you start analyzing companies based on their sustainability performance?
MM: Working with business leaders and investment managers around the world, I could see a definite need to develop performance metrics. We read through over 1000 CSR reports and found that only 93 had disclosed quantifiable environmental and social data based on GRI’s G2 Core Guidelines.
GT: How did you select the metrics you used?
MM: When you look closely at all of the data that’s out there, very little is comparable across all sectors, industries and regions. We did years of research and analysis to identify exactly which metrics the leaders were reporting. We also did a lot of statistical analysis to see which metrics had the best correlations with financial performance. The GRI G3 Core guidelines were very helpful in identifying these leaders and outperformers.
GT: How did you come up with the NASDAQ CRD Global Sustainability Index (QCRD)?
MM: At CRD Analytics, we evaluate corporations through the lens of 200 quantitative and qualitative financial and non-financial performance metrics to give investors a truly holistic view of where companies fall within their industries. We focus on a range of key performance indicators, from carbon footprint, energy usage, water consumption, hazardous and non-hazardous waste, employee safety, workforce diversity, management composition and other leading indicators of sustainable performance.
The index is comprised of the 1200 global companies that currently meet our minimum requirement for ESG disclosure. We analyze them using 25 fundamental financial metrics along with 175 non-financial, ESG performance based metrics. We don’t do any negative screening; only companies can exclude themselves by not publicly disclosing their ESG performance information.
The QCRD Index is being licensed by Investment Managers like HIP Investor to create Managed Accounts; the outperformance is attracting more interest and as the Assets Under Management grows companies that are in the index will a see a direct benefit to their stock price. This brings both the carrot and the stick.
GT: How do you account for “greenwashing”?
MM: The only way companies can get into our index is by disclosing their ESG performance data publicly and correctly. We have been able to clearly identify the sustainability champions, leaders, intermediate adopters and laggards. There are 45,000 public companies so with only 1200 report correctly we’re just scratching the surface…
It’s about basic business fundamentals. When C-level executives were asked why they are taking the lead on sustainability-driven management they responded with 1) brand reputation value, 2) competitive advantage, 3) increased profits and 4) increased market share 5) greater potential for product innovation.
GT: What can we learn from watching your index?
MM: These are the leaders in their respective industries; they’re doing all the right things and benefiting from it in a holistic way. The intermediate adopters and laggards can learn a lot from them. The champions and leaders tend to be in the high tech and computing; healthcare and medical; finance and banking. This group makes up 56 percent of the overall portfolio weight. We’ve seen a top-down mandate from the board room to the mail room. A company needs to get buy-in from the people with their feet on the street to integrate sustainability
GT: What does the future hold with regard to sustainability reporting?
MM: I think if you were to fast forwarded ahead 20 years, all public companies will be required to report their sustainability performance, especially any and all material non-financial risk and opportunities. One effective approach might be to integrate the sustainability report with the annual report. Personally, I think the sustainability report will one day go away because the only way investors will take this seriously is if it’s included in a company’s financial statements and 10-Ks which have been audited by an external third party.
Michael Muyot is President and Founder of CRD Analytics, where he oversees the development of the SmartViewTM 360 Platform, the tool that powers both the NASDAQ CRD Global Sustainability Index (QCRD) and the Global 1000 Sustainable Performance Leaders on Justmeans. He will be speaking about the future of sustainability metrics at NAEM’s “Measuring Corporate Sustainability”conference on May 4.
Quantifying the value of your sustainability investments
Celia Spence
We heard at the 2010 EHS Management Forum about how Bloomberg is now posting environmental, social and governance (ESG) performance data on the terminals its 300,000 customers use to make investment decisions every day.
Bloomberg went live with this data in July 2009 and it is reported in the April issue of Fast Company magazine that “in the second half of 2010, 5,000 unique customers in 29 countries accessed more than 50 million ESG indicators via Bloomberg’s screens.” This is a 29% increase over first half of last year.
According to the article and Bloomberg’s sustainability director, Curtis Ravenel, they expect that trend to continue. Investors are finally waking up to the idea that good performance in these areas can impact shareholder value. Bloomberg gleans this data from many different sources and provides it to their clients as just one more subject area to be used to evaluate investment decisions. Ravenel states that “ESG ought to be in SEC-required company filings, and until it is, it won’t be viewed as material by a lot of people.
“Of course, a lot of the financial data in there now aren’t material either.”
While performance data may provide important bits of information for investors, what is really needed to determine whether they are material is to analyze how the ESG initiatives impact the cash flow of the company. Full valuation audits of ESG initiatives could answer that question. Understanding how ESG initiatives can impact shareholder value provides information that is critical for strategic planning and gives environmental, health and safety (EHS), and sustainability leaders the evidence they need to push projects forward in a meaningful manner.
Does your company have any idea of how your initiatives are impacting shareholder value? Do you just do a simple payback analysis and leave it at that?
Showing the link to the price of the stock is going to be critical for fully integrating sustainability in our corporations. Because, let’s face it, a company that is not producing value for its shareholders is not sustainable.
Let’s talk about metrics
Carol Singer Neuvelt
After an exciting week in San Antonio talking about environmental, health and safety (EHS) management information systems (MIS), I’ve been thinking a lot about what an impressive feat data collection and management really is. All I can say is ‘Bravo.’
Perhaps nothing drives home the enormity of this task more than hearing EHS managers describe the process for mapping work flows or hearing Mark Stoler recall how he managed to get General Electric’s approximately 300,000 employees to adopt a single, global EHS tracking system.
Without this kind of peek under the hood, it might seem as though comprehensive data like this is easy to come by. It isn’t.
Beyond the initial challenge of figuring out how to document internal processes, though, identifying and reporting metrics is often just as laden with obstacles. While most of the information is intended to enhance internal decision-making or track performance, there is, of course, a growing interest in a company’s EHS and sustainability metrics by outside entities as well.
And when it comes to external requests for data, the burden of responding usually falls on the EHS function. In our recent ‘Green Metrics that Matter’ survey of the NAEM Board of Regents, 74 percent of those who responded said the corporate EHS manager took the lead role in external reporting. For 17 percent of respondents, these requests took up as much as one-quarter of an employee’s time (and we expect these numbers to jump as we survey our full membership).
With the amount of time EHS folks are spending, it’s not surprising that about half of respondents said they were fairly dissatisfied with the current state of EHS/environmental, social, governance (ESG) disclosure.
There must be a better way.
In the latest installment of SustainAbility’s ‘Rate the Raters’ research, the firm identified the following steps ratings firms should take to improve their influence and make the process easier for corporate leaders:
- Improve transparency: Transparency leads to trust, according to the researchers. “We find that the stronger ratings in our selection are the most transparent. When raters provide strong disclosure of their methodologies and results, they give companies clear blueprints for improving performance in the future…This also gives clients, ratings users and other stakeholders a sound basis on which to decide whether to use rating information when making decisions (which drives ratings adoption or uptake).”
- Start engaging stakeholders: It’s time for ratings firms to do the same kind of stakeholder engagement that sustainability-oriented companies now do, the study found. “The majority of ratings today are based on arms-length assessments of performance,” the report stated. “Going forward, we believe that every rater can and should spend more time with the companies they assess, and that there are myriad benefits to doing so (e.g. gain stronger understanding of their businesses, verify publicly-reported information, help companies understand ratings and improve sustainability performance).”
As a step toward improving the reporting process, NAEM will host a collaborative dialogue on May 4 for EHS and sustainability decision-makers, as well as representatives from research firms, investor relations departments and NGO’s. The purpose is to help attendees better understand one another’s objectives and concerns, which we hope will help improve the consistency, clarity and value of corporate sustainability efforts.
As we put together the program for the day, what are the kinds of issues would you like us to address? What questions do you have for ESG research and ratings firms?
Ensuring the credibility of sustainability reporting
Sandy Nessing
As the end of the year approaches, companies are gearing up for their next round of sustainability reporting. What will be different about the next crop of reports in 2011?
I suspect quite a bit.
Under pressure from stakeholders for more transparency of, and accountability for, business strategy, operations and performance, companies are facing a new imperative: How accurate, trustworthy and credible is the information that is being reported? How is it represented in the context of risk management, cost initiatives and decision-making?
This shift is forcing more and more companies to seek some type of assurance of their reporting. At American Electric Power Co., Inc. (AEP), we took that step in 2010 by inviting our internal auditors to audit our Corporate Accountability Report. It was painful for the organization, largely because the voluntary nature of sustainability reporting means there are fewer systems in place for data tracking where compliance is not involved. It remains a challenge, but investors, analysts and other stakeholders now have a greater degree of assurance that what we’re reporting is accurate and relevant.
This type of reporting may be voluntary today, but the tipping point is approaching. The Securities and Exchange Commission (SEC) opened the door earlier this year with its guidance on climate risk disclosure. Transparency is clearly a priority. Those companies with more robust voluntary reporting will be in a better position to meet the challenges under new regulations and mandates.
Many companies already seek third-party assurance of their sustainability reporting. While some advocate for it, I’m not entirely sold on its value, especially since there is no universal set of rules like there is on the financial side. Although I believe it will become necessary as we move toward integrated reporting, we’ve only taken baby steps in that direction and I think it’s too soon to force the same rigor as financial reporting without similar reporting requirements. For now, I think the internal audit review, coupled with our partnership with risk management and external stakeholder reviews of our reports, are more than sufficient.
What do you think about this approach? What are you doing in your company to verify the accuracy of your sustainability reports?
What are the green metrics that really matter?
Carol Singer Neuvelt
The world of environmental, social and governance (ESG) performance analytics is exploding at a breakneck speed. What once was a niche field of socially responsible investing (SRI), is transforming into a vast marketplace of financial ESG-oriented indices, ratings firms, carbon reporting and mass-market editorials like Newsweek’s Green 100 ranking. Today the trend toward broader ESG and sustainability reporting is beginning to expand into auxiliary areas such as supplier questionnaires and product labeling.
With all this activity, it seems like everyone has an opinion about which metrics determine a company’s “greenness.” What remains unclear, however, is whether these types of ratings schemes can truly illustrate competitive eco-advantage in today’s complex global marketplace, or even reliably reflect strong EHS and sustainability management within a company.
When this movement took hold a decade ago, many corporate environmental leaders were excited that the external world was finally paying attention to the value their efforts contributed to the bottom line. Indeed, the establishment of the Dow Jones Sustainability Index, the growth of financial firms such as KLD and even the creation of the Carbon Disclosure Project were viewed as affirmations of their professional focus.
But recently, my conversations with corporate EHS leaders seem to reflect a frustration with the ever-growing number of requests. As environmental managers spend more and more time crunching data, they do so with little insight into who the requesting firm is, what their business interests are or how the mountains of data will eventually be used. What we do know is that some of this information is being used to make material judgments about a company’s long-term prospects. Yet does any of this data really indicate true progress?
I believe there is a need for a clear, thoughtful approach to ESG and Sustainability reporting that reflects the performance metrics that are both meaningful to a company and useful to its C-suite leadership, and relevant to external stakeholders.
To address this issue, NAEM has launched its ‘Green Metrics that Matter’ program, an audit of the field of ESG and Sustainability analytics. Our final report will identify the key players, the proprietary benefits of participating with them and the core metrics EHS leaders send to their C-suite. We believe this insight will help promote better decision-making by both corporate users and the broader ESG community.
As we continue our research, we would like to invite you to share your key metrics with us through our confidential online survey. We’d also love to hear your thoughts on this project. How are sustainability analytics changing how you manage? Are the questions you’re being asked the right ones for determining the extent of your environmental stewardship? Is this information truly helping the public better understand whether your products are sustainable? Or is it just an additional paperwork burden?
Will the BP spill change anything?
Carol Singer Neuvelt
I recently started thinking about the importance of cultural attitudes vis-a-vis the environment, after reading an article in the Washington Post about the prospects for climate change legislation. The story explored the question of whether or not the BP spill will influence the debate and help spur legislative action:
“For environmentalists, the BP oil spill may be disproving the maxim that great tragedies produce great change. Traditionally, American environmentalism wins its biggest victories after some important piece of American environment is poisoned, exterminated or set on fire…But this year, the worst oil spill in U.S. history– and, before that, the worst coal mining disaster in 40 years — haven’t put the same kind of drive into the debate over climate change and fossil-fuel energy.”
As I was reading the article, it seemed to me that if a society’s not ready for action, environmental disasters won’t necessarily translate into change. Indeed, in looking back over the history of environmental catastrophes, the cultural context seems to be as important to change as the tragedy itself.
One of the first examples we confronted, of course, was the burning of Ohio’s Cuyahoga River in 1969. During my tenure at the EPA, we talked about that incident as the seminal event that established the need for a regulatory framework at both the federal and state level. From my perspective, the other reason this event had such a big impact is because it came on the heels of the cultural movement of the 1960s, which included a focus on society’s connection with the earth.
The next major event was the nuclear meltdown at Three Mile Island in 1979. What this taught us is that the regulation of end-of-pipe controls alone do not prevent disasters. And the unintended consequences of engineering (such as we are facing now) are not always thoroughly considered. The result was a greater emphasis in the regulatory world on the need for environmental and safety oversight from inside a company. It was also the beginning of the recognition of the role community activists can have on the public debate. As we began to notice the long-term effects of industry on communities, citizens started to find their voice through activists like Lois Gibbs who advanced the environmental movement in a new way.
And then in the 80s, we had the gas leak at the Union Carbide plant in Bhopal, India and the explosion at the Chernobyl nuclear facility in the Ukraine. These tragedies not only introduced our global awareness and response to environmental issues, but also were catalyst that led to the passage of community “right-to-know” legislation. The other key outcome from Bhopal that’s still relevant today was the strong demand for public and financial accountability. Union Carbide no longer exists, yet the effects of the leak continue in the form of on-going litigation, severance to individuals, and continued quantification of the disaster’s impact.
So what does this all mean for where we’re headed tomorrow? What do you think?
Should the BP spill be an instigator for climate change legislation? Should regulations come out of it? If so, what regulatory, legal, financial or societal changes do you think we need? I’d love to hear from you.
So, who’s minding the store?
Frank Brandauer
I came up in a time when an “engaged and fair” regulator was viewed (if not begrudgingly) by industry as a necessary and valued partner. Their actions kept the playing field level, provided a measure of protection and helped industry keep its risks in focus. Whatever the relationship, regulators were seen as a real and significant force both in terms of actions and outcomes.
Nowadays there seems to be a never ending list of government branches and agencies that are unable to effectively regulate. And their failures have had profound and wide-ranging impacts on our society. From the financial sector (Enron, the mortgage collapse, AIG and Madoff) to Consumer Product Safety (imports from China, contaminated meats and vegetables) and most recently oil and gas exploration (BP and natural gas fracking), enforcement does not appear to be what it once was.
Clearly there has been a shift away from strong and aggressive regulation toward a belief in the power of corporate governance, transparency and market forces. In light of recent events, I wonder if we can afford the costs when these other approaches fail?
We are in the midst of a great social experiment, be it planned or not. My brother-in-law says that “no one ever goes to jail,” and other than a few executions in China (in extreme cases), it seems that individuals are not being held accountable for their mistakes. Thus said, I believe (and truly hope) CEO’s around the world are taking a second look at their EHS risks and efforts after seeing how their colleagues at BP have fared in recent weeks.
From the perspective of an EHS manager, the questions I think are most interesting are:
- Does reduced regulatory oversight or effectiveness actually increase or decrease industry’s EHS risk and associated costs?
- Is the amount of EHS citations still an effective EHS metric?
- Are market forces and NGO’s an effective substitution for regulation?
- Have you talked with your management today, and if so what did you say? If not, why not?
Frank Brandauer is Vice President of Regulatory Affairs at Therapak Corp., President of Avail Consulting Services LLC and a member of the NAEM board.
