Keesa Schreane: We have met with sustainable investing experts from SASB to Bloomberg, from Ceres, and to Cornerstone Capital, discussing the most debated questions in the industry: managing ESG data gaps, standardizing sustainability reporting and translating ESG into financial value for the company.
We are talking to Mindy Luber, CEO, and president at Ceres. How do investors manage data gaps?
Mindy Luber: Well, first of all, investors are not looking for all the data in the world. They are looking for material, financial data when they don't have it. They do the analysis and figure out how to plug the gaps. They may put in their own numbers or look elsewhere, but the more companies put into the marketplace, the more they disclose their data, the better they're going to be analyzed and reviewed by their investors.
Keesa Schreane: So we're talking about KPI is in which KPI is our material. I understand that if you're in a different industry, KPI is in one industry might look different than KPI is in another industry. Is that the case and is there a level of consistency that we can bring around KPI as well?
Mindy Luber: Not perfectly. It is, as you say, different by industry sectors. Think about it. What are the risk issues for an insurance company? And the risk issues for an insurance company, which actually add up to tens, if not hundreds of billions of dollars these days, are very different than the risk issues for an apparel company. But that doesn't mean they're not material for both sectors. If I were the Gap or Levi-Strauss or an apparel company, I would be worried about my cotton crop is my cotton crop in an area where drought or storms are going to kill the crop, which has happened consistently over the last five or six years and more so than before. That's their capers. You know, what are the risks and the opportunities they're looking at? What kind of goals and practices do they need to put in place? If you're a bank and you're financing coal-fired power plants, that's a different set of risks. So, I would argue the risks can be reputational risks or physical risks or legal risks. All very, very different. Think about if you're in the agricultural sector. I mean, two years ago, the drought in California, half of the farms could not be farmed and that meant workers were laid off. It meant prices of produce went up. It meant truckers lost their job. It meant certain foods weren't available at the supermarkets. And so if you're in agriculture, you've got to be looking at different risks and different KPI is for what you want to accomplish. Similar issues, very different risks and opportunities depending on your sector.
Wow. So we're talking about the various risk, legal risk, reputational risk, climate risk. Should those risks also guide whether the emphasis should be on the E in the ESG? should firms look at those in a holistic way and balance all three of those environmental, social and governance are? Should that be in some way informed by the industry and the risks that you just spoke about?
You know, sometimes I think we in the sustainability field tend to overcomplicate things. What I sent the United States Congress a few months ago. And I would say anywhere else, ESG risks are just risks - if something is a financial risk to a sector or a major risk to a sector. From my perspective, whether it's E, S, G or just a straight financial risk, shouldn't it matter, it should be integrated. If it's an opportunity, it should be integrated. And so ESG risks, well, why are trade risks more important than ESG risks or tax risks or inflation risks? Let's just put one category of risks out there. And it may be an environmental risk, or social risk, or a trade risk, or a new pandemic risk with new diseases and flu coming on the scene. They are real financial risks that have to be taken into account as data points, as an important measurement for investors and for companies. And we need to in some ways stop putting them in silos, but just look at them for what they are, which are financial risks.
Keesa Schreane: So how do you translate ESG performance into financial value?
Mindy Luber: Sure. Look, if you're Wal-Mart or Target or some of the larger companies that have changed their transportation systems, how they transport their product, have changed their refrigeration systems, have changed their supply chain demands, all of those things, you know, ESG is saving money in many, many instances and companies. So it does show that if in fact, they're saving money if FedEx is saving money because they no longer make left turns, which they did to save energy and thus they're saving money, those things need to be shown. They need to be disclosed. They need to be articulated, and they need part of the need to be part of the discussion with investors. Many of the sustainability changes that we're looking for do generate. Savings if they do. Let's show it.
Keesa Schreane: So we talked a bit about timely topics that institutional investors should be aware of, what you think's going on, the most important thing going on the market right now that's timely and relevant. And how should institutional investors really hone in on that important topic?
Mindy Luber: Sure. So let's take climate risk is a perfect example. We just all came from, you know, many people from the World Economic Forum, some of the largest investors talking about climate risk finally after a decade of pushing that ball up the hill. But without question, when you face the kind of risk that climate change brings to us, every single sector of our economy is impacted. If you're a bank, what your financing is impacted. If you're an insurance company, if you're a mortgage company, if you're an agricultural company, I could go on and on. There's almost no sector that's not impacted.
Mindy Luber: And so we've got to look at that risk and figure out how to avoid it. If you're a manufacturer and you're manufacturing systems require water and you end up in a city where there's not enough water to drive your manufacturing systems, that is a catastrophe for your business. So we've got to look at things like climate risk. And here's what we're seeing investors doing. We work with 390 global investors, large institutional investors. Their assets, assets total 40 trillion dollars. They have said climate risk is the largest financial risk that they're facing. They have looked at the hundred largest emitters of greenhouse gases which make up our global warming problem. And they have said we are going to move those companies to set ambitious goals and change their practices related to climate change, change how they power their firms, change how they disclose it, change what they do day to day. And you know what? Companies are moving because their largest owners, three hundred and ninety-plus investors have said, we want you to bring your greenhouse gas emissions down to most of their portfolio. Companies have said, we want you to be transparent and we want your boards involved in this issue because of the size of the risk. So institutional investors matter, of course, they are the largest owners of companies and they are coming together and making a difference around climate change, around diversity on corporate boards in ways that I've never seen before.
Keesa Schreane: Wow. And what bodies like SEC, what bodies are really having an impact on what's going on with the impact that they're having?
Mindy Luber: Well, the SEC has a set of guidance on the books that says companies need to disclose the material financial issues related to climate risk and water risk. The reality is most companies are not doing it and the SEC is presently not enforcing against that guidance. So we've got a rule. It's not being complied with. You know, politics getting in the way. Who knows? Let's stay out of politics for the moment. But the SEC's job is to make sure that investors have the information they need to make smart decisions. Do they want to invest in company A or B, or do they not? And they cannot make smart decisions without adequate risk information. So it really is the SEC job to make sure there is adequate risk information. At the moment. They're not enforcing their guidance. That calls for it. We need to see that as a change. The SEC today is expecting a final day of comments on whether or not they should limit what shareholders could ask companies for in their shareholder resolutions or their proxy statements. I think that is an extremely damaging rule that the SEC is looking forward to putting into place. I hope the commentary that comes into them in formal comments to their room suggests that they ought to back off. Right now they're saying if you want to file a shareholder resolution, you need to be a large investor. The threshold for how much assets you need is just going up. And look, it is important to have institutional investors weighing in. But it's also important for citizens. If they have an issue and they're small investors, their voice needs to be heard as well.
Keesa Schreane: On that note, many thank you so much for joining us.
Mindy Luber: Great. Thank you.
Keesa Schreane: Next, we have Katie Schmitz, director of investor outreach at Sustainability Accounting Standards Board. Thank you so much for joining us, Katie. So let's jump right into it. Data gaps, how can we manage ESG data gaps and where do they exist?
Katie Schmitz: Well, some would argue that there aren't data gaps, but there's a more pervasive problem with data quality. And there's a lot of ESG information out there in the market, but it lacks comparability. Much of it is binary. So simple. "Yes", "No" answers to questions like "do you have a policy in place on labor conditions in your supply chain", which five years ago may have been the question to ask, but today the more relevant question is "how are you managing those issues"? So moving from the yes-no answers to more fulsome disclosure, that's investment grade and decision-useful for investors.
Keesa Schreane: So when do we see that movement taking place? Has that shift happened already?
Katie Schmitz: I think it's happening. I mean, the whole reason for SASB's raise on debt is to provide a framework through which companies can translate the work they've been doing for decades on sustainability, in many cases, into a language that is understood and spoken by investors. So I would say it's early days. And if you look at it from a historical perspective, the transition from, you know, the days before the international gap and U.S. gap, it took a long time to get to those generally accepted accounting principles. And likewise, we in a fairly early stage of the evolution of this whole reporting space around sustainability and investor understanding of the importance of good disclosure on sustainability issues. So I would submit to you that with the codification of SASB standards in November of 2018, that was a watershed moment. We now have standards in place for 77 Industries that really focus on the intersection of sustainability issues that a lot of people have been talking about for a very long while.
Katie Schmitz: But those issues, for which we have evidence of the likelihood that those things can affect the financial condition, our operating performance of companies in a given industry. So I'd say we're in very early days of that standardization, but we're we've been very, very pleased to see the uptake of SASB standards. By investors, even before the standards were codified, a sort of framework for thinking about these issues, as well as after the standards were codified by companies. Over 100 companies today are using SASB in a standardized way to communicate with their investors about their performance on sustainability.
Keesa Schreane: So we look at those standards, who are the primary drivers? So who will be, or who are the early adopters and who can we see in the near term over the next year or 18 months being the driving force behind those standards?
Well, I would say in one word, investors, if I use two words, I would say, institutional investors, although there is a rising tide of retail investors who are also seeking better information about how companies are performing on these issues. And that really stems from sort of an again, an evolution in this whole space around things that we intuitively understood, but didn't have a lot of evidence to support the fact that they should be included in investment decisions. And today, where we have a growing body of evidence that shows companies that better manage these issues, outperform their peers who don't and also have better impacts on the world. So investors really have sort of come along in this evolutionary process. Some would say that they've been lagging, they're sort of bringing up the rear. But now that they are leaning in on this issue, I think they are a key driver in the adoption of standardized disclosure on these issues.
So let's look at the flip side. Who are the entities, are the people, are the industries who do not see value in standardization or who in some way attempt to stop your efforts?
Katie Schmitz: I don't think that there's anyone who's trying to stop our efforts. I do think that if I had to point a finger at an enemy, it is confusion in the market and sort of a mythology that has built up around how hard this all is and we can't do more. And so there's definitely fatigue, there's reporting fatigue, there's survey fatigue. And the perception that this is yet another thing that we must do instead of saying, no, this is actually kind of a subset. This is a slice of what you're already thinking about reporting about. Likely if you're a large-cap company in particular and a way of translating this again into something that investors can fold into their investment decision-making process. So it's a lot of overcoming perceptions in the market. And helping people understand this rich ecosystem of standards, tools and frameworks that are available for companies now to use to communicate to different audiences.
And I think that's a very important distinction to make when you go into a different market - you have to translate yourself for different audiences. And I think there has been this desire for there to be one thing to give us just one thing that we can do that satisfies everyone. And that has proven to be very challenging and thus has also resulted in there being a lot of noise in the system, which is what investors are now saying: "Now we need clarity. We need comparable, consistent, reliable data. And please translate your work for us".
Keesa Schreane: When do we see the standardization? The standard is standardization. Give it out. What do we see that happening? Do we see that being something that's going to be a very near term, full adoption? What does that look like? And then when do we see it happening?
Katie Schmitz: Well, those are a couple of questions nested together. So standardization is upon us. So SASB standards are available for use to communicate your performance to investors. GRI have standards for the communication of impact and companies impacts on the world and also very relevant to the SDGs. Those two things, among other frameworks like TCFD are the very robust pieces of this ecosystem that I refer to previously. There's also the ICRC, the International Integrated Reporting Council that have given us really solid principles-based frameworks through which we've asked companies to communicate their long term value proposition propositions. So, the standards and tools are available and out there the uptake of those standards and tools is patchy. And I think we see in terms of what the drivers of adoption will be, that is a mixture of a variety of different things. Investor interest, most certainly there is tremendous policy and regulatory activity happening outside the United States that we should all be keenly aware of, which we certainly are aware of. And I think it's very important to recognize that investors operate in global capital markets. And so they are thinking globally about these issues. And so they as investors are seeking for there to be a standard through which companies communicate to them about their performance on these things. And they have gravitated toward SASB as that standard, so how this fits into this developing ecosystem and these regulatory developments that we see in other markets? I think that all say that they are going to be built upon existing frameworks and standards. I think we can expect to see that landscape moved pretty quickly outside the United States, and we're certainly keeping a close eye on that.
Keesa Schreane: So if we look at standards as well as overall performance. So what's being measured? How can a company translate that into financial value?
Katie Schmitz; Well, I think I'll take the flip side of that question. And and somewhat turn it on. It's hard to say if something is in a SASB standard, it's because we tie that particular issue and the related metrics to the likelihood of it having an impact on financial performance, financial condition or operating performance. So that's one of the reasons that investors are so interested in a SASB lens on information, because it takes a broad, you know, swirling array of topics and issues that are always evolving. And there's always a new thing on the horizon and says, okay, what if those things are likely to affect a company's performance in this industry that can affect their performance, my portfolio, you know, reputational risk and so on and so forth.
Katie Schmitz: So if it's in the SASB standard, you can follow the breadcrumbs back to our research and the standards development process that is very rigorous and well-defined to tie everything back to key financial performance drivers that can affect the balance sheet income statement, you know, of a company in a given industry. So that is why it's such an important tool for management, for boards of directors, for people who are trying to get their heads around this. If a company hasn't started the sustainability reporting journey or even thinking about these things, to take a look at the things that are in SASB standards, because it's really a flaw of the things that you would want to know about and want to have well in hand in order to ensure that you are going to be there for the long run. And I think many people of the last couple of months have been using a phrase that I like a lot. It's about 21st-century risk management. It's about being there for the long. And that's really what this is about.
Keesa Schreane: 21ST Century risk management adoption as well as implementation, the importance of standardization. Thank you so much for joining us, Katie. Thank you so much for the opportunity.
Our next guest is Erica Karp, founder, and CEO of Cornerstone Capital.
CEO of Cornerstone Capital. There is a lot of history that goes into the making of this company, partnerships, et cetera. Could you share with us a bit about what you do and then the partnerships that you have?
Right. Well, so Cornerstone Capital Group fundamentally is an impact investment advisor. So that's what we do. We serve foundations, endowments, families, individuals who want to align their money and their values. Our heritage is as a research organization, an investment research organization. And we use our thematic sustainable research or sustainable thematic research to inform our manager due diligence. So we diligence hundreds and hundreds of managers. That helps us pick the best investments for our clients. That's basically what we are.
So. Well, I am curious to hear about the due diligence piece and basically where are we now? Where do you think we will be, say, at the end of 2020? What really is going to impact where things go in terms of that due diligence piece?
Erika Karp: Well, this is actually a huge issue right now. And arguably it's one of the issues that the S.E.C. is looking particularly carefully at. One of the reasons is because the kind of ESG analysis space or the sustainable investment space is actually starting to have a huge number of new product launches. And the quality of those launches of those fund managers is all over the map because the language is problematic. The data is problematic. And most importantly, the expertise is problematic. There are those of us who have been doing this for decades and those who frankly think this is a marketing opportunity. Let me in. So making those differentiations. It's critically important right now.
Keesa Schreane: Speaking of risk-adjusted returns, we talked a bit about translating ESG performance are those metrics that you get to those poor performance areas into financial values? What KPI is should institutional investors be aware of?
Erika Karp: Well, again, as long as we're talking about risk-adjusted returns. First, there's no black and white answer to this. What is black and white is that you have to have an understanding based on the industry in which a company operates. You have to have an understanding of the most important areas, the material areas of impact. Right. And so, for instance, if you were in the restaurant/hotel industry, you really need to understand the risk associated with human trafficking or sexual and gender-based violence. Right. If you were in the shipping industry, you really have to have an understanding of safety issues and carbon emissions. If you are in the beverage industry or the semiconductor industry. Right, you really have to have an understanding of what's going on with access to water because of the nature of what you're doing. So the bottom line is it depends on what you need to look at. And many, many companies at the board level have had discussions around, you know, a material.
Keesa Schreane: So, materiality sounds like it can be pretty static, but how the metrics around that materiality/ The fundamental metrics, do we expect that to change the standards around materiality? What will standards look like in, say, the next year? Will standards ever be standardized?
Erika Karp: You must know that I love that question, as a founding board member of theSASB. So the Sustainability Accounting Standards Board. That's why it was created and that's why it was so compelling to me from the start, because we are talking about by sector materiality. The answer is worth. We've made wonderful strides in terms of starting to express the disclosures. The standards for disclosure, that said, standards take an enormous amount of time. Standards, though, are critical to innovation. So I think Sasabe has made great progress. We need to see corporate adoption to get that standardization. This is very complex because very often industries have their own standards and now we have the centralized standards, and of course, we have the G.R.I. So there's a lot of kind of schemes coming up. And I think we're going to start to see, you know, consolidation. But this takes time because of the complexity.
Keesa Schreane: How much time is this something we're talking about, 2021 and 2022? What do you do now?
Erika Karp: Unfortunately, I think we're thinking more 2025, 2030. Somebody asked me this same question 10 years ago and it was like, yeah, we're gonna get these standards set up. I'm like, no, no. I started my career 30 years ago in the technology industry and standards take time. That doesn't mean we don't do anything now. All right. This whole field, this whole discipline of sustainability is constantly evolving. And the key is that we want to understand - 1) what the key risks and opportunities are for corporations, 2) what is it, what should be disclosed so we can get standardization and projections and accountability in order to build all that. But also number 3), and this is more qualitative. We want to understand what a company stands for. What are their values? What are they going to hold people accountable for? What are they going to audit? And I have to tell you that if there were a single thing that I wanted to know around kind of corporate governance and corporate sustainability, I want to know how consistent is this company in what it says it's going to do and what it actually does because you can tell me as much data as you want. But if there are obvious inconsistencies, it's going to blow everything away in terms of credibility and in terms of trust. And the one thing we really need to reestablish in the world of institutional structures, we need to reestablish trust.
Keesa Schreane: Transparency is a big part of that transparency and trust, critical in capitalism, critical in business and critical on the functioning of our society. Thank you so much, Erica, for joining us.
Erika Karp: It's my pleasure.
Keesa Schreane: Finally, we will hear from Emily Chasten, sustainable finance editor at Bloomberg Green, talking about making the data-driven ESG investing decisions and the role of A.I.
Keesa Schreane: Emily, thank you for joining us. Socially conscious investors, what do they want now versus a year ago?
Emily Chasan: So I've been covering this space for about four years at Bloomberg and we've just launched Bloomberg Green and we're really focusing on ESG investors. And what we're seeing is that they want companies to move to a place of action from a place of disclosure. So the market for a long time has sort of rewarded companies for being transparent in this space and, you know, saying what their carbon footprint is or what their diversity is. But now they want to see more action. They want to see pathways. They want to see that you're aligned to 1.5 degrees. You're setting science-based targets, you're using industry standards. They really want that alignment so that they can just move forward at a faster pace.
Keesa Schreane: So how can these firms who these people who really want to see action take place? How can firms get past the perception that ESG is a PR exercise?
Emily Chasan: Yeah, well, ESG is really about risk fundamentally. This is what we talked about. Investors, too, as we always see them saying, how can we understand the risks that are out there beyond what's in the financial statements? And that's really what ESG is. So obviously a lot of companies with sustainability stories started in marketing. So there is sort of a history there and maybe some people are skeptical about it. But recently I did a story interviewing a quant investor and he said, you know, when companies say too much PR and they're too fluffy, that's not really a good sustainable investment. Maybe they're trying to hide something. He likes the companies that are really true about the problems they're facing and the hurricanes and the floods, and he'll give them extra points.
Keesa Schreane: So, you know, the topic of quant investors in your research and conversations there, how can quant analysts help an investor choosing from, say, thousands of stocks or evaluate small companies or even emerging market equities?
Emily Chasan: Well, one of the interesting things about ESG is there's still only ESG information about 4000, 3000 companies. So you don't have the whole universe of companies that have this information. So quant investors that we've talked to are really looking at putting this information into their models and estimating and filling in the gaps in the holes in the information and creating a system that gives them a better input. So a good example is carbon taxes. We talked to this investor at Acadian Asset Management and they saw that in places where there is a carbon tax, there is a price on carbon that the market is incorporating into those companies. But when you go a little further out and you see companies where there's no tax in that region, the market was still incorporating it. So they said these stocks look artificially cheap and they wanted to incorporate a carbon price throughout the whole portfolio. And so they just estimated what it would be.
Keesa Schreane: Wow. OK. And in terms of basing sustainability on AI versus human touch, what are the benefits of basing one's sustainability analysis on artificial intelligence vs. human elements?
Emily Chasan: So ESG investing really started as an actively managed portfolio. Right. And now there's passive and then AI is even sort of another form of passive. It just really depends on what you want. You know, maybe you think that a human can understand this information better and understand these risks that really broad risks. The data is very unstructured. Maybe you think a machine can do it better. And that's just a difference of opinion, I guess.
Keesa Schreane: Great. Emily Chasten, thank you so much for joining us. Thank you.
Thank you for joining us today. We've spoken with some of the key leaders in the ESG space and clearly data and standardization of ESG reporting remain the central issues in the industry.
What did you think about the podcast? Would you like to share your thoughts on the topic? Suggest themes for upcoming episodes or even have your story featured on the podcast. Reach out to me using the email in the episode description are post on social media using hashtag #RSPpodcast. Stay tuned.
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