Rather than getting caught up in a debate over fiduciary duty or whether or not sustainability or ESG performance is material, let’s just cut to the chase on the latest BlackRock letter. It’s still a company’s choice whether to disclose ESG information. If your company is selling a product or a service, you are obviously responding to customer demands and interests. So what about customers buying your stock? If they are increasingly asking for ESG information, how do you rationalize ignoring this request?
We all conduct some level of due diligence in our lives on a daily basis. For many of us, the purchase of a home is probably the biggest personal due diligence process we experience. In major M&A deals extensive due diligence is conducted on a range of financial and non-financial items. In fact, in an increasing number of M&A deals, ESG and sustainability issues are increasingly high-priority issues.
Reading the tea leaves
This year’s BlackRock letter documents a few things that can help companies understand and predict what is next:
- BlackRock references the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures (TCFD) in Larry Fink’s letter. These are the guidelines and standards it is expecting companies to use as they measure, manage and report on ESG risks and opportunities
- BlackRock’s FAQ section explains how it is researching ESG issues throughout its portfolios, as well as its own internal ESG strategies, policies and impacts
- BlackRock’s customers are increasingly expecting it to conduct ESG due diligence on its portfolios. That’s why BlackRock includes a very specific client letter this year. This customer/supplier dynamic has been building for more than 20 years and it’s not going to stop: look at the growth in signatories to the CDP, Principles for Responsible Investment and TCFD supporters.
What does this tell us? A rapidly increasing number of institutions are looking for your sustainability or ESG information and they are comparing what you disclose to the disclosures of your peers. They are also increasingly seeking that your disclosure be done according to recognized regulations, standards or guidelines, and they are increasingly asking for this information be made publicly available.
Disclosing ESG performance
Ultimately, whether your company is large or small, public or private, someone is going to ask about your sustainability efforts and how you are managing your ESG risks. The more serious stakeholders – financial partners (investors, lenders, insurers, and so on) and customers – are going to conduct due diligence on you. Many will use third-party vendors that specialize in gathering publicly available and proprietary ESG information. If they can’t find information in the public domain or aren’t comfortable with what they find, they will ask you directly through a letter or questionnaire. They may even ask for proof through verification or assurance. It’s already happening all across the global markets and it’s really your choice as to whether to take control of your ESG narrative or let your stakeholders speculate on how you are managing these issues.
You will ultimately want to do a thorough assessment of your most material ESG issues and understand how they relate to your overall business and performance. As part of this, you need to know how the market views your performance compared with others in your industry. Investors don’t buy a stock by looking at a single company; they examine performance across an entire global sector. Why would it be different for ESG performance? With this in mind, a few simple benchmarking steps can help you understand how you’re performing among your peers:
- The Global Reporting Initiative is the most widely used standard for sustainability reporting. It has been around for more than 20 years and provides a searchable database of more than 14,000 organizations that have disclosed sustainability information. Use the Sustainability Disclosure Database to understand what your peers are disclosing about their ESG performance
- One of the most common sources of ESG for investors is Bloomberg’s ESG data service. This data is accessed by more than 18,000 customers, many of which are the investor signatories mentioned above. Through this service, any user has access to ESG data on more than 11,000 companies and across 1,000 ESG data points. If you have access, this is another way to quickly understand how you compare with your peers
- The entities mentioned above are just a few of the organizations that make up the much larger ESG ecosystem. It is critically important to understand this ecosystem and develop your own ESG roadmap. This will help you identify the most influential of the ESG ratings firms, understand how they gather and use your information and how asset managers and owners use this third-party information to make investment decisions.
This field is not going to go away and is only amplifying and expanding its commitment to ESG investing. Many companies have the departments, experts and information needed to address these ESG demands. Generally, what is missing is a cohesive strategy to measure, manage and report on the most material ESG issues.
Mike Wallace is a partner at BrownFlynn