The investor perspective on ESG reporting

While investors are often mentioned as a single population with mostly common needs, in reality there are different subsects of the investor community that may take a different approach, resulting in varying perspectives on ESG reporting, such as:

1. Asset owners include organizations, such as insurance companies and pension funds, that invest with a long-term horizon to support their long-term obligations (e.g., life insurance, annuities and pension benefits). As they invest their funds with asset managers, such as passive index funds, they’ll ask questions about the long-term sustainability attributes of the investment and cite ESG factors that their investment mandates would consider.
2. Passive (or index fund) asset managers invest in companies through an index comprising several or many companies. Their returns will benefit if the companies in the index prosper over the long term. As such, they have an incentive to engage with companies to encourage longer-term thinking. They see a company’s maturity around ESG as a means to long-term value creation, which will likely ultimately generate greater returns for their investment strategy.
3. Active investors buy, sell or hold shares and often trade them. They are also known as “buy-side” investors. They may hold individual shares for a short, medium or long term.
4. Sell-side analysts also play a role in the system, asking questions on earnings calls about ESG, as well as publishing research reports with recommendations for their clients about whether to buy, sell or hold shares.

1. How do asset owners use ESG information?

Asset owners’ goals are to maximize returns while reducing risk. Asset owners look to ESG information to achieve both goals through engagement with investee companies and proxy voting. The California State Teachers’ Retirement System (CalSTRS) engages with hundreds of companies each year. It expects the board members of companies to actively think about overseeing management and corporate disclosure of the priority ESG issues that are relevant to the business, which relate to the company’s long-term strategy and performance. ESG information is also used in portfolio construction decisions. Stronger ESG performance likely results in a higher portfolio weighting.

2. Are there particular broadly relevant ESG topics that companies should think about disclosing?

CalSTRS engages with companies on a number of priorities. For example, one is to understand how a company is preparing to transition to a lower carbon economy. Therefore, CalSTRS is interested in a company’s goals for achieving lower, or net–zero, emissions. In terms of climate, asset owners are looking for disclosures of Scope 1, 2 and 3 emissions, as well as TCFD reporting. Human capital management information is also a priority disclosure that is reviewed — such as diversity in the workforce and how human capital management is included in decision-making for the company. Additionally, CalSTRS wants companies to utilize SASB disclosures as it provides industry-specific information in a comparable format.

1. What were some of the key themes heading into the 2021 proxy season for BlackRock?

There was a focus on a number of areas, such as board quality and effectiveness incentives aligned with value creation, climate and natural-capital strategy, purpose and financial resiliency, and the company’s impact on people. There was a specific focus on diversity, equity and inclusion, specifically board and workforce diversity. Around climate and natural capital, the intent was for engagement teams to ask companies to enhance disclosures by including SASB- and TCFD-aligned metrics, along with a clear climate reduction plan.

2. How did those priorities play out in actual proxy voting in 2021?

There was a large step-up in terms of support of shareholder proposals — 35% vs. 17% in the prior year. Engagement was deepened, particularly around climate. Notably, approximately 65% of companies BlackRock had a focus on in the prior year made meaningful progress.

3. How do you typically engage with companies during the year?

During the off-proxy season, BlackRock may prioritize companies for engagement based on the assets under management, as well as the percentage of holding. BlackRock may also use the off-season to take a deeper dive into ESG factors that were not able to be addressed during the proxy season. Companies should not interpret engagement by BlackRock to be a negative. Instead, oftentimes it may be more of a check-in to understand how a company is progressing toward its goals and targets.

1. What has been your journey as a sell–side analyst in thinking about ESG?

Scotiabank analysts found that including nonfinancial information with financial information gives a better, more complete understanding of the mosaic for any given stock or industry. In order to better understand this, and the impacts on equity valuation, it became clear that there needed to dedicate a full-time role to ESG.

2. As you’re talking to the buy side, what are some of the ESG items that resonate the most?

It’s important to think about ESG information as both quantitative and qualitative. While the former allows for trend analysis and peer comparison, the narrative sections can provide necessary context for items of thematic importance. Scotiabank built an analytical framework that’s scalable and shows change analysis, which is helpful from a forward-looking perspective. The themes are all thought about within the context of the business: how are companies thinking about fitting ESG into a product life cycle? Why isn’t the composition of companies more diverse, even though studies show that more diverse companies outperform their competitors? These are the questions Scotiabank dives into that clients are most interested in.

3. Have you ever noticed any disconnect between what companies and what investors think around the topic of ESG?

On the corporate side, Scotiabank’s perception is that ESG is often viewed as a box-ticking exercise, which could be a result of being overwhelmed by the different interests and rating agencies that are competing for the company’s time. On the buy side, and as investors in general, Scotiabank analysts simply want to know more deeply whether to invest in any given company — and ESG can provide trust in achieving performance. However, the gap between the buy side and companies is narrowing as the transparency and immediacy of information are providing a more general awareness of what the holders of funds want and what stakeholders see as important in this space.