Gina Sanchez, Board Member and ESG Specialist, Los Angeles County Employees Retirement Association (LACERA).

Gina Sanchez comments featured in Clear path Analysis’s fourth annual “Environmental, Social & Governance Investing, North America 2022”.

When I was approached by the members of the board of Los Angeles County Employees Retirement Association (LACERA), it was because my consulting firm had launched a successful practice into environmental, social and governance (ESG) impact measurement alongside our general asset allocation consulting, which we do for global investment clients. They were very specifically looking at getting back experience onto the board because the board of LA County was making some significant progress towards internalising ESG measurement, diversity, equity, and inclusion methodology and ramping up those efforts.

"With the Diversity, Equality, and Inclusion efforts and the measurement that we do concerning how we evaluate our managers, we have seen a measurable change in not only the recruitment of women and minorities into the workforce. "

The incredible strides that we have taken as an organisation are the result of intentionality at the organisation to make this an effort that matters to us. We can measure in many ways the changes that we have had whether through our participation in corporate governance efforts such as proxy voting, through direct engagement with companies or the sponsorship and support of various legislations. The pinnacle of which was legislation in California that mandated a requirement of a minimum number of females on boards. In the following year after the efforts that we made, alongside CalPERS and others, we saw 113 women appointed to corporate boards for public companies in California.

With the Diversity, Equality, and Inclusion (DEI) efforts and the measurement that we do concerning how we evaluate our managers, we have seen a measurable change in not only the recruitment of women and minorities into the workforce but also the belated elevation of women within the work pipeline of the organisations into not only positions of power, like onto the executive and investment committees, but also into positions of economic power. For us, this is the measurement that matters in terms of being able to move the needle on equality and what we know is that organisations that make these efforts tend to also be organisations that build and create corporate value.

Continuing to move

The challenge that we have is that it is easy once you have committed to being best-in-practice ESG or sustainability citizen you also, as a person or organisation, fall prey to your echo chamber where you believe that everyone believes the way that you believe and that this is the only way of doing things. Low and behold the world is made up of a whole series of echo chambers, which tell different stories, and we forget that there is an entire echo system of messaging being pushed out to various participants of social media suggesting that these issues are not material, that they do not exist or that they don’t need to be measured.

We have to keep in mind that not everyone ascribes to the importance, value, and power of measurement as a tool. It, therefore, makes it that much more important that our efforts continue to be consistent and that they not be limited by the notion of perfection.

The greatest bludgeon that comes to anyone who is trying to get into sustainability, whether it is through a corporate responsibility or DEI effort etc., they will consistently be quoting a paper that was put out by MIT Sloan, which showed that there was a less than 60% correlation between ESG ratings agencies. Rating agencies simply were making all of this data up and therefore they were coming to very different conclusions. This is true, but, I would also say that in 2017 Harvard Business School published a paper that showed that even when ESG reporting is voluntary, the act of going through and voluntarily measuring, publishing, and disclosing ESG information tended to drive corporate value as measured through a Tobin’s Q.

"The value of being forced to disclose information not only reduced ESG incidents, which would be expected, but also had a great impact on organisations that otherwise may not have had participated in the ESG disclosure process."

There was a follow-up paper in 2021 by the European Corporate Governance Institute, which showed that even in countries where mandatory disclosure was required, earnings forecast for those same companies became more accurate by virtue of more transparent information.

Therefore, the value of being forced to disclose information not only reduced ESG incidents, which would be expected, but also had a great impact on organisations that otherwise may not have had participated in the ESG disclosure process, but frankly created a better and more transparent set of data that caused earnings estimates and analysis to be significantly more accurate.

This is both measurable and meaningful if you are in the business of trying to make business and portfolio decisions based on this information.

There was also a paper by the Swiss Finance Institute that was published in 2021, which showed that even where there was significant ratings disagreement, this disagreement tended to be very correlated with high-risk premia and lower corporate value.

"These factors tell us that we should not aim for perfection to believe that we are achieving something in the effort and in fact that making the effort results in significant, positive, and measurable outcomes."

Cresting the wave

All of these factors tell us that we should not necessarily aim for perfection to believe that we are achieving something in the effort and in fact that making the effort results in significant, positive, and measurable outcomes that are valuable for understanding what corporate value is and what corporate value is derived.

We all do our part to try to push these conversations whether at the regulation level with the FCC and the movements of the SEC, whether with organisations that are looking to establish frameworks and methodologies for how we should be disclosure and what we should be disclosing such as the Global Reporting Initiative (GRI), SASB (Now part of the IFRS Foundation) or Task Force on Climate-Related Financial Disclosures (TCFD), these organisations are starting to form and merge into fewer organisations with more agreement on what should be the standards for disclosure.

At LA County we support the continued maturation of the standardisation of data disclosure, the regulated requirement for this disclosure and the efforts towards measuring the thresholds of materiality for the outcomes of our efforts at human progress.

To see the rest of Gina Sanchez’s paper and read the report in full, please click here.

Disclaimer: All comments and views are Sanchez’s own

 

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