Marcela Pinilla, Manager, Financial Services and Impact Investing at BSR.

Fund Operator: How are shareholders influencing change in the ESG space and are corporations doing enough to successfully pivot to meet their expectations?

Marcela Pinilla: It has been a fascinating journey for companies and shareholders alike. Ten years ago, the abundance of data that is accessible now from research providers did not exist, nor did the massive flow of dollars going to passive investments, which has further galvanized ESG framework consensus and certainly gotten the attention of boards in the last five.

In the US, a record $14.4 billion flowed into ESG funds in the first and second quarters of 2020, more than the $9.1 billion that went into sustainable funds in 2019.

Looking into the future, Morningstar and State Street believe there will be a nearly eightfold increase in global ESG ETF and index mutual fund assets—from $170 billion as of May 31, 2020 to more than $1.3 trillion by 2030.

"Proxy season should be a very interesting one and no less active despite changes in the SEC rules and a second year of virtual meetings."

As a result, companies now experience the demand from institutional investors for more ESG data as well as active investors seeking leadership on sustainability on issues like racial justice, climate change, and lobbying and political spending.

Proxy season should be a very interesting one and no less active despite changes in the SEC rules and a second year of virtual meetings, and we will follow it closely to ensure we help companies respond and engage constructively with their investors.

Companies that were already working on building sustainability into their business with buy-in from upper management, internal communication and resources, have fared much better in responding to investor requests and dialogue.

The companies that have a more difficult time are the ones who are still catching up or those who are not approaching sustainability in an integrated way.

"Companies are seeking to understand what needs to change in their core business, who their stakeholders are and what they want, and how they are being evaluated by investors."

By this I mean that sustainability might still be a philanthropic effort or a unit outside of the oversight of executive leadership or the board. These companies have a much harder time responding to requests from the more sophisticated investors.

What we are seeing is that companies are seeking to understand what needs to change in their core business, who their stakeholders are and what they want, and how they are being evaluated by investors and ESG research providers.

Spending on ESG research is predicted to nearly double by the end of 2020 from 2018 spending, so we are helping companies to understand what it means to be rated by a research provider, how this information is used by investors, and how to approach improving performance and disclosure in a genuine, systematic, way.

This last trend on ESG research spending really gets to why I believe that to stay ahead of the game, companies should develop their own ESG strategies through an internal process rather than in response to a specific investor request.

Fund Operator: Where can the corporate world stand to improve in ESG integration as it faces increasing societal and environmental challenges?

Marcela: It is crucial for a company to ask itself why sustainability is important to their business. And the answer should not only be: “marketing”.

Companies that want to understand the what and the how need to conduct a materiality assessment to get a signal from the noise on the issues that need to get resources allocated to them.

"Companies that have developed teams and effective internal communications are the ones who will be able to execute on a credible sustainability strategy."

Today companies want to know how ESG issues affect them and in turn how their products and services affect society and the environment at all stages of the lifecycle.

Companies that have developed teams and effective internal communications are the ones who will be able to execute on a credible sustainability strategy.

They will also be more likely to develop a coherent and comprehensive approach that is much more resilient than a siloed department.

Disclosure is the culmination of all this ongoing work.

Fund Operator: How do corporations overcome the barriers associated with the costs of ESG compliance?

Marcela: I will turn that around by stating that companies should ask themselves what it would cost to not pay attention to ESG issues.

There are a spectrum of risks and opportunities that they should be considering, including license to operate, operational, regulatory, reputational, and value-creation in an ongoing basis.

This is why it is so important for ESG or sustainability strategy teams to connect the dots for leadership and boards. Risk management helps businesses avoid costly mishaps.

For example, companies have for years talked about diversity commitments and taken action, but perhaps not quickly, or thoughtfully, enough. Our current pandemic environment has amplified the shortcomings of our collective approaches, no matter how well-intentioned.

"Companies should ask themselves what it would cost

to not pay attention to ESG issues."

Among the many consequences, we have seen litigation by investors against companies who have failed to implement and deliver on their diversity commitments.

As a result, they have had to spend way more dealing with the aftermath, versus the costs associated with being a forward-thinking company.

On the whole, which one does a long-term investor want to select, the reactive company or the proactive, strategic thinker?

 

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