Sustainability has been steadily increasing as a focus for the investor and corporate governance community. It’s been a slow shift, to be sure, but it’s happening. Two recent developments:
- The proxy advisory firm Institutional Shareholder Services (ISS) acquired IW Financial, a firm that provides environment, social and governance (ESG) research and consulting services.
- Investment advisers State Street sent a letter to Boards of Directors urging them to be more transparent on efforts to manage climate change and other ESG hot topics.
Beyond the content of the announcements themselves, the way ISS and State Street are talking about ESG is worthy of attention. ISS asserts that there is a “growing demand” for ESG information within the investment community, while State Street points to recent corporate scandals and the risks associated with Boards that fail to properly manage these issues.
In addition, the link to shareholder activism is growing. In the 2016 proxy season, environmental issues were the second most common type of shareholder proposals. And as Shirley Westcott from Alliance Advisors LLC notes, the growing prevalence of proxy access “could give activists more leverage in advancing their agenda.”
When issuing its proxy voting recommendations, ISS sides with the activist shareholder approximately 50 percent of the time – and ISS has significant influence, with investors tending to vote in line with ISS recommendations. ISS’ addition of IW Financial suggests greater scrutiny of ESG-related shareholder proposals, which could lead to more support for greater ESG disclosures. As for State Street, the investment firm supported 46 percent of climate-related proposals in 2016, up from just 13 percent in 2012. While many other investment firms generally show less support for such proposals, the mood on these issues on Wall Street is changing.
This is an area where companies would do well to stay ahead of their investors and analysts, rather than trying to catch up later. It goes a long way toward credibility. Here are a few questions to ask yourself now to get started:
- Have we properly assessed the ESG risks for our company at the Board and senior management level (e.g., climate change, diversity and inclusion, safety and labor issues)?
- Are we communicating about those risks as well as what we’re doing to mitigate them in a way that’s accessible (including data)?
- Do we have investor-specific messaging around our sustainability initiatives that “connects the dots” for this audience?
So, are you prepared? Let’s talk about it.