The most popular song of the 1970s British rock band Ten Years After goes, “I’d love to change the world … but I don’t know what to do.” After a great guitar lick, the lead singer adds, “… so I leave it up to you.”
In a world riven by political polarization and dysfunctional governments, only companies can change the world. Corporations are dynamic and innovative, and only highly effective executive management teams can retain their jobs in today’s shareholder activist world.
Shareholders, especially large fund managers, pensions and sovereign wealth funds (SWF), which are estimated to own 43% of the world’s $79.2 trillion in equities, understand that destroying the planet by pumping CO2 into the atmosphere is not in their long-term interests, nor their investors’. Like Ten Years After, they’d love it to change, but they don’t know what to do. The answer is here.
A cry for help – investors’ strong need for meaningful disclosure
Although we have seen a substantial increase in environmental, social and governance (ESG) reporting in the past few years, it is mostly pablum. The US’s Governance & Accountability Institute found that 82% of the S&P 500 issued sustainability reports in 2016, but corporates are not divulging what’s imporant: 76% of the reports failed to disclose any metrics, and 53% simply used bland, boilerplate language that offered no insight. If sustainability is not being measured, it is not being managed.
We hear investors’ voices loud and clear – they want to be able to compare companies and reward management teams for adequate disclosure and consistent reporting, and support activities that have positive environmental impact. Accelerated sustainable action starts with comparable disclosure, and comparable disclosure requires corporations to report on comparable metrics and present data in a comparable manner. Investors are asking for increased transparency and tools to assess data on environmental issues, and we would argue that the tools are here.
Greentech is seeing strong interest from asset managers and investors taking ESG considerations into account in their investment processes. A survey completed by Morgan Stanley earlier this year polling 118 pension funds, endowments and SWFs reported that 84% of investors are now “actively considering” ESG integration in their investment process. Nevertheless, data quality is still the biggest issue for investors to adequately assess corporations. In the survey, 68% of investors listed availability of “quality ESG data” as the biggest challenge in the investment process.
The issue isn’t that we don’t have metrics and standards available – quite the contrary. Plenty of lyrics have been written. When you dig deeper into the landscape of dedicated metric providers, pledgers and initiatives, most – if not all – are striving for that main goal of “meaningful disclosure”. Metrics providers, such as the Global Reporting Initiative (GRI), Sustainable Accounting Standards Board (SASB), and CDP (formerly the Carbon Disclosure Project), are increasingly working together to find common ground on environmental impact and sustainable investing. We are bound to see consolidation in this space, and are pleased to see material progress towards the harmonization of metrics and standards.
For example, GRI, SASB and CDP, together with another five metrics and accounting standards providers, have joined forces under the Corporate Reporting Dialogue, a project that is mapping metrics and principles believed to be broadly consistent with “all forms of standards development and business reporting to stakeholders” in order to build alignment. The Task Force On Climate-related Financial Disclosures (TCFD), spearheaded by FSB Chairman and Bank of England Governor Mark Carney and chaired by Michael Bloomberg, has also made notable progress. It is drawing the attention of CEOs and CFOs, where the reporting needs to come from to have real impact on the future of business and the environment, and for financial markets to better reflect climate risk.
In Europe, the European Commission’s Technical Expert Group of Sustainable Finance (TEG) is making progress toward harmonizing standards. The effort includes the development of an EU classification taxonomy to help determine whether an economic activity is environmentally sustainable, as well as benchmarks and guidelines to improve corporate disclosure of climate-related information.
In contrast, in the US, the Securities Exchange Commission won’t take action, at least not as long as the current administration continues to support dependence on fossil fuels. Leading up to the Global Climate Action Summit in San Francisco, to be quickly followed by the UN Climate Week in New York, it is more important than ever that investors speak with a clear voice and demand corporates act and be accountable for their actions. We should not diminish the role of global organizations such as the World Economic Forum (the Forum) in facilitating a common voice and creating consensus. As we’ll come to hear more about at the Forum’s Sustainable Development Impact Summit in New York, the organization is currently working on an interesting project under which it seeks to deploy its convening power and bring together numerous ESG stakeholders with the aim to build a more effective global ESG ecosystem. It is clear that we cannot wait for regulators to act. It is up to investors to require real measurement and push for harmonized standards. Only then will corporates voluntarily report on ESG factors.
The new dawn – creating the virtuous circle
Investors collectively have the power to change corporate behaviour. In the absence of a global suite of standards and regulation, we need to give investors the tools they need to be able to report and assess corporations and their environmental impact. Investors need to tell us what input they need, and the metric providers and standard setters need to work towards agreement on common standards, with a focus on what is material and what would be seen as meaningful disclosure. Consistent application of metrics, responding to investors’ cry for inputs that matter, will fuel investor climate activism and allow for greater transparency.
There is no “you” to leave responsible climate capitalism “up to”. CEOs and CIOs of fund managers, pension funds and SWFs have to know – they are the “man in the mirror” (or woman – to paraphrase a Michael Jackson hit). The standards are coming. The time is now – for calendar 2018 financial reporting – for the large owners of corporate equites to demand hard metrics to be disclosed.
Only when environmental impact decisions are made at the top will we be able to move closer towards integrated reporting, full transparency and a meaningful improved environmental impact on our society. And only then can we close the virtuous circle and accelerate the amount of capital that is invested in sustainable technologies and infrastructure systems.
With the average public company CEO tenure being only four years, most CEOs will want to continue to equivocate and stall. That’s why equity owners must demand the change. Corporations will make meaningful changes which can lessen CO2 emissions by 10 billion tons – half of what COP21 calls for in the 2-degree scenario – once executive management teams align their operations and their supply chains to lower carbon and be more sustainable.
This can be done once we realize that all companies have to sing the same lyrics to avoid collective economic devastation. And the lyrics, in terms of common, measurable standards, have now been written.
By: Jeffrey McDermott