Stuart Kaplow ESG ReportInvestments by individuals and institutions driven by environmental, social and governance matters continue to remain front and center in the minds of boards of directors, government regulators and the media.
Of course, there is no single or even widely accepted definition of ESG and some have suggested that any analysis of environmental, social and governance information about a company is so broad and fungible that it could include almost any corporate excellence.
We advise companies how best to score with sustainability data, analytics, ratings and indexes for their target audiences (e.g., one of the largest ESG mutual funds puts only a 17% weight on social issues while the leading independent global provider of ESG data weighs social issues at 33%).
Such is problematic for corporate directors, in particular in their risk oversight role as they consider risk management policies to be implemented by the company’s management that are consistent with the board’s strategy and risk appetite. With more than a dozen voluntary initiatives that have gained some traction, but few, if any, laws that support the policies, ESG issues are admittedly more widely considered in the EU than in the U.S. and elsewhere around the globe.
U.S. companies are largely governed in this arena by state laws that largely track the Milton Friedman belief that a company should have no social responsibility to the public because its only proper concern is to increase profits for itself and for its shareholders and that the shareholders in their private capacity are the ones with the social responsibility.
That 1990s popular view might sound controversial today, but there is the April 23, 2018, the U.S. Department of Labor issued Field Assistance Bulletin No. 2018-01, clarifying previous guidance for ERISA covered private sector employee benefit plans regarding proxy voting, shareholder engagement, and economically targeted investments in the context of ESG initiatives. The bulletin advises that directors must “always put first the economic interests of the plan” and make financial performance the main consideration when evaluating investments.
That guidance mandates a balancing and weighting of what is the ‘main consideration.’
All companies should consider, not only who their customers are but also who their investors are, however not all companies should publicize an ESG policy or score to respond to what many see as a fleeting trend.
The issue is not new and has its roots in the 1960s ‘purposed’ investment practices of pension funds managed by trade unions. And then disinvestment by U.S. corporations in the South Africa apartheid regime in the 1970s gave wide media attention and future legitimization to investing based on social goals.
Increasingly in 2018 companies are accentuating “intangible investment valuation” as part of an ESG governance strategy, deaccentuating traditional brick and mortar assets and focusing on intellectual property, which may include environmental and social components, that may or may not be publicly articulated but is aimed at modernizing and making more correct business valuation for stockholders.
Some group of investors considering ESG factors will certainly not invest in fossil fuel companies, but there are industries that are more ESG friendly than others, like green building. We are told that millennials and women, who make up increasing percentages of the workforce will drive ESG investing in the future. And such may be the case. I wrote in a recent blog post, The Hottest Environmental Trend is Sustainable Business Practices and such is true today.
However, there is a perspective that investing in a company with a low ESG rating, for example because of historically poor governance (.. maybe a German auto manufacturer) or being a big polluter (.. possibly the coal industry) allow big upsides in stock prices (.. at least one German automaker and coal have outperformed the market in the last 12 months by more than double).
WeWork recently announced an ESG policy to discourage consumption of meat. The meat-free policy applies to direct company purchases as well as to meals purchased by employees and charged to the company. The move was driven by environmental considerations, and that by 2023, the company expects the change to have saved 16.6 billion gallons of water, 445 million pounds of carbon dioxide emissions and 15 million animals. The commitment is bold and strategic, aimed at the target audience of WeWork spaces users and not at stockholders (as the company is not yet publicly traded).
Eradicating meat from the bottom line will not appeal to most U.S. companies as a good ESG policy or otherwise. But then corporate directors must have a different perspective than potential common stock purchasers, today and into the future.
Third party certified green building has been a low hanging fruit ESG corporate practice approved by many boards of directors.
Fair labor practices are another ideal and easy to articulate ESG practice as I recently described in the blog post, Modern Slavery Exists and We Must Stop It Now.
If there is an obvious trend this law firm gleans in working with businesses navigating the complexity of the constantly evolving ESG investment decision making landscape, it is a belief that there is something fundamentally different happening in investing today and that understanding the move toward intangible investment valuation may be the real key to creating sustainable value for stockholders in the future.
