Disclosure of the value of ESG investors outside of securities filings

When talking about ESG, investor groups often sound like they are taking a hard line on the sustainability disclosures they want to see from CFOs and their companies.

But ESG investors on a panel at the FEI’s Corporate Financial Reporting Insights conference last week seemed more pragmatic and flexible than demanding.

Prior to any sweeping disclosure rules on climate risk from the Securities and Exchange Commission, investors are very interested in the information disclosed in corporate sustainability reports (CSRs). Investment professionals are urging companies to use the frameworks established by the Sustainable Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures.

But they also recognize that this is the beginning. They want to engage with companies about the ESG information and data they provide and understand how companies frame and measure a company’s ESG risks. How investors get the information isn’t as important as a consistent timeline and an easy-to-digest presentation, FEI panelists said.

We typically engage with companies around their sustainability report regardless of what they have disclosed in their 10-Ks and 10-Qs. —Tanya Levy-Odom, BlackRock

“In terms of 10-K filings, I understand a number of companies are focusing on climate-related disclosures in this context,” said Tanya Levy-Odom, director of investment management at BlackRock. “We haven’t been prescriptive about where companies disclose their sustainability information; we typically engage with companies around their sustainability report regardless of what they have disclosed in their 10-Ks and 10-Qs.

The Levy-Odom team assesses the corporate governance of companies in which BlackRock invests, including environmental and social factors material to business operations.

CSR gives a company much more leeway to tell its story. In fact, Levy-Odom said she hopes ESG disclosure requirements in securities filings won’t limit or prevent companies from disclosing even more information “as opposed to less information at the future,” she said.

Currently, the Securities and Exchange Commission requires disclosure of “material” climate information in discussion management and analysis of filings with the SEC. Materiality in this context follows the traditional accounting definition — “events or occurrences that would affect the judgment of a sophisticated investor” are considered material.

“More and more of what [the issuer] may not be considered material to the numbers, income statement and cash flow statements, which investors want to know. —David Tsoupros, AllianceBernstein

But right now, in the ESG investing space, materiality equates to what’s important to investors. “I think regulators are behind the eight ball in importance, and the market is already determining that [certain ESG] factors are important to how investors invest,” said David Tsoupros, principal research analyst at AllianceBernstein’s US Concentrated Growth Fund.

“More and more of what [the issuer] may not be material to the numbers, income statement and cash flow statements, which investors want to know,” Tsoupros said. Ideally, companies will disclose quantifiable, specific data that is comparable over time and across companies, he said.

Schedule and estimates

At this early stage of ESG reporting, however, panel investors realize that they may need to actively engage with a company to get the full picture of sustainability. For example, says Tsoupros, because biodiversity is important to his clients, Tsoupros asked a company if it made palm oil products. (According to some groups, palm oil production is a threat to some endangered species.)

“They gave me a lot of reluctance to disclose this, but eventually they did,” Tsoupros said. The disclosure was that “palm oil makes up one percent of one percent of our manufactured products. … They tell me it’s not material, and that satisfies me.

While timing may mean everything to some investors, the issue of timing a sustainability report isn’t a big hurdle right now. ESG investors recognize that for publicly traded companies, CSR is likely to come out after earnings, SEC filings and proxy statements.

A company’s data on climate change “isn’t necessarily tradable over a month, a quarter, or even a year,” Tsoupros explained, so it’s timeline consistency that’s important. “If you tend to release your CSR in June, I’d like to see that every June,” he said.

If complete information isn’t available or a metric is hard to pinpoint, investors are used to making decisions based on guesswork, panelists said. For example, a number of companies have started publishing climate transition scenario analyses, Levy-Odom said, which contain various estimates. To complete the estimates, Levy-Odom found it helpful to have a conversation with management about the thought process behind each scenario.

ESG investors may be relatively patient now, but they will have higher expectations, of course, as US and global compliance standards develop and accounting tools for environmental reporting mature. After ESG disclosures, the next step is to set goals, Tsoupros said. “If it is material for [their] business, we pressure our companies to set goals, the same way they budget and tell us what their financial outlook is,” he said.

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