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Greta Thunberg Wants More from Corporations – But How Do Investors Monitor Them?

John Jannarone

Companies May Soon Adopt a Standardized Framework for Reporting ESG Matters

By John Jannarone

As U.S. President Donald Trump and Swedish environmental activist Greta Thunberg descended on Davos, Switzerland, this week, the topics of climate change and social responsibility came into sharp focus not only for countries, but corporations. The trouble is, it can be tricky for investors to determine exactly how companies are addressing those concerns.

In his annual letter to CEOs last week, BlackRock Inc.’s Larry Fink once again put pressure on companies to focus on environmental, social, and governance (ESG)-related issues. He also made a more specific request: that companies make disclosures around ESG in alignment with standards developed by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD).

ESG experts say that the BlackRock request is significant because it could steer more companies toward a specific reporting standard.

“BlackRock has always had a policy to directly hold Boards accountable for not properly overseeing ESG issues (rather than supporting shareholder proposals, for example),” Lyndon Park, Managing Director and Head of Governance Solutions at consulting and advisory firm ICR Inc. told CorpGov. “What is new is that there is now a specific recommendation for companies to disclose based on SASB and TCFD recommendations, the first explicit recommendation that could potentially standardize ESG reporting frameworks.”

It appears that SASB and TCFD standards are already becoming part of corporate reporting – if only gradually. A combined 38 proxy statements and annual reports (10-Ks) mentioned SASB in 2019, up from just two documents in 2015, according to Sentieo, a leading AI-enabled financial research and workflow platform. The trend was similar for TCFD, which was mentioned in 37 times last year, up from zero mentions in 2015 when it was established.

“While we are seeing a surge in ESG investing, from indices to formal allocations by the large institutional managers, the reported data is still not standardized,” said Nick Mazing, Director of Research at Sentieo. “This has created very different approaches for determining what is an ESG rating: from company and consumer surveys, to relying on single data point disclosures, such as gender balance in board rooms.”

Within SEC filings, mentions of SASB and TCFD vary considerably. Some companies have embraced such frameworks outright, some have fought shareholder proposals to incorporate them, and others have alluded to them only in passing.

Consider The Clorox Company, which appears ahead of most companies in selecting a framework. “This year, as part of our ongoing efforts to implement best practices and provide additional information that our shareholders may find helpful, we are including certain information aligned with the Sustainability Accounting Standards Board (SASB) reporting framework,” Clorox said in its proxy filing in October. “This is the first year that we will be reporting certain information aligned with SASB, and we hope to continue making more disclosures in the future pursuant to this framework as standards continue to formalize and collecting and validating data for relevant industry classifications becomes more commonplace and comprehensive.”

SASB was also mentioned by Charter Communications, Inc. in its 2019 proxy because of a shareholder proposal urging the company to use it as a standard for ESG reporting – a proposal Charter told shareholders to vote against. “We agree that environmental, social and governance-related (“ESG”) matters are important and worthwhile areas of focus for the Company. We conduct our business with a compliance focus and have a strong corporate culture of ‘doing the right thing,’ including with respect to ESG matters,” Charter said in its proxy in March. “However, although the Company remains mindful and vigilant with respect to ESG matters as it hires employees, engages vendors and provides products and services to its customers, we do not believe that separate reporting with respect to our policies and improvement targets as proposed in the stockholder proposal represent an efficient or prudent use of our corporate resources.”

Mr. Park also pointed out that many companies may actually use SASB but not include it in SEC filings, instead making mention in the “sustainability” section of their investor relations websites. And they may also not tie SASB directly to ESG – something that BlackRock could help change.

“One important takeaway – BlackRock’s active strategies are pivoting to a comprehensively ESG-integrated model,” Mr. Park added. “This sea change is coming for other global active managers, as there is a raft of regulatory imperatives coming from the EU in 2020 which will require asset managers to better describe how each is integrating ESG into investment considerations.”

BlackRock’s letter may also lead more directors and senior management members to simply pay more attention to ESG matters, even if they don’t adopt standardized frameworks. “Whether or not BlackRock’s efforts produce a consensus on a sustainability disclosure standard and accelerated voluntary reporting, it is clear that, going forward, investors will expect officers and directors of investee companies to demonstrate a strong understanding of company-specific sustainability and climate-related risks,” Wachtell, Lipton, Rosen & Katz wrote in a client note regarding the BlackRock letter. “Companies that have not yet disclosed against SASB and TCFD standards are well-advised to familiarize themselves with these frameworks and develop their rationales for not making those disclosures, deciding upon a reasonable time frame for making new disclosures or adhering to a different standard.”

CorpGov Contact:

John Jannarone, Editor-in-Chief

editor@corpgov.com

www.CorpGov.com

Twitter: @CorpGovernor