Musing About the Alphabet Soup of ESG – SRI – CSR … et al!
Posted on March 20, 2017 by Hank Boerner – Chair & Chief Strategist#Bloomberg #CFA Institute #Cornerstone Capital #Erika Karp #ESG #Global Reporting Initiative #GRI #Kurt N. Schacht #Matt Orsagh #National Investor Relations Institute #NIRI IR Update #Rebecca A. Fender #Usman H
March 16, 2017
by Hank Boerner and Louis Coppola – G&A Institute
Often in our conversations with managers at companies that are new to corporate sustainability and especially new to publishing corporate sustainability reports, we often move into exploration of the various terms and titles applied to corporate sustainability.
SRI. ESG. Sustainability. Corporate Citizenship. Corporate Responsibility.
Or, Corporate Social Responsibility. Shorthand: CSR, CR. What else!
And on the investment side, in our discussions with financial analysts, or asset managers, we’re discussing socially responsible investing, sustainable & responsible investing (both SRI) and more recently, sustainable & responsible & impact investing — the “S&R&I”).
This alphabet soup of titles, characterizations, approach classifications and so on is usually confusing to corporate managers not well versed in matters related to corporate sustainability.
And, to investors new to sustainable investing, sustainable & responsible investing, impact investing, analyzing corporate ESG analytics…those managers also have questions on what all these terms really mean (And ask: is there a substantive difference between terms?).
Each year as the data partners for the Global Reporting Initiative (GRI) in the U.S.A., United Kingdom and Republic of Ireland, we analyze and database more than 1,500 reports each year (most are published by corporations; there are also institutional and public sector reports). Here we see firsthand every day this alphabet soup of terms playing out:
- Corporate Responsibility / Corporate Social Responsibility (CR/CSR)
- Corporate Citizenship (an older but still popular titling, especially among large-caps)
- Corporate Sustainability (more often leaning toward environmental management, growing out of the traditional EHS functions at operating companies)
- Environmental Update / Progress Report
- Corporate Ethics
The Investment Community Point-of-View
And for investors: There is also Faith-based investing and ethical investing, and a few other terms. (“Green Bonds” are coming on strong!)
Many institutional investor — asset owners and their managers, and their analysts — are seeming to favor “ESG” because it better captures the entirety of the three main issues buckets (Corporate Environmental, Social and Corporate Governance strategies, performance and issues) that make up what most investors consider to be a pretty good definition of corporate sustainability.
As corporate sustainability consultants and advisors, working closely with managements to help them effectively engage with investors on ESG issues, and so we see the term ESG becoming more and more of a preferred term for these discussions.
Consider, too, the familiar Bloomberg terminal on the desks of many investors is helping to bring volumes of corporate ESG data through the Bloomberg ESG Dashboard.
The Views of the Professional Analyst
The CFA Institute, the global education, training, testing and certification, and professional standards organization for financial analysts (“Charterholders” use the CFA professional designation) addressed this alphabet soup in its recent guide for investment professionals — “Environmental, Social and Governance Issues in Investing” (published in 2016).
The guide authors explain: “The practice of environmental, social and governance issues in investing has evolved significantly from its origins in the exclusionary screening of listed equities on the basis of moral values. A variety of methods are now being used by both value-motivated and values-motivated investors considering ESG issues across asset classes.”
(The guide was authored by Usman Hayet, CFA; Matt Orsagh, CFA, CIPM; with contributions by Kurt N. Schacht, JD, CFA; and Rebecca A. Fender, CFA.) Consider their views:
E: Looking at the environmental components (the “E”), CFA Institute, investor concerns include climate change and fossil fuel assets [becoming stranded], water stress…that means that corporate ESG KPIs should be carefully examined.
S: Looking at the social (“S”), the authors point out that labor relations can have a direct and significant impact on financial performance.
G: Looking at corporate governance (“G”), the authors note that these were previously seen as a concern for value-motivated investment, and the E and S issues were relevant mainly for values-motivated investors. Not anymore — ESG issues are relevant for all long-term investors.
The CFA authors explain that there are various labels for the same issues and ESG common theme underlying the various labels is an emphasis is on ESG issues.
We Are Leaning in the Direction of….
In our work we prefer to use “Sustainability” or “ESG”, which we think best encapsulates the entirety of what we consider to be the issues in focus for institutional and individual investors. And therefore we advise that the company’s ESG key performance indicators should be a priority concern for the board, C-suite and various level of management and corporate function areas, because of the importance of access to capital, cost of capital, and so on.
The corporate ESG performance and reporting on same might be positioned under an oversight umbrella in the corporate structure. We see these ESG activities being in the province of legal, public affairs, human resources, supply chain management, operations, EHS, investor relations, finance, corporate communications, and so on.
At times, however, we do find that some people in the corporate community hear the term “Sustainability” they automatically think only of environmental-related issues — (“E”) which of course, are just one part of what we consider sustainability to be.
And yes, all of this is still not clear cut, is it? Varying terms and titles will probably be used for a while.
As explained, we prefer ESG when we are working with our sustainability consulting clients because this term includes the three main issue areas or buckets of issues — and says what it means. Using “ESG” tends to make sure that it’s clear that our work includes three “bucket” areas – Environmental, Social and Corporate Governance. (Not just Environmental!)
And the clearer we can be with our terminology, and more specific, the better off we will all be.
But Investors Are Not Asking….
Managers at many companies that we communicate with, especially in our investor relations sustainability consulting, will say, “Why don’t our analysts ask questions about sustainability on our quarterly calls?”
Erika Karp, formerly of UBS and founder of Cornerstone Capital in New York City often responds to this key question during her public presentations (Cornerstone is an ESG-focused investment firm.)
Erika: “You’re wrong, they are asking! If you peel back the layers of the “E” (climate, biodiversity, water, energy, waste etc); the “S” (employee retention, training, community engagement, human rights, labor contracts, benefits); and the “G” (executive compensation, proxy resolutions, board makeup, board independence, board skills, board diversity, critical issues management, and oversight of the company’s key functions) — then you can listen to the quarterly calls and you will see that you are in fact getting questions on sustainability (or ESG issues).”
We agree with Erika! And this line of discussion points even more to the problems with our terminology in this space.
Of course, even though the analyst may not be asking: “Hey, so what about your sustainability?” the analysts and asset managers on your calls may be or are asking about the individual elements that make up sustainability, and some of these ESG KPI’s are more important than others. It’s important to recognize that these are Sustainability issues that they are asking you about!
As We Move Ahead…
All of this terminology discussion is our industry’s challenge, and somewhat of an educational problem in that we need to better inform others about the intricacies and the complexities that make up “Corporate Sustainability” so that there is deeper understanding of the full breadth and depth and importance of the ESG performance areas — and of the full impacts on a company’s reputation, valuation and more.
Of course, there are variations in which of these ESG issues is important (or material!), depending on industry and sector, size and geography.
We think that as we move along, “ESG” will continue to be a more preferred term for many analysts looking holistically at a public issuer. ESG will likely to continue to catch on because this approach will more clearly reflect the “completeness and complexity” of the various issue buckets that make up the corporate sustainability journey – ESG represents what it means and says what it is!
The Early Evolvement of SRI – and the Lasting Legacy
Looking back, the emergence of the Socially Responsible Investing approach (SRI #1), starting with screening out the shares of companies from portfolios (tobacco, gaming, etc.) may have a lasting legacy for some in the investment community. More and more investors are now using the term, Sustainable & Responsible Investing (SRI #2), and even Sustainable & Responsible & Impact Investing (SRI #3 also!). These are gaining currency in the mainstream analyst and asset management communities.
And so, this is not necessarily a new discussion about titles and terminologies – it has been going on for quite some time. In April 2009, when one of us (Hank) was editing the National Investor Relations Institute monthly magazine — IR Update — he offered up a commentary: ” Stay Tuned: More Initials for the IRO — These Could Spell Long-Term Success… Or Market Failure for Corporate Issuers ”
It was about ESG – SRI – CSR – even TARP (remember that?) — in that almost a decade-ago column, we noted that a 2008 survey of asset owners and managers, two terms were emerging as the preferred references: ESG and Sustainability best summed up their approach. We think this still rings true today.
It’s still an interesting read: http://www.hankboerner.com/library/NIRI%20IR%20Update/2009/Boerner2009Apr.pdf
What are you thinking about this? Do weigh in — please share your thoughts in the comments area below — weigh in on the dialogue!
What are your preferred terms in the daily conversation about…….