Investors and corporates recognise added value of ESG

Sustainalytics supports hundreds of investors who incorporate environmental, social and governance (ESG) criteria into their investment processes. Bob Mann, president and chief operating officer, says that investors and corporates are increasingly aligned when it comes to sustainability.

Bob Mann Sustainalytics

Is awareness of ESG increasing among investors?
It certainly is. What’s especially important is that this is a global phenomenon – it’s happening in Asia, Europe and especially in the US. One of the drivers is simply that as awareness increases in one region, a virtuous circle occurs. That makes it easier for international corporate issuers to meet the expectations of investors worldwide and adhere to ESG standards.

Why is ESG becoming more important to investors?
One driver is the growth of the retail market, especially in the US. Millennials and women are showing significant interest in aligning their investment behaviour with their personal beliefs and goals. Flows associated with such investment behaviour are currently small but strong growth is anticipated in the coming years.

In the broader institutional market, there is growing evidence that ESG – when properly executed – adds to performance. We are not at the point where mainstream institutional investors are going to prioritise companies with high ESG standards but understanding around the threat of climate change, for example, has been internalised by the institutional community.

How have attitudes among corporates changed?
A decade ago many companies understood ESG and recognised that it was good for employee recruitment and motivation. But they struggled to implement widespread ESG policies because at that time there was no signal coming from investors that these issues were relevant. Now the signals are more aligned: investors are increasingly singing from the same hymn sheet as companies.

In what ways does Sustainalytics engage with companies?
We work with companies in two ways. First, we are a provider of ESG and corporate governance research and ratings to investors, assessing about 10,000 companies a year. This is an arm’s-length process that focuses on disclosure and due diligence to deliver meaningful information to investors about companies’ ESG performance.

Second, we work directly with companies – mostly blue chips – to analyse ESG information for rating purposes, usually associated with a green loan or bond. This market is growing rapidly: in our first year we assessed 35 companies; in our second 100; this year we are on track to assess between 150 and 170 companies. Growth is being driven by a number of factors, most obviously an increase in issuance of green loans and bonds. However, another important source of growth is that companies have made significant improvements in ESG and want that information to be more widely appreciated.

Consequently, we are seeing an increase in ratings related to the issuer rather than simply the use of proceeds, which has historically been the case with green loans or bonds.

How complex is the rating process?
It depends on the type of rating sought. For a green loan or bond where our opinion is being sought about whether the use of proceeds is green and will make a difference to sustainability, the opinion is relatively straightforward. The process generally takes about a month and we ensure that it carefully aligns with the loan or bond issuance process so seeking a rating does not cause a delay.

Where a company is seeking an issuer rating, for example if it wanted to borrow using ING’s sustainability improvement loan, which is linked to the company’s sustainability performance rather than the use of proceeds, the process is more meaningful and involves a wider range of parties within a company, including finance and sustainability, for example.

How can companies use ESG information internally?
ESG and sustainability assessments are important to decision-making: we aim to provide information that creates value for companies. First, assessments can provide a valid source of information that helps internal advocates to promote change.

Second, ESG information is typically comparable across an industry so it can prove helpful to understand relative performance compared to peer companies. Third, we share best practices with corporates that enable them to understand the changes they need to make.

What challenges does ESG face in gaining wider recognition?
ESG remains challenging in some ways because there are no clear unambiguous standards, unlike those associated with financial reporting, for example. In contrast, ESG is a disparate landscape with a variety of reporting methods on subjects such as the environment and governance. That can make the topic hard to measure and understand. Consequently, an intermediary is needed between investors and corporates. Both parties are currently on a journey and need help to organise complicated information so that companies can collate it and investors can digest it. The first step is to establish transparent indicators – that’s where we fit in.

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