How should the standards for environmental, social, and governance (ESG) criteria be set for companies? It pays to consult others to get a wider view, the Sustainability Accounting Standards Board (SASB) says.
So call in investors and other stakeholders to get an expanded perspective, says the ESG movement’s advisory nonprofit group. Does that sound like common sense? Of course. But companies need to wake up to this need for outside input.
“Market feedback is a fundamental tenet of our approach,” Marvin Smith, director of SASB’s stakeholder outreach, said in a company webinar on the importance of ESG standards held last week. SASB promulgates its own set of standards, which individual companies use as a starting point for their own disclosures.
Supporters say ESG standards are worthwhile to adopt, even though some criticize them as subjective and confusing. Numerous studies show that ESG-oriented companies have better earnings in the long run. The standards just need improvement through better communication among shareholders and companies, as well as with firms such as SASB, supporters argue.
Take dams that are used to store hazardous byproducts in water from mining operations, called tailings. Some of them failed, with bad results for the environment. In 2016, for instance, contaminated liquid from a Florida mine seeped into the local groundwater supply. After investors and companies were looped in, and standards were set by SASB, these basins filled with toxic waste were made much safer and more reliable.
Before setting a new standard criterion, SASB said it solicits input from the public, as well as advisory groups and independent research. If the company standards board votes to further a criterion for a standard setting project, it will open the criterion to a public comment period for final feedback.
A call for refined ESG standards is getting louder as different corners of the world, including the US, are scrapping or weakening regulations around sustainable investing. The US Department of Labor (DOL) last week unveiled a proposal that some say would weaken ESG investing. The proposal says company pension plans have a fiduciary duty to beneficiaries, not to social causes advanced through ESG investing.
Meanwhile, sustainable investing advocates say that any ESG frameworks should be built on existing standards from places such as SASB.
Feedback around ESG disclosures can also start as a conversation between stakeholders and companies, as well as come from within firms.
“Where we focus our engagement topics and issues are really on those that are business relevant and have the potential greatest impact on sustainable earnings over the medium and to the long-term,” said Julie Moret, global head of ESG at Franklin Templeton.
Franklin Templeton, an asset manager managing $620 billion, started with SASB’s framework and then added its own proprietary data to show companies what it wanted in the way of ESG in order to invest. These included strategy, risk and communication, human and social capital, governance, and environmental considerations.
But its best progress is built on relationships, Moret said. For example, after recently engaging an Asian cement manufacturer on disclosing carbon emission performance targets, the firm made a commitment to do so.
“For investors, the takeaway for us is really the next time that we engage with that corporation, it’s a check-in point in terms of, you know, what are the challenges, to what extent have some of those areas been achieved?” Moret said.
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Tags: environmental social and governance, ESG, Investment, Investment Fund, SASB, Stock, Sustainability Accounting Standards Board