Podcast transcript: How are investors integrating ESG into their decision-making

Chris Hagler

Welcome to Sustainability Matters, a podcast series of EY. My name is Chris Hagler. I’m one of the leaders of our Climate Change and Sustainability practice and your host for this series. We designed this podcast series to provide leading trends and practical advice around environmental, social and governance, or ESG, issues and opportunities facing business today.

This special podcast is a recording from a panel discussion that EY hosted at GreenBiz Conference this past February in Phoenix. The topic is “How investors are integrating ESG into their decision-making.” The US form for Sustainable and Responsible Investments Report from 2018 estimated that around $12 trillion of asset in the US are managed under some sustainable investment strategy, and since then, sustainable investments globally have seen tremendous growth. That focus on ESG investment strategy comes with the need for additional information. Investors evaluating ESG performance wrestle with the availability of consistent and comparable metrics, a plethora of ranking and rating systems and the management of new risks.

Here to share insights from their experiences in ESG investing are my colleague and our moderator, Rich Goode, a managing director at EY in the Climate Change and Sustainability practice, and our panelists include Elodie Timmermans, a senior manager at EY with significant experience in ESG and financial services; Verity Chegar, director and ESG Integration team lead for BlackRock Sustainable Investing; Ramsay Huntley, sustainable finance strategist responsible for sustainable innovation at Wells Fargo; and Courtney Thompson, vice president of Global Sustainable Finance at Morgan Stanley. Thank you for listening. We hope you enjoy the discussion.

Rich Goode

Good morning, my name is Rich Goode. I’m a managing director with EY in our Climate Change and Sustainability Services practice and really happy to be here with you today moderating. Before I introduce our esteemed panel here and get us some interesting questions, I just want to reflect on a couple of things. We’re living in exciting, engaging and terrifying times. I’m sure many of you who have spent a big part of their career in this big thing we call sustainability and ESG, it seems like it’s always been a struggle for relevance. This time feels a little bit different in that we are relevant. This topic is relevant.

And I just sort of reflected that last week at home, my cell phone rang at 7:30, and my wife was like, “Who’s calling you at night?” And it was the CEO for this company we’ve chatted with, saying “Hey, we’re thinking about doing this for our ESG policy. What do you think about that idea?” And CEOs don’t normally call me at home at night. I don’t know about you, maybe they do. But it just feels different. It’s far more relevant now.

So, with that, what I’d like to do is just quickly introduced our panel and then jump right in. Just as a reminder, so you remember where you are, this session is how are investors integrating ESG into their decision-making. And I think that is a great topic. We’re really happy to be talking about this because these are questions, we’re getting every day. All right, what information do you need and how are you going to use it so we can best serve your needs?

My panelists, from my right here, I have Elodie Timmermans from EY. She’s a senior manager in our Climate Change and Sustainability Services practice. I have Verity Chegar from BlackRock. I have Ramsay Huntley from Wells Fargo, and last, but certainly not least, Courtney Thompson from Morgan Stanley.

I’d just like to jump right in, and we like to keep this conversation and we’ll definitely leave time for questions at the end because I know there are some burning questions out there. And I guess I’ll start with you Courtney. How are asset managers and financial institutions using ESG ranking and ratings while performing their own analysis to understand risk? So, what’s the role of those ranking and ratings in your own analyses?

Courtney Thompson

Yeah, it’s a great question and where I sit at Morgan Stanley spans across all three of our business units. So, I focus both on our asset management business as well as our wealth management business, where we have lots of investment products that we offer to clients who are increasingly asking about ESG and sustainability and their investment portfolios. So, I think one piece of context that’s helpful for the backdrop of thinking about ESG data and rankings is the different styles of ESG investing. There’s obviously some funds and investment strategies that will exclude certain sectors or behaviors because of values-based or risk-based reasons, so some of the data is helpful for avoiding those in certain investment portfolios, if that’s what the strategies aim to do. But really, where we’ve seen a lot of the asset flows, certainly on our wealth management platform, have been into strategies really called ESG integration. So, that’s about looking at the fundamentals of environmental, social and governance factors, alongside your fundamental financials. And so, that’s really what both active and passive managers have been doing for a long time, and this is just adding another layer of data.

We’ve seen the proliferation of different ESG ratings and rankings, and those have factored into multiple different strategies that I’ve seen in the market. And really, the way we’ve looked at the landscape of data, there’s kind of three buckets that investors are looking at. Some is the really traditional kind of ESG ratings that look at kind of multiple ESG factors of a company and roll those up into a single score. Historically, those have been very black box, but they are becoming more transparent over time. Most investors, I would say, take those with a grain of salt. They’re a directional view on the overall sustainability or ESG profile of a company, and it may give an indication of where some ESG risks might lie in their portfolio or with a specific company they look at.

But I would say very few investors are taking those wholesale and making entire investment decisions based on those, right? They’re really more interested in digging down into the next layer of data, understanding specific points about employee retention or carbon emissions or policies and procedures that companies have in place related to what they think are the material ESG issues. So, that’s one bucket.

The second bucket is really single-issue providers, so some data providers that are diving very deep on specific topics, like gender diversity or carbon emissions or physical risk. So, increasingly, that is, those different providers, although they’re necessarily the big-name data providers, have become really influential in certain investment strategies. And so, those are one to keep an eye on as corporations and understanding how you’re being reviewed.

And then finally, there’s a move towards AI. I know some other panels have gotten into this as well, but some of the high frequency data, so understanding the sentiment of a company from social media feeds and otherwise, what is the news saying about certain ESG risks or issues facing companies today. So, I would say those are really the three buckets that are influencing this ESG integration and, in some cases, more thematic investment portfolios that are trying to pick companies based on more specific ESG or sustainability themes. So, I’ll stop there, but that’s kind of the backdrop that I’ve seen on the data question.

Verity Chegar

May I hop on that question too a little bit?

Goode

Yes, please, Verity.

Chegar

Because I think everything Courtney said was true and correct. I did hear that there was a raters and rankers panel yesterday that got a little fiery, so, unfortunately I missed that. But I think the takeaway I heard was that both companies and investors feel frustrated with the raters and rankers, and I think that’s true in our experience. However, it is the sort of, for lack of a better phrase, a necessary evil that we must use in order to achieve the scale that we require to apply ESG and sustainable investing to our entire business.

So, BlackRock, as you may know, has a large index business as well. And so, if you are trying to analyze the ESG performance or the qualities or the sustainability attributes of 3,000 companies and each of those 3,000 companies is reporting information in a different way — so it’s completely incomparable, many of them will be telling stories and sharing anecdotes about certain facilities rather than talking about total operations, where you can really get a sense of the scale or magnitude or materiality of performance of a given issue — then we need someone else to come in and provide an opinion that kind of normalizes all of that information across all of those companies.

And of course, there’s a large group of companies that are saying absolutely nothing about the sustainability information that we are trying to measure. So, yes, AI and other web-scraping tools are available to what’s passively out there in publicly available information. But until we get this sort of systematic disclosure from the companies themselves in a comparable, consistent, high-quality way that it’s mostly quantitative in many cases, we’re going to continue to need to rely on research opinions and some of those ranking sources in order to really be able to create the products that our clients are asking for, which are ESG funds that hold many, many securities.

Goode

Verity, I think I’ll come back to you with our next question, which is with ESG data evolving, how do you work directly with your clients to get the data that you need? Make sure the data that they’re looking for, you’re able to get it. And we talked a little bit about the ratings and rankings agencies and almost like a necessary evil, and you can have one company with two very different scores on two separate platforms. How are you working with your clients directly to access the information you need?

Chegar

Well, again, I compliment Courtney for giving a really nice overview of the landscape there. And one thing is that when I started in this role, I came from what we call core portfolio management, 17 years in the asset management industry and about half of that in portfolio management, starting out with small-cap and micro-cap companies. And there’s a little bit of an analogy to sustainability information, where you have to really dig to uncover the stuff that really matters, because it’s not necessarily readily available. That was certainly the case when I started on the sustainability and sustainable investing field in around 2011, when I was reading 10-Ks and annual reports and trying to find out what’s the one material thing that’s going to change our investment thesis about the future earnings growth of this company and the reason we’re investing in this stock.

I found out about SASB and I said, “Oh, if this group can actually help companies just tell all of us investors what matters in a way that is going to be able, I can just track it and read it on a report on a regular basis, that’s going to make my job a lot easier.” Fast forward 2020, nine years later, there’s almost too much information. There’s a lot of sustainability stuff out there, but again, it’s about filtering into what matters, what’s going to make a difference for the investment case.

And on the index side, certainly we need uniformity in terms of metrics, in order to kind of understand which companies sort of fit into the fund objective or not, or as it fits into the index. On the active side, we have an array of sources available. It’s absolutely true that that third-party research opinion is something that is a starting point, but the investors are professional investors. They’re very well experienced in analyzing opportunities and risks and then using that as a starting point to understand what issues might be rising to the fore for a company in a given industry and then diving in deeper.

Certainly, we have clients who come to us wanting to know what sources of data are available and in use, but because BlackRock’s active investment platform is so diverse, the sources of information are going to be primary. So, directly talking to companies on private equity, private credit. There are going to be lots of interesting and unique specialized research sources, including climate, physical risk analysis for our muni bond team that wants to know which plants could physically be impacted by extreme weather events. So, we’ve got access to data that tells us that kind of impact for risk modeling. And then again, on the fundamental active equity teams or the systematic active equity teams, they’re going to be using a mix of and variety of sources, including original company reports, primary sources that many of you are probably working on in order to determine sustainability performance and then feed that back into the valuation and help that inform the decision to invest, divest.

Elodie Timmermans

Thank you. And I think just as we work with our clients who are often like asset managers or wealth and asset arms of banks in wealth and asset management space, they often ask us okay, how can we integrate the ranking and ratings of the various companies that are out there. And oftentimes, what we see is that the investors are actually, you notice, they’re actually taking that into consideration, but they’re not just taking that into consideration. They know the companies. They’re engaged with the boards and investor relations, and so, they’ll ask some specific questions about, “Hey, why is your rating maybe a bit lower than your peer,” and there’s oftentimes a good explanation.

And some of those rankings and rating agencies often take into account some legacy type of risks that the company might have addressed already, or if something happened in your supply chain, around human rights, for instance, and you’ve addressed it as a company, the ranking might still be a bit lower, but you’ve already taken things into consideration. Or you have a risk about climate risk, and the company is already doing something around it, but you haven’t disclosed that yet in your external reporting, having that engagement is critical.

And so, I think as you work on your reports, but also on your ESG strategy, just remembering to understand where your risks are from an ERM perspective, and then also just understanding that and knowing how to answer to those questions is going to be critical. Because it’s not having an answer which is going to be a risk for the investor, instead of having the answer.

Goode

That’s an important component, not having answer. A lot of the exchanges even say report or explain. And that leads to, I think, the topic of transparency, right? You as a company may not be able to get access to certain information. It just may be difficult for you to get a handle on it. Maybe you’ll have it next year. Say that. When it comes to this section, if somebody’s expecting you in a certain SASB metric to report something and you’re just unable to do so, don’t leave it blank, don’t delete it. Just say, due to these factors, we’re unable to get information this year. We expect next year or the year after. So, transparency. Adam Werbach wrote a great book, Strategy for Sustainability, and in it, he has this great saying that I always remember. He says, “If time is money, transparency is time.” So, by being transparent, you’re not only saving time, but saving money as well.

Chegar

BlackRock did just that. We published our SASB report in January and we did not disclose to every single metric and we explained why. So, if anyone is looking for a sample or an example, that’s on our website at BlackRock.com.

Goode

Excellent, there you go, best in class. Ramsay, you’re at Wells, a little bit of a different model. You’ve got lots of different parts of your business. Can you talk a little bit about how you’re integrating ESG into your risk and decision-making?

Ramsay Huntley

Sure, thanks, Rich. At Wells, I’m part of the sustainability and corporate responsibility function for the bank. And within that, we’re an enterprise-level function. And so, as you might imagine, we work across the various lines of business. And for those of you that aren’t familiar with the way that Wells is structured, we have three primary businesses. One is our consumer, retail bank, our wholesale banking, which is our corporate banking arm, and then Wells Fargo Investment Management. For example, when I think about wholesale banking, there are a number of industries that we and our peers in the financial services sector engage with. They are considered to be perhaps more sensitive from a social or an environmental perspective. It could be oil and gas with issues around where drilling is taking place, pipeline issues, that I think we’re all familiar with over the last few years.

The arms and armaments industry — what our team has done there is to develop a really robust framework for how we consider environmental and social risk. If you’re used to working with a bank, you’re used to credit risks being applied to any sort of project you might be considering financing. And so, this is a layer with that to consider additional risks that present themselves with various industries.

And I think what’s interesting is to see the way those industries that are considered sensitive are expanding, frankly, quite rapidly. So, perhaps if you were initially looking at say oil and gas as a highly sensitive industry, now there’s considerations for mining for agriculture, forestry, even consumer finance, for instance, with predatory lending and whatnot.

So my message to those of you in the room is think about where your companies lie upon that spectrum, and think about how transparent you’re being now and if you’re able to answer those questions comfortably, frankly, for yourselves first, but then more broadly publicly, because I think you’re seeing this obviously in the investor space, but you’re seeing it, I think, really throughout the entirety of the financial services sector. And my sense right now is that there’s no sense that’s going to back down, that it’s only going to continue to expand and grow. So, I think we’ll see that become much more robust as we think about risk and where risk might come from.

Thompson

Yeah, maybe just one point to add on that too. I think we often talk, and we were talking about this a bit in our prep, so kind of a joint observation from all of us, which is that a lot of the ESG data ratings-and-rankers conversation is typically associated with equity investors. But as you think about financing and, increasingly, fixed income investments, whether those are short-term liquidity investments, longer-term bond funds, right? These investors and the end clients that we work with, for example, in our wealth management business, they want ESG integrated across their entire portfolio, and a well-balanced portfolio has typically an allocation to fixed income of various durations. So, therefore, fixed income investors, financers, credit lenders are also considering this.

So, the disclosures and transparency and consideration around risk, especially for fixed income investors is particular important. I mean, we have tracked certainly the flows into different funds and different asset classes that are tracking sustainability and ESG. We’re seeing quite a bit of growth on the fixed income side. So, I would keep that in the backdrop as well. This is not just about obviously the equity and the stock conversation, though it often starts there.

Timmermans

And I think also what people sometimes don’t realize is this is not new for banks, right? Most banks have an environmental and social risk framework, where you look at what are the sectors with the most risks and asking questions about okay, how do we make sure we address those risks. And that could be following the environmental and social risk framework, it could be following the equitable principles, things like that. It’s becoming more integrated within your overall, even for, if you are a company and you want a loan basically, the banks are going to start looking at your environmental and social and governance risks associated with that.

And I think that as you, from a company perspective, you might start getting more questions from your Treasury team or from the businesses because they’re asking questions about hey, why is the bank asking me this question or what’s the answer to this question, because they don’t have the answers about the ESG strategies that the company might have.

Huntley

Yeahs, I think that’s a really good point. I suspect a lot of you in corporates, your engagement on this topic is probably with investor relations, they’re hearing from their relationships, the inbound questions as it relates to ESG and whatnot. But I think to that point, Treasury is a different part of the organization that is probably going to be moving much more rapidly along this journey in much the way that our colleagues have over time. So, again, that whole idea of this is just going to keep expanding kind of out and out and up and up. And by that, I mean covering different sectors and deeper and deeper within those sectors, whether that’s from the equity perspective or whether it’s from the fixed income, financing, what have you.

Goode

Keeping on the topic of risk for a moment, again, in Joel’s opening yesterday in the plenary, he had sort of said a risk is a risk. And I think a lot of times when we talk about ESG risks, we sort of think of that in a separate category. And if you think back to maybe the early days of sustainability, it was a separate function. It was maybe run out of maybe a communications group or tacked on to an environmental health and safety or something like that. And it was always separate. And going back to like sort of the opening theme here, integrating ESG information into decision-making is, really, what are your risks? And a risk is a risk. So, ESG is not really separate.

In fact, the WBCSD and COSO got together, and EY helped them on this endeavor, write a report that’s basically integrating ESG risks into enterprise risk management. And so, if you Google search WBCSD ESG ERM (Laughter) there’ll be a quiz on this later (Laughter) you’ll find the guidance. It’s a great document. And for those of us in the sustainability field or ESG field still trying to get our risks under the enterprise risk register, that gives you some really good, practical, step-by-step guidance on how to do that. In EY, we have a lot of clients that ask us for what we say in the insight session, please come out and give us sort of the lay of the land. So, we have to stay on top of this.

And what we noticed, a lot of the asset managers, investors in private equity are doing in terms of communications to corporates, if you will, is first tell us what you’re doing. Respond. Be open. Be transparent. Then sort of the next step is engagement. And you talked a little bit about that, Verity, you’re going and engaging. And I wonder, just before we leave that topic of risk, if you could just maybe say a couple of words or Ramsay or Courtney, about what these conversations are like. When you meet with a corporate, who are you meeting with? Do you get a different reaction from the investor relations vs. the chief sustainability officer vs. the CFO? Does CFO say get your hands off of my K? That’s what they say to me. (Laughter) So, I’m just wondering what those interactions are like.

Chegar

Well, we’re engaging at multiple levels at BlackRock. And I failed to mention at the onset that I’m on the BlackRock Sustainable Investing team, which is an internal platform function. So, we partner. We do a lot of partnering with other teams. We partner with investment teams to do their ESG integration, so we engage with those investors to help them understand how to measure and access information to basically understand sustainability risk and opportunity for their investment universe.

We also work with colleagues on the BlackRock Investment Stewardship team. That’s the team that does engagement with portfolio companies and also votes proxies. So, for our index strategies, which is almost two-thirds of our business, it’s a very meaningful segment of our business, it’s a very important segment for our clients to be exposed to index investments where they can sort of track an index, and therefore, the portfolio we manage for them holds the same companies that the index has as designed by the provider, the index provider.

So, one thing we do at our firm is to engage with the index providers. We engage with them to understand their methodology, to make sure that they’re creating a suitable array of indexes that are appropriate and match the sort of building blocks that our clients are asking for, including across asset classes, so that we can have ESG product offerings, both on the equity side and the fixed income side. We can have thematic exposures to ideas like the future of transportation and so on, low carbon economy indexes and so on. So, we engage with the index providers.

And then also that team, that BlackRock Investment Stewardship team meets with portfolio companies that are owned by our clients, so they’re engaging on behalf of clients. In those portfolios, they’re typically are going to hold the stock as long as it’s in the index. So, there’s not that active decision to say “oh, I found a risk here, I want to exit this holding because it’s too risky for the profile of my client.” That’s not an option in index management, portfolio management. So, this BlackRock Investment Stewardship team engages with the companies in that portfolio, which might be exhibiting higher risk, to understand what is the management team’s plan or strategy for mitigating and managing this risk in the future. Are they disclosing that strategy very clearly to the public, not just to us?

And then how are they measuring that performance of mitigating and managing that risk over time? Are they demonstrating strong performance in that over time? In other words, to reduce that risk. So, that effort is a function that BlackRock Investment Stewardship team does as a fiduciary acting on behalf of clients. We believe that that can enhance and improve the long-term value of portfolio companies across a universe of investments that we have. And in other words, it’s like instead of just having a single company do better than another sort of in this kind of race of individual companies, we hope that it can sort of raise the performance level of all companies across sectors, across investible universes in a way that’s going to hopefully benefit us all and get toward a more systems level achievement of true sustainable economies.

Goode

I think that really makes it clear in terms of the goal, right? I mean, ultimately, you’re looking at proper fiduciary management for your investors, your clients. And by engaging with companies to help them understand and mitigate and respond to ESG risks, you’re helping them build value, which in turn helps you build value for your client as well.

Thompson

Yeah, and I would just add to the engagement question, I think really the three main things that I’ve seen our investment teams internally and those externally that we look at really try to get out of engagements. I think just echoing a lot of what Verity was saying, is, really, they’re looking to understand are certain risks on the radar for your company. If there’s something out there that they’re viewing as a material risk, as an investment thesis to a sector, they want to understand is that on your radar, whether that’s part of your ESG rating and rankings and disclosures, is it top of mind?

Two, if there is a risk that’s been flagged, is that something that you have a plan around? Again, that maybe in the works internally, that idea of being transparent around what’s happening, I think, can be very helpful and give investors comfort that yes, this rater or ranking is flagging your company on an issue, but you may have a very robust plan in the works internally, and that may give them a lot of comfort.

And then, thirdly, it’s often an opportunity to clarify when there are gaps or, frankly, inaccuracies in a lot of these data ratings rankings providers that are out there. I know yesterday’s panel got into this a bit. It’s a struggle I think we’ve all seen. There’s often inaccuracies or delays or gaps in a lot of this data. As a company reporting on that, that may be endlessly frustrating to you. It is equally frustrating to the investment community, but we’ve definitely seen instances where a rating or ranking had put out a number about a company and then upon engagement with that company, it became very clear that that was an outdated number, an outdated figured or, frankly, just an inaccurate ratio or metric for a given industry or company. And so, that’s really an opportunity I think to showcase and go beyond and get above some of the ratings and ranking noise, if you will.

Goode

Great. That was really, really helpful. So, Elodie, you and I, we’re killing our scope-three travel emissions, working with our clients. But with the clients that we’re working with, what are some of the biggest questions you get in terms of when they’re sort of saying, “Okay, I know I have to do more here. What’s the first step, how should I build an effective ESG program?”

Timmermans

That’s a great question. What we’re seeing also is that on the financial sector side, you have obviously the companies are already have an ESG framework, they are integrating ESG within their decision-making, their products. But still in the financial sector side, you still have companies that don’t necessarily have an ESG framework or they’re hearing a lot about what BlackRock is doing or what the other investors are coming out with. Or they know about the principles for responsible investing, or principles for responsible banking. But they don’t necessarily have a framework in place yet. So, the question is okay, what do we do from a company perspective and how do we start integrating this within our products and decision-making?

Typically, what we’ll recommend the company to do is start with a sustainable materiality assessment. And by doing that, looking at what do you have in place already at the company level, because the reality is oftentimes the company is already doing some initiatives, whether it’s about diversity and inclusion or the team is looking at responsible investing somehow. So, there is oftentimes much more in place already. It’s just siloed and there’s not a proper governance in place.

So, as you go through the materiality assessment, looking at what is important for me as a company to be sustainable and really improve my long-term value, but what is important for my stakeholders — both shareholders, employee, clients — because everyone is starting to look at ESG in a slightly different way. So, understanding both that criteria is key.

Second aspect, once we’ll have done the materiality assessment is creating and building that ESG framework, what is relevant for you as a company. You have SASB, you have the TCFD, the Task Force on Climate-related Financial Disclosures, GRI and other frameworks that are very useful to take into consideration. But at the end of the day, no company is the same, and so, you really have to look at what is relevant for you as a company and tell your story, because first you don’t want the story to be told for you. But second, oftentimes, the companies are not … you work in one sector, but you might also have this piece in another sector or some other items might be relevant for you and your communities or employees.

So, looking at what is relevant for you and what is your ESG framework. And then setting goals, both on the aspirational type of goals, looking at 10 years from now, 15 years from now. But also what is the short-term level, what can you do to basically improve your ESG frameworks or just build out that foundation? And looking at what’s the governance, how do you make sure that this becomes integrated within your full company and not just a silo? Just because of what we talked about earlier — so, that’s more like on the corporate perspective.

And then, just engaging with your teams from product and services perspective, and looking at where do we need to integrate ESG within our decision-making? In the financial sector, a risk can take place in how do you integrate ESG within your credit analysis? Or when you have ESG funds? Or just your overall indexes, when do you look at ESG? But for the products, it’s also when do we need to be more sustainable, or when does innovation come into place and do we want to reduce our carbon footprint or come up with a new product that’s going to help achieve some of the sustainable development goals? Things like that. So, it’s really about the integration across the company.

And finally, just like what do you disclose externally to your investors and your stakeholders? Because they want to hear the story. And again, you want to make sure you are capable of telling the right story and not be the story be told for you.

Goode

That’s right.

Chegar

We need to change that phrase from materiality assessment, because if you’re going to come to me and request a materiality assessment and not bring your investor relations department or anybody from the CFO office, we’re talking about two different things here. Let’s do bring the investor relations and the CFO office along to that conversation, so that that team really knows and is thinking about what matters to investors in order to disclose material disclosures. Or let’s call it an importance assessment or something that matters assessment or a reporting assessment or what our employees need to hear about. Because if that’s really what you’re talking about without having investor relations in the room to hear directly from, for example, a BlackRock, where we are analyzing ESG in every single investment team for every single investment strategy, they’re not going to hear that message that we are actually making investment decisions every day based on this stuff. And to us, it is material.

Thompson

Yeah, I think it’s really about knowing your audience for a lot of this information. Our team inside of Morgan Stanley, also similarly to many of my panelists, sits centrally within the firm. Our team is responsible for a lot of the work that goes into our own sustainability report. And I think it’s really become an evolution internally for us to say our sustainability report is an investor document. And so, we’ve aligned with SASB as well. We started that evolution in 2016. Last year, we were one of two US banks to issue the first SASB-aligned matrix and index in our sustainability report. And we’ve, again, really stripped down our sustainability report to focus on the things that we think are material to investors.

We use our website and we use other avenues to really communicate to our other stakeholders, our employees, our customers, our other NGOs and stakeholders. So, it’s really about segmenting your resources and your communications channels to target your different audiences. And, obviously, this panel is about what investors are looking for, and so, again, I would really encourage thinking about frameworks like SASB. Think about what are the materiality assessments and factors within your company and making sure, as Verity said, the right folks internally who really have senior leadership and ownership of those are in the room and in the conversation and thinking about those.

Huntley

I think that’s all spot on. And then I would, if I would have an ask or a thing I would say all of you might want to consider to is, as those risks rise up within that level, the IR team and folks that have legal responsibility for those disclosures from say like an SEC-type level, you’re helping those teams proactively find the resources they need to be able to best answer those questions.

Think about climate risk, for instance. And that’s still a nascent field, right? I mean I think we can all agree that that’s an area where there’s a lot of activity right now, but it’s still an area that is, frankly, brand new. I think there’s probably a lot of people in this room more expert than I am, but there’s a very limited number of people that are really actively engaged in that work. Yet, we’re talking about things that are truly material type risks associated with that. I would say you can be very valuable to those teams to help them better understand how they’re going to have to address those questions, because those are, I think, becoming very real questions that are rising up in importance, frankly, on a weekly basis it feels like at this point.

Goode

In listening to all of you, it comes loud and clear, tell your story your way. Get the message across, be ahead of it. Just myself as a client server, I’ve had two engagements in the last year that came about not because they were just sort of looking proactively to upgrade their program and their reporting program, but they came from threatened shareholder resolutions. And that’s not where you want to be. You want to get ahead of this.

And then as we sort of dovetail into our next topic, I kind of want to just reflect that we’ve talked an awful lot about risk, but maybe just a reminder that not all risk is bad. Right? The opposite of risk is opportunity, and when you look at a lot of the frameworks like TCFD, they ask companies to look at your risks as well as your opportunities, because investors aren’t just looking at risk, but they’re looking at potential. So, don’t forget that side of it.

And then I guess using that as a pivot point for opportunity, I always want to end on a high note, right, the opportunity, let’s talk about some new products. Maybe Ramsay, we’ll start with you, there’s green bonds, there’s transition bonds, there’s new ESG funds, there’s indices. Let’s talk a little bit about what’s the future of sustainable finance.

Huntley

That and a lot more, right. (Laughter) One example I think that’s getting a lot of attention, you probably see a new example weekly at this point, is the sustainability link loan. Anybody here in the room, any hands, people that are familiar with that product? Sustainability link loans. for instance, a energy company they went to the street with a very large corporate revolver.

There were 25 banks participating in that revolver. Wells was one of them, and the interesting thing about that revolver is the discount that is available to them if they hit very clear, very near-term climate-related objectives. Now, I’ll be frank, their targets were not huge. It was, I forget off the top of my head, but one or two percent reduction in their emissions, but on a very short basis, like two years.

So, the idea being that that product aligns to what they’ve said they’re going to do publicly, which is to basically hit a high point with emissions and then start to actually actively drop them, right? And they get penalized if they don’t hit that. So, they’re going to get a bonus if they do, right? They’re going to get basis points reduced on the cost of that revolver. But there’s also a penalty with that if they don’t hit those numbers. And right now, I mean if you look at those products, those penalties and, frankly, the additional adder to them is not huge, because these are new products.

But it’s really interesting to see where this is going to go within the market. And I think you’re starting to see, well, frankly, in places I wouldn’t have expected even just a few months ago. There was recently a global ag company that participated in one as well. These are I think are rising up quickly, so if you’re thinking about linking that from a financing perspective, that’s an interesting new product that’s out there, obviously in addition to what Rich mentioned with what we’re seeing in corporate bonds from a green perspective, munis from a green perspective, etc., etc.

Thompson

Absolutely. We’re, I would say from the Morgan Stanley side, seeing a similar evolution in the listed bond market, whether that’s on the greener sustainability bond side, where the use of proceeds from the bonds are going to earmarked projects that achieve environmental or social or sustainability outcomes. And then, similarly, the sustainability, or SDG sustainable development goal, linked bonds, very similar idea in structure to what Ramsay described, where you’re really committing to the capital markets on sustainability outcomes, and that is tied to your financing. And I think those really bring, as we were talking about getting the right folks in the room and showcasing to the capital markets and investors, how core to your business strategy these issues are, I think linking that very front and center within your fundraising and capital raising strategy is a very strong message to send to the markets and a great way to do that.

Huntley

And not to belabor the point that I think a lot of you have heard in other sessions here and from the main stage, but to be able to do that, you’d better have really solid data. Right? If we as a bank and 24 other fellow banks are going to extend them that credit, based on their emissions data, we need to be very clear that their emissions data is correct, right? And so again, not to belabor that, but the data underpins all of this, and so it’s really important to be getting that right and getting it better all the time.

Chegar

On that idea, I think what you said earlier about tell your own story might be true, but tell your story with data that’s gone through an internal control system that is verified and aligned with the strategy and also that has some really robust application of materiality in the financial and strategic business sense.

Timmermans

That’s so true. And so that’s part of like what we see also, being an audit firm is also looking at okay, is your data consistent and comparable year over years? Do you disclose where the uncertainties are, what’s included, what’s excluded and really just being transparent in your criteria. Not all of the ESG information is going through audit yet, but there are ways to get more controls in place. Whether it’s having two people looking at the same data, having internal audit taking a look at some of the environmental/social type of information, making sure that you have the right people, the CFO, investor relations, legal, looking at the information and making sure they are comfortable with the information being disclosed, and engaging with your external auditors to get the data verified, because as the data gets more scrutiny, you want to make sure the right information is being disclosed. It’s a journey. It’s okay if it’s not perfect. But in that criteria, you have to disclose that, so that the user of the information knows where the uncertainties are, but also where you can just make sure that it’s comparable year over year, especially if you’re going to look at targets and decreases and post-metrics.

Thompson

Maybe one other point I’ll just make on the opportunity side and data, it’s kind of a slight tangent from this, but I think one of the evolutions we’re seeing, particularly within our wealth management business, thinking about investors who want to align their investments with either their values or either their impact objectives and goals, risk is obviously, as we’ve talked mostly about here, a key piece of that and understanding which companies they’re invested in that have good policies in place and procedures in place to avoid certain risks. But many investors are very interested in the opportunity side of sustainability, right? They want to know where your products and services are going. What positive impacts they have in the market from a social or environmental perspective. If your products are providing access to basic goods and services. If your products are enabling a transition to a low-carbon economy. These are all things that investors are really focused on and very interested in.

So, I think that’s another key piece of the story to tell overall. I think risk is a very key one, and I think a common denominator across ESG and sustainable investing. But the opportunity side, particularly for investors who are focused on playing a theme, looking at the transition to a low-carbon economy, thinking about access to goods and services, financial inclusion. These are big focus areas within the sustainable finance and sustainable investor community. So, definitely keep that in mind and that should be a part of a story, and I think is a really exciting way to tell that story as well.

Goode

I think that’s a great way to sort of end sort of our formal questions. I would imagine there’s lots of questions from the audience here. So, let’s have it. We’ve got this panel of experts up here, great advice, and on the other side of the table from you in terms of what information you’re looking to pull together. Questions? So, the question is for an early reporter, not necessarily having external goals yet, in terms of engagement, is having internal goals and sharing that with investors, is that okay? And I’ll turn that over to the panel here.

Chegar

I guess from my experience the best rule is public disclosure, because then you’re going to reach so many more investors than the ones you have a conversation with. And you’re also going to reach all of the other stakeholders that you have. Probably employees are going to go to your website too and want to know what direction are you going, is this a company I want to continue working for because I like that direction, I want to work toward that goal.

This is something we’ve been talking a lot about internally at BlackRock too. As an employee, I’m really interested in diversity and making sure that we are moving toward a more diverse employee base, and I was really pleased that we disclosed that information of our current diversity profile in our SASB disclosure this year. So, we have a starting point, and now I want us to set some ambitious goals and put them out there.

Goode

Next, another question. So, the question really is for certain initiatives that companies or maybe even their funding or NGOs like yourself are working on, how do you be sure that that positive aspect of the story gets seen and heard versus just rolling up to being a metric or statistic?

Thompson

One response I would have to that I think is again, taking kind of Morgan Stanley’s own experience in sustainability reporting, which is to say we would take a very close look at whether that is something that is core to our business strategy and whether that’s adding value in either risk mitigation or a meaningful kind of revenue opportunity to the firm. If so, that is something we would probably include in our investor-facing sustainability report. If it’s not, or not yet, or not necessarily tied, but obviously a key and important initiative of the firm as it relates to our community develop and outreach, we may include that in other areas. That may be on our website, that may be in other communications.

So, I think it gets down to kind of again, knowing your audience and where that information is going. And I think again, maybe the common denominator on all of this is thinking about where it adds value to your business strategy, and that’s really the first thing that investors are looking for. But there’s not to say that you don’t have other very important stakeholders as a company for whom that information is very important. So, it’s just a matter of segmenting your resources and your communication channels.

Huntley

I would agree with all that. In a previous role, I did a lot more work with the Wells Fargo Foundation. And strategically for the foundation, there’s new alignment to some core areas at Wells Fargo, one of which is housing affordability. Well, Wells is the largest provider of mortgages in the United States. We hold approximately one in three mortgages in the market. And so, housing is a core issue for the bank. And so, the interesting thing for us then is well where do we play from a housing affordability perspective, right? And as you might imagine, with a large diversified bank, we touch all of that.

So, it’s core to the business and I think that’s where it’s gotten really interesting and, frankly, much more strategic for the company because you can engage employee expertise, employee connections, networks, in a way that is much more aligned to who you are as a business and ultimately what you’re doing strategically and what you’re able to say to your investors about what you’re doing strategically. So, that integration I think is really where kind of 21st century corporate philanthropy will integrate to the larger sustainability strategy, if you will.

Goode

The question is you’re looking to integrate SASB and TCFD a little bit better into your reporting, but there’s yet another one from World Economic Forum and more acronyms. Will anybody pass the quiz from earlier? (Laughter) More acronyms. Maybe I’ll start and then if anybody else wants to jump in.

So, there’s this thing called the Better Reporting Initiative, BRI, I believe I have that acronym right (Laughter) where it’s doing just that. It’s looking at the myriad of frameworks that are out there and looking for the overlap in between them and trying to come up with a more aligned reporting approach, because you’re right, BlackRock has come out and said we’d like to see SASB and TCFD, maybe with some science-based targets. Then you’ve got World Economic Forum coming out. So, the Better Reporting Initiative is doing just that. And so far, their work has shown the alignment between, it’s about between 50 and 70 percent, depending on what frameworks we’re talking about, the overall alignment. But it’s still a little bit rocky landscape out there, how do you hit them all?

And generally, what we say to some of our clients is pick the big ones — SASB, TCFD. You can integrate those in a report, in a table, in your GRI-level report. If you’ve been a GRI reporter for a long time, you can still just add a SASB table. Make sure you’re talking about your TCFD and your CDP; yet another one, Carbon Disclosure Project. But it’s still a little bit rocky. But maybe I’d asked Elodie here and others to continue to comment on that.

Timmermans

Yeah, thank you, Rich. So, in the corporate reporting dialogue, which is kind of looking at the differences between the various frameworks, you were referring to the WEF, the WEF one, so it’s actually, it’s not a new one. So, what they’ve been doing and the different Big Four, so EY, PricewaterhouseCoopers, Deloitte, KPMG were all involved in this project is to basically look at, “Okay, how do you really create a long-term value as a company for your shareholders but also for your stakeholders?” And they looked at what are those indicators and how are you going to measure your outcomes. So, not just your specific KPI basically, but really what is your positive and negative impact on your social capital or diversity or natural capital.

And what they did is they basically took the SASB or TCFD indicators as a basis, so it’s not that it’s adding a new framework basically. You’re just still looking at those indicators. But then what they’re trying to do is taking it a step further to then look at what are your outcomes as a company and really looking at where is the positive impact and beyond your specific input indicators. So, for you, it wouldn’t change like what you are disclosing as a first step, but it’s more looking forward, as you said, your goals. Again, what is your impact on the environment and communities and things like that.

Chegar

I guess from a practical perspective on that kind of framework vs. the other ones we’ve been talking about, the active investors inside BlackRock who are fundamental, who are looking at a company and deciding do I want to invest in this company or not, whether it’s on the equity side or on the debt side, they’re typically looking at industry-relevant information. If the WEF version is sort of one size fits all, it’s going to be a little less useful to those investors who are looking for something about that’s relevant to companies in a given industry and how that company is managing the risks, and then looking forward to the strategic opportunities to evolve that particular industry and the company’s long-term success, given that business.

Goode

The question was how important, and how is information about suppliers and supply chain used in understanding a company’s ESG risk and opportunity?

Thompson

I’ll caveat by saying I’m not a supply chain expert myself, but I would say that I think taking an industry-relevant view to your supply chains is very important. Obviously, different industries have very different and complex supply chains in very different ways. And I believe the SASB framework will give some very good guidance, especially, again, thinking about what’s material to an investor audience, as to which types of metrics or information about supply chains is going to be most relevant. So, as a banker or financial services firm, my supply chain or my firm’s supply chain is going to be very different, I imagine than many of your supply chains, thinking more about physical products and other things.

So, I think looking at supply chain information in a very industry-relevant sense is very important. I do think some of the evolutions on the AI side, whether that’s remote sensing technology or the ability again to kind of web-scrape and use natural language processing to understand new sentiment about companies that may be further and deeper into a supply chain and may not be a publicly listed company covered by a rater or a ranking agency, I think is also going to be an important evolution over the next couple of years as this evolves.

Goode

I’ll just add a comment to that. As an example, there are some companies that have lots of manufacturing operations in say developing countries where they have a history of human rights violations or risks, that could end up being a reputational risk that you’d want to carry forward and you’d want to see. That may be how it translates. I think we have time for one more question.

Chegar

One last comment on the supply chain. I’ve found that the industry cooperation, the industry organizations that get together to accomplish that and map it out and share information for shared suppliers because often they’re joint customers, is very effective.

Goode

That’s a great point. One last question for you, Verity, providing a little bit of clarity and guidance on BlackRock’s letter about having TCFD SASB integration by the end of 2020 and any additional comments about the role of scenario analysis pursuant to TCFD. Verity?

Chegar

Thanks. So, BlackRock’s CEO, Larry Fink, wrote a letter to CEOs this January 14th. He does this every year. And this year’s letter, he called upon these CEOs that he addressed and really, every company in which we invest on behalf of clients, to disclose aligned with SASB and TCFD by this year. The goal here is for investors at BlackRock, but really across the market, so all of my colleagues up here on this stage, to be able to have comparable, quality, consistently reported data in order to make investment decisions.

If there’s one takeaway I hope you all walk out of the room with, it’s that we are using ESG data in investment decisions across our businesses every single day. So, we need this high investor quality information to analyze and make informed decisions if you don’t want us to use the raters and rankers and so on. So, this call is making a plea for that. We do want the comparability. We do want the … you called it compliance. I’m not aware that there is a compliance to SASB, rather that it’s an exercise that should be done with internal controls with your senior leadership in order to understand really what are the material risks and come up with a way to address them.

You will see in BlackRock’s own report that we are still working on some things. And we said that right in our SASB disclosure, that we want to go this direction and we’re going to work toward that and we’re going to disclose it when we have it, but we still addressed it and we explained why we didn’t have a number there right now. So, we want that, because we want the comparability. On the TCFD question, the important question there is what is the governance structure? How is your organization from the board to the C-suite to the management level to the employee level; how are they all working together to understand what’s important for the business, what the future of the business is and how the business is going to measure that success to get there?

TCFD, as most of you hopefully know, refers back to SASB and CDP and some others for the actual metrics to disclose within the TCFD framework, so there’s alignment there, and that’s on purpose. TCFD was written with input from SASB and CDP and others. We are a founding member of the task force; BlackRock does sit on the task force. But the goal there again is to make it a strategic conversation, which hopefully will happen at your next board meeting next quarter.

Goode

All right. So I’d just like to personally thank our panel for their insights and maybe starting Courtney with you and bring it on down the line, any sort of parting advice to companies who are really starting or continuing or enhancing their journey to better ESG reporting, any sort of parting advice?

Thompson

Yeah, I would definitely say if you’re internal on a sustainability team and you’ve not yet connected with your leadership peers inside of the organization from an investor relations or a treasury or a corporate secretary perspective, I think hopefully some of the comments you heard here and you’ll hear throughout the rest of the conference on the ESG data, an investor question will be good input to that conversation. But get to know them.

Have a good conversation around whether it’s SASB, TCFD or other frameworks or ways your company is being viewed by investors. And that can be a great way to open the conversation and provide commonality and understand kind of how you might take some next steps in whether you’re early days in reporting or you’ve been doing this for a long time, kind of how to take that to the next level and make sure that your story is being communicated to investors in a way that reflects truly the work that you’re doing internally from a sustainability perspective.

Huntley

I agree with all that. My build would be whether you know it or not, your job is to be a translator. So, you translate important data that is material in every sense, to investors, to your stakeholders, and you probably work with people that have not yet learned how to translate that. So, if I had one bit of advice, be the best translator you can be, and if you think about a translator, that means you speak both languages, right? So, you need to take what you know well and translate it for the people across the table from you and help them better understand what it is that you’re doing in their language as well, because those languages are certainly creating some barriers right now, and we’ve got to more rapidly break that down.

Chegar

I’m going to have two, Rich, with apologies. One is to get involved with the industry organizations to solve some of these problems. There’s been a lot of conversation about systems approaches and I think a lot of the challenges that we face in our respective industries are not unique to our own companies, but are things that we’re all facing collectively, so let’s solve some of these problems together. There’s plenty of room for individual performance and market and leadership within your industry once you figure out the best translation for your own strategy.

And the second thing is as you’re going through the SASB reporting framework, please give us your feedback. The standards were developed thanks to high-quality feedback from both investors and companies, and we don’t want that critical piece to go away. So, as you’re going through and reading the detail of the metrics and the technical protocols to figure out how to do that comparable, consistent, quality reporting, let SASB know where you think things should change.

Timmermans

I would echo everything that’s been said. So, really, engagement, both internally and externally to really get more, basically, a better grip on all those ESG issues. And the second piece is just making sure you have good governance around your ESG teams and frameworks and goals, because that’s the only way you’re really going to be able to get it integrated across your company and be able to move things forward.

Goode

And I guess my final comment is don’t panic. (Laughter) The old saying, what’s the best way to eat an elephant, one bite at a time. I think that’s the advice that I often give clients. There’s a lot to do, there’s a lot of acronyms. The test will be on the outside before you can have your coffee. But really, the best time to start was many years ago. The second-best time to start is today. Don’t panic. Be authentic, be open, be transparent and engage. And with that, thank you very much to our panel. Thank you all for coming.

(Applause)

Hagler

Thank you for joining us for that discussion on trends and recommendations for integrating ESG into investment decisions. We look forward to exploring some of the topics that they brought up, including artificial intelligence, big data and more in our future podcasts. Please follow me at @chrishagler and follow EY’s sustainable impact hub at @EY_Sustainable and please subscribe to this podcast on iTunes, Spotify, Google Play or wherever you get your podcasts.