November 19, 2019

Sustainability Reports: 34% of “Smaller” Companies Join the Party

Recently, the “Governance & Accountability Institute” announced that 60% of the Russell 1000 are now publishing sustainability reports. The top half of that index aligns with the S&P 500 – where sustainability reporting has become mainstream – and 34% of the smaller companies have picked up the practice too. Here’s some other takeaways:

– Of the 60% of Russell 1000® companies that report, 72% were S&P 500® companies – and 28% were from the second half of companies in the index

– Of the 40% of Russell 1000® companies that do not report, 83% were the smaller half of companies by market cap – while only 17% of the non-reporters were S&P 500® companies

Like just about everything, this has become a political issue too. This Stinson blog reports that a right-wing org is asking the SEC to prohibit companies from making “materially false and misleading claims and statements related to global climate change.” Meanwhile, in the more mainstream world, the US Chamber is now focusing on sustainability disclosure – and has now released its own set of “best practices” for voluntary ESG reporting.

“Responsible Investors” Say ESG Isn’t a Fad

You have to wonder what’s driving sustainability reporting by smaller companies. They’re less likely than large companies to be doing it in response to proposals from “activist” shareholders. But there are also shareholders whose attention companies actually want to attract. A recent SquareWell Partners study says that providing ESG info is the “price of entry” for companies of all sizes that want to add big investors to their rosters – or keep them there. Here’s a few key findings:

– Nearly all of the top 50 asset managers (managing $50.6 trillion) are signatories to the UN “Principles of Responsible Investing” – committing to incorporate ESG factors into investment & ownership decisions

– Oddly, the Global Sustainable Investment Initiative reports “only” $30.7 trillion of sustainably invested assets last year – so it’s possible the PRI signatories aren’t following through on the principles

– One-third of the asset managers clearly disclose their approach to integrating ESG factors into fixed income;

– 64% of the asset managers are signatories to the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD);

– Close to 80% of the asset managers engage with portfolio companies on ESG issues;

– 68% of the asset managers use two or more ESG research and data providers;

– Only 20% of the asset managers have a low receptivity to activist demands; and

– A quarter of the asset managers have gone public with their discontent at portfolio companies since January 2018.

For even more on this topic, see Aon’s 28-page report on responsible investing trends. Also check out this recap from Cooley’s Cydney Posner about a recent meeting of the SEC’s Investor Advisory Committee – where reps from AllianceBernstein, Neuberger Berman, SSGA and Calvert discussed how they’re using ESG data for all their portfolios and (for the most part) called for the SEC to guide companies toward more standardized disclosure.

On the debt side, take a gander at this recent PepsiCo announcement about a $1 billion “green bonds” offering where the proceeds will be used to finance the company’s “UN Sustainable Development Goals.” This Moody’s alert says that green bond issues could top $250 billion this year – much higher than what was originally forecast – and walks through some of the global trends. To keep track of memos on this growing trend, we’ve added a new “sustainable finance” subsection to our “Debt Financings” Practice Area.

E&S Risk Factors on the Rise

This NACD blog analyzes the increasing prevalence of “E&S” risk factors. Here’s what’s trending on climate change:

Thirty percent of Russell 3000 companies discussed climate change as a risk in their 10-K statement, with only 3 percent of companies discussing climate change risk in the MD&A section. Predictably, the energy and mining sector had the most disclosure on climate change risk. Retail and consumer sector companies, which are not thought of traditionally for being exposed to climate change risk, also had a high rate of disclosure, citing damage to their supply chain and access to raw materials as risks.

Disclosures for every sector focused on the risk of regulatory and market responses to climate change, including legislative regulation of air emissions, caps, and carbon taxes. Other companies were more detailed in their discussion of climate change risk as it relates to their specific operations, such as Monster Beverage Co.’s 10-K, which states that, “In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs, and may require us to make additional investments in facilities and equipment. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.”

Liz Dunshee