Fiduciary Failure: Closing the ESG Disclosure Gap

The TakeAway: Flex your muscles, report tells investors, to get better environmental, social, and governance reporting (and practice) from companies.

What’s the secret to good corporate governance?  Good investor governance.  That’s why we were delighted by a recent report from the Canadian Institute of Chartered Accountants (CICA) that provides a practical guide for improving responsible institutional investor behavior.  In light of tomorrow’s expected SEC action regarding proxy access, which promises to open the door for investors to nominate corporate board candidates, now is a good time to build an informed, engaged, and fully functioning institutional investor system—from public and corporate pension funds to mutual funds and investment intermediaries, and, most importantly, to endowments.  (The latter are laggards.)  The corporate / investor governance equation plays a particularly important role when it comes to advancing environmental, social, and governance (ESG) practices and reporting, the focal point of the CICA Discussion Brief.

Co-authored by Alan Willis and Julie Desjardins, Environmental, Social, and Governance (ESG) Issues in Institutional Investor Decision Making concisely synthesizes current environmental, social, and governance reporting activity.  The 50-page Brief aims “to stimulate informed dialogue among interested parties about the demand for and supply of ESG disclosures used by institutional investors.”  It’s brimming with facts about “current market and regulatory trends and existing regulatory reporting requirements related to ESG issues” and provides suggestions for better mixing of corporate sustainability factors into investor policy and practice.

Willis and Desjardins don’t let investors fully off the hook:  they devote an entire section to current trends in investor interest in ESG.  Based upon a study of interviews conducted with institutional investors (15) and research service providers (2), the authors reveal what ESG information investors are looking for, where they find it, how they use it, and how satisfied they are.  One section covers the current state of ESG regulatory reporting in Canada and elsewhere, as well as stock exchange requirements—the regulatory frontier in sustainability.  A final section on closing the “ESG disclosure gap” between what investors want and get rounds out the report.

This final section also includes options for folding ESG into investor decision making, through:

• Voluntary Market Actions on the part of institutional investors (e.g., requiring investment managers, consultants, and advisors to disclose how they’re incorporating ESG risks and opportunities, how ESG is factored into decision making, ESG-related compensation schemes, and efforts to integrate ESG into mainstream financial reporting), research organizations, education systems, stock exchanges and professional associations;

• Regulatory Actions that the Canadian Securities Administrators and other stock exchanges can do; and

• Third Party Actions, played by industry groups, academic institutions, professional associations, and NGOs in conducting research, developing industry-based key performance indicators, and helping to build an integrated reporting framework that would “deliver comparable, consistent, and reliable information”.

We especially enjoyed Appendix 1, which lists organizations and initiatives advocating improvements in ESG reporting.  And a chart itemizes key issues within the “E”, “S” and “G” categories.

With such importance now attached to the fiduciary role, including tomorrow’s SEC decision on board elections, we applaud the contribution Willis and Desjardins make.  Too bad there’s not much uptake of the best practices they outline here in the US, particularly within the endowment category.  Glaring evidence:  Of the 800 total signatories to the UN’s Principles for Responsible Investment (PRI), only 20 are U.S. funds, of which only four are endowments.  (The rest of the U.S. signatories are pension funds.)

Guess our work is cut out for us in pushing for good investor governance across the board—especially among endowments.