Blackrock’s Michelle Edkins calls on the exchanges to integrate sustainability disclosure requirements into listing standards.
Sound practices in relation to the material environmental and social aspects of a company's business can be a signal of operational excellence and management quality.
ESG risks constitute seven of the top 10 most concerning global risks in the World Economic Forum's annual “Global Risks 2015” report. But they are difficult for investors to incorporate into investment analysis and stewardship activities, as investors do not yet have the complete, consistent and comparable data required to accurately measure how companies are managing them.
If BlackRock (BLK) wants to compare the financial performance of, say, telecom companies in Singapore, the U.S. and Spain, we can rely on a set of widely understood international accounting standards. If we also want to compare the carbon dependency, employee turnover levels or the number of independent directors of those companies, it is either impossible due to lack of disclosure or requires so many assumptions and extrapolations that the output is nigh on meaningless.
Market-led solutions need more support
This problem is not new. BlackRock (BLK) and organizations, such as Boston-based Ceres, which advocates for sustainability leadership by companies and investors, have worked for many years to encourage better corporate reporting. We prefer practitioner-led solutions as they garner buy-in by all those affected by a change in approach. Many large companies have led by example, and a growing number of companies now participate in initiatives such as CDP, formerly Carbon Disclosure Project, a London-based organization that collects data on environmental impacts to assist investors and corporations worldwide with sustainability decision-making, and the Global Reporting Initiative, an Amsterdam-based organization that promotes corporate reporting on sustainability factors. However, the level of ESG disclosure is neither broad-based nor consistent enough to meet investor needs.
The practitioner-led, market-based solution needs more support from a wider base of market players as there is evidence that voluntary regimes are stalling while many regulatory responses are piecemeal. We are seeing more interest from investors, including our clients, in ESG integration, and index providers are responding with new benchmarks.
BlackRock, as a long-term, fiduciary investor, is using the ESG data that is available to benchmark, analyze and value the companies in which we invest on behalf of clients. For the companies we invest in through indexed portfolios, these data are an important input into our engagement or stewardship work. But the data are patchy.
To achieve critical mass, investors need more market participants, particularly those with authority in the markets, such as the stock exchanges, to require ESG disclosure.