InspIR’s Q & A with Chad Spitler on Integrating ESG and IR to Maximize Value: An Investor’s Point of View

 

On May 27, 2020, InspIR Group hosted the first of its InspIR Insights webinar series.  Ivan Peill, InspIR Senior Director and member of the Firm’s ESG Integration team moderated the panel including Chad Spitler, CEO of Third Economy and former Managing Director of BlackRock who established the firm’s Investment Stewardship and Sustainable Investing Teams.   Following are highlights of a Q&A with Chad.

 

Q: What are the first steps in developing a sustainability report and ESG ratings?

 A: Chad Spitler

“….in addition to thinking of a materiality analysis [which is a required first step this is needed under the global reporting initiative in order to do a proper sustainability report], you might also want to do a peer benchmarking, to get a sense of where you are at, relative to others in your industry. Another great starting point would be looking at ESG rating reports on your company from some of the providers out there, and how they are assessing your company.”

 

Q: How in-depth should a company’s ESG program be?  Fully compliant with GRI, for example? Scopes one through three for GHG emissions? And what about independent audits, which are an additional expense?

A: Chad Spitler

“…. What investors are looking for are companies that use ESG as a prism or a view toward corporate strategy. There is no compliance manual. This is about each company coming up with their own understanding of how ESG factors contribute to long-term financial performance, and then communicating that to the market, to investors. There are no right or wrong answers. There are standards, frameworks, but it’s really the company that has the best insight into this.”

“….one of the things that I have come to conclude in building ESG ratings, where I assess the quality of ESG programs at companies for investment purposes, is that sometimes less is more. I would rather have a few really good quality data points that I can rely on and can compare across companies than I necessarily want every single possible data on it. I really see GRI as a comprehensive set of considerations that companies can evaluate with respect to their own view on which of those line items might drive financial performance.”

“….the Sustainability Accounting Standard’s Board. That is a framework that I think is very complementary to GRI, the Global Reporting Initiative (GRI). The reason why I think so many US investors favor SASB is because it takes financial relevance into account. So it’s not necessarily thinking about each possible factor, but it’s really saying, by sector, what are the top considerations, what ESG factors may have the most financial relevance for an investor, and let’s take a look at those as a starting point.”

“….for companies that are thinking about getting started, SASB is a more manageable set of factors to consider, while GRI really gives you that comprehensive view into everything you might want to take into account.”

“….if you are in a highly emitting sector, like oil and gas, transportation, utilities, then having a really good understanding of your carbon footprint is critical, and your investors will expect that you have that understanding. For other sectors, it will depend where you are at, relative to your peers, and how it relates to your company’s risks and opportunities with regard to your corporate strategy. So again, the idea here is that a company needs to take charge, tell your own story, and decide, from an ESG perspective, which of the factors are the most relevant to your business.

 “….if you are the large universal owners who are essentially holding the market for perpetuity, more and more so via index funds, then you want to have an understanding, as a fiduciary, as to how climate has potential risk or opportunity with regard to your investment portfolio. TCFD essentially brought together….the leading minds as it relates to climate and investment risk and opportunity and came up with a reporting framework that I think is very helpful, especially for companies who are in high-emitting areas or high-risk sectors.”

One thing to reflect on when you are engaging with investors is that they are engaging around ESG or sustainability from a Values perspective or a Value perspective.   A Value perspective is from a financial value perspective. So how would a commitment to something like renewable energy lead to cost savings or to lower utility costs, for example. While an investor coming at for a Values perspective, might be approaching the question more for an environmental consideration, in a sense that maybe the company is an environmental manager and they have investment products that are Clean Tech or are oriented to those types of objectives.”

 

Q: What is considered a reasonable pace of improvement and over what period of time for a commitment that a company makes? Presumably it varies by metric, but it would be interesting to understand what the expectations of the investors are as far as how quickly a company improves over time.

 A: Chad Spitler

“….I think the reason why American Water scores so high is because Ed [Edward Vallejo, VP Investor Relations and ESG Reporting] has such a great understanding of the investment community and their expectations.

“….when I think about where a company is on the ESG journey and on the path that it needs to take, it tends to start with the qualitative statements. Policies, written words that describe where you are today and how you are thinking.  From there, the words tend to evolve into metrics. So how are you measuring the kinds of things that you’ve mentioned in your policies, and then, when you are really advanced, that’s when you set goals that you are tracking metrics against, and you are reporting your progress.  It’s this qualitative statement to metrics versus goals that investors are looking for companies to establish over time. There isn’t a one-year timeframe or three-year timeframe, per se, as much as it is that each company explains why they are, where they are relative to each particular factor…..as long as you understand where you are on that progression and within each of the main content areas for your sector, within the acronym ESG, and that you can talk about how you intend to advance those over time, that’s how you can satisfy your investors that you are progressing forward.

 

Q: What’s a good timeline for developing an ESG or sustainability report that will get a company noticed by the investment community?

 A: Chad Spitler

“Generally speaking, the best practice would be to update a sustainability report on an annual basis.  I think if you go longer than 2 years, you are probably going to start looking outdated. I would recommend annual updates. And to get your first sustainability report going, I would probably plan a three- to six-month process, depending on the size and complexity of the organization.

 

Q: What about compensation, linking ESG to compensation? How common is that? How should a company approach building ESG into incentive-based compensation?

 A: Chad Spitler

“….tying safety records to executive bonuses, for example, or some sort of compensation program, is not necessarily so new. However, thinking about safety as part of ESG has been sort of a new approach. Really the idea here is that compensation aligns with your shareholders’ priorities. If you are saying safety is a priority for your company, but you are not compensating your executives for achieving safety goals, then your compensation program doesn’t support your statement that safety is a priority. The idea is that by aligning ESG with compensation it reinforces that these are the priorities and part of the company’s strategy. What investors are worried about is companies that are saying there are ESG priorities but then not actually implementing into practice.”

 

Q: Presumably there is a way to measure ROI for an ESG program at a company?

A: Chad Spitler

“As it relates to ROI broadly for ESG, we are looking at longer-term horizons than you would traditionally look at.  That is one of the complicating factors. These factors don’t tend to show themselves as being statistically significant in the short term – it’s only over the mid and long-term that you would start to see that. If you look at ESG indices, for example, compared to their core non-ESG indices, they do start to outperform over time, as investors have hypothesized.”

“A couple of the leaders, in terms of what aspects of ESG tend to have been identified in research as providing a better return on investment are more in the S and the G categories. There is a lot of good research out there on the value of diverse boards and diverse leadership teams, and diversity throughout companies. We are starting to see that companies that are proactive in developing diverse boards, leaders, and employee populations tend to perform better over longer-term horizons. Hence, that is one reason why diversity is such a hot topic for investors to discuss with companies. It’s not a social objective they have, it’s because research shows that diversity leads to better financial performance.

In a post COVID-19 world, we are starting to see companies that have built resilient business models that have taken care of employees throughout the epidemic. These are the kinds of companies that are retaining investment capital and they are shining the light on how ESG can be part of financial success. And that’s how you really want to position your ESG program. Again, this is a financial question, not to be confused by the acronym starting with S. It’s really about how ESG ties to financial strategy.”

 

Q: What can you tell us about inclusion in sustainability indexes, beyond the obvious?

A: Chad Spitler

“….it’s hard to get in a sustainability index….To get into the sustainability index, you have to be a leader. That’s the whole idea – that ESG indexes only include the best companies, and that’s why they show they outperform.”

“One of the hardest and most challenging questionnaires and surveys out there is the RobecoSAM ESG survey. It used to be that the RobecoSAM survey was the survey needed to get into the Dow Jones Sustainability Index. Companies….were spending a lot of time trying to complete the RobecoSAM questionnaire, but they were nowhere near being able to get into the Dow Jones Sustainability Index. However, that survey, because it’s so comprehensive, is a great resource for you. If you can answer everything positively in the survey, then you are far along the bell curve and you are a leader. Just make sure you understand when these surveys and questionnaires come in, what’s your return, what do you want to achieve in completing the surveys.”

 

Q: Which of the ESG ratings firms are the most respected and influential within the investment community? What is your advice for dealing with them?

 A: Chad Spitler

“From a US market perspective, there are three ESG rating firms that should be top of mind for all companies….MSCI is the biggest and the broadest geographically. So, you want to make sure you are communicating effectively with that rater….your ESG rating, [is] linked to ISS’s proxy recommendations. As such, you definitely want to stay on the top of how ISS is rating your company…. Sustainalytics, which has a similar model to ISS, in the sense that its ratings go into the Glass-Lewis recommendations.

In terms of engagement, they each have their processes and approaches, and the experience varies by company. “I would encourage you to develop a relationship between your company and the rating agency. See if you can connect with the person directly that writes your report. Develop an understanding as to whether the ratings firm will accept internal information, as Sustainalytics will do, or if they only use public information. And then familiarize yourself with their ratings updates. What are their schedules and how do you position your information in front of them relative to their timelines.”

 

Q: Bank of America calculates that the cost of debt for good versus bad company, in terms of ESG, can be two percentage points lower. Do you agree with that? And what calculations have you seen that would support a company’s investment in a robust ESG program?

A: Chad Spitler

“There is a lot of discussion around the qualification of the benefit of ESG, and cost of capital is one of the ways in which it’s been contemplated. I’ve seen situations where I think that is true, and I’ve seen situations where it’s hard to really tell. The ability to achieve a lower cost of capital is somewhat dependent on the provider of that capital.

 

Q: What are the implications of companies publishing inaccurate or estimated data to investors and other key stakeholders?

A: Chad Spitler

“Poor data quality is a big issue for investors.  It has gotten much better than when I first started. I built BlackRock’s first ESG rating methodology in 2009, a little over 11 years ago. At the time, that’s when I concluded that less is more, because we incorporated a lot of data elements that we just couldn’t get comparable data on. That’s why you’ve seen firms like BlackRock get so behind reporting frameworks like SASB….As SASB has grown, as more companies have started to report, the data quality has gotten better….as companies are improving their disclosure, the ratings methodologies or the assessments of ESG performance are also advancing….you get less credit for ESG disclosure and investors are focusing more on how you identify the actual implementation of that policy or the performance of the company…. ESG ratings are becoming more sophisticated and more accurate.”

 

Q: What ESG questions have investors asked, where they wanted to speak with the board versus the CEO? And in such cases, which committee or board member was speaking with that investor?

A: Chad Spitler

“When they are engaging and they are asking for a board member, it’s from this fiduciary perspective, that the board member is nominated and elected to represent the clients of the investment manager. If the investment manager identifies a compensation concern, they are going to want to talk to the chair of the compensation committee.”

“One of the big differences between how investor relations engage with say, a sell side analyst, versus how investor relations engages with a corporate governance or investment stewardship team at a large index manager, is understanding that difference in perspective. With the investment stewardship teams, their tools are really voting and engaging. Different than investors that have the tools of buy/sell recommendations or who are actually executing trades. Again, different types of investments have different ways on how ESG is integrated.”

 

Q: Do you think investors or other stakeholders would view this positively or not, that the two roles [Investor Relations Officer and a Sustainability Officer] are combined?

A: Chad Spitler

“Some investors will have a preferred structure, others may not. The important thing is explaining why it makes sense for your particular company. There is no real right or wrong answer to this….help your investors understand why combining the two roles is the right structure and approach, based on where you your company is today and what it might look like in the future.”

 

Q: What is the perception of investors regarding questionnaires, like the Dow Jones sustainability index versus the ratings firms like MSCI? Are they largely treated the same? Which one provides more useful information when it comes to investment?

A: Chad Spitler

“….investors use them in different ways. Some will use them to help inform voting, others it will be part of portfolio construction, integrated into how buy/sell decisions are made….I’m actually moderating a panel tomorrow for another webinar, where we have a portfolio manager from Tudor Investment Corporation….She develops her own investment thesis and then uses the ratings as some sort of proof of concept post construction of the portfolio. Her portfolio has a really high ESG rating, but it’s not because she’s using them pre-construction, she’s been able to develop her own approach to that.”

“The thing to take into account about the ratings is they have their own proprietary methodologies, they have their own strengths and weaknesses and they are selling their research to your investors, who are going to use them in different ways. You really need to conduct that research and diligence to get to know who your investors are and what research and ratings they are using, and how they are using it.”

 

Q: Do you see ESG ratings ever being harmonized or becoming less burdensome, let’s say?

A: Chad Spitler

“The reason why you have different approaches is that these different providers of the questionnaires or research are really trying to develop their own unique view of your company….while they are going to harmonize around big themes, raters are going to differentiate themselves by coming up with unique insights….and that’s also what investors are looking for, they are looking for those unique insights.

“The solution to survey fatigue is to think about the source of the questionnaire or survey, and how relevant are they, and how important are they to your business. And where does that information go. Can you get away with sending them a standard set of Q&As, for example, or can you send your sustainability report in lieu of responding to each individual question. Often times, some of the smaller ones that are less important to your business, maybe that’s an approach to managing those, but if it is one of the big ones – Ed mentioned Moody’s and S&P, where a response is going to impact your company’s credit rating, you might want to spend a little more time customizing your response to those raters.”

 

Q: For small companies, how can they add ESG programs that are financially viable for a small company and still be valuable to shareholders?

A: Chad Spitler

“….if you had to prioritize, I would suggest starting with the “G” of ESG. The ESG acronym is a little misleading. How we used to describe it at Blackrock was that it’s a big “G” with a little “E” and “S”. And the idea being that the governance aspect of this is really critical and foundational. If you have a board committee with ownership of sustainability and you have sustainability expertise on your board, and you have a board member who can talk with investors about ESG and sustainability, right there you have a great foundation.  Don’t try to be all things to all investors. Really focus on developing your own priorities. Once you have that governance piece in place, of all of the “E” and “S” aspects that you could consider, which have the most financial relevance to your business, and then focus on those and communicating those as your priorities.”

 

Q: How can alternative investors take into account ESG when they still can’t properly account for traditional risk, in a global portfolio?

A: Chad Spitler

“….in terms of fundamental analysis, where I think ESG tends to enter the models, is as a risk factor in a discounted cash flow model. I think that is where the rubber meets the road, in terms of the technical aspects. But the thing to remember, is again gets back to different kinds of investors. Really so much of the ESG motivation and market movement is around indexing and ESG as it relates to voting and engagement, less around portfolio construction. Then, when you think about portfolio construction, and how ESG comes into play, it really goes into either fundamental or scientific, are sort of the two different approaches to active management….it takes its form in many different ways, and again it goes back to – for investors it was always “know your client”, for investor relations it’s “know your investor.”

 

Q: What is the best way to engage suppliers when it comes to ESG – now we are getting beyond scope one metrics – particularly when it’s a fragmented market, any thoughts on suppliers as it relates to ESG?

A: Chad Spitler

“If I was wearing my investor hat and I was assessing the corporate approach towards this question, I would want to understand first of all what’s the supplier’s policy, what kinds of things are included in that policy, and then explain how that policy is implemented in practice, and what are some of the things that are considered in selecting those suppliers in a way that it’s really about mitigating risks and identifying opportunities. Can you use ESG to find better suppliers that can give you new services at better price points, for example? Those are the kinds of things that these policies are intended to do, to mitigate risk in the supply chain and find opportunities for cost savings and other benefits.

 

Closing Comments

Chad Spitler

“Just remember governance within sustainability. If there is one piece of advice that I would give to every company, that is established board oversight of your ESG/sustainability program and be able to communicate your own priorities proactively. Don’t wait for the investors to come to you, take the bull by the horns, get proactive and leverage the board to develop that strategy and proactivity.”

 

Biographies

Chad Spitler

Chad Spitler is the Founder and CEO of Third Economy, a sustainable investment research and advisory firm.  Chad was formerly a Partner at PJT CamberView Partners, an advisory firm specializing in helping public companies engage with their investors, particularly around complex or contested shareholder matters.  He is most widely known for his role in building what are now BlackRock’s Investment Stewardship and Sustainable Investing teams.  As a Managing Director at the world’s largest asset manager, Chad led the team responsible for analyzing how environmental, social and governance (ESG) factors may impact financial performance, and integrating that analysis into investment decisions, proxy voting, corporate engagement and product development.  His work facilitated billions of dollars of capital into sustainable investments and hundreds of public companies to integrate long-term thinking into their business strategies.

Chad speaks both publicly and privately with regulators, policy makers, non-profits, academics and the largest global companies and investors, to further the field of sustainable investing and transition the capital markets to a lower carbon economy.  With over 20 years of institutional investing and sustainability experience, he sits on the Finance Working Group of the San Francisco Bay Conservation and Development Commission, and the Dean’s External Advisory Board of the University of Michigan’s School for the Environment and Sustainability.  He holds an M.A. from the University of Colorado, Boulder and a B.S. from the University of Michigan, Ann Arbor.

Ivan Peill

Ivan Peill is a Senior Director with InspIR Group and brings over 20 years of investors relations and 10 years of corporate communications experience to his client practice. He also co-leads the firm’s investor access practice and is a member of the ESG Integration practice area. Ivan joined InspIR from Stockholm-based Skanska AB, where he was a Vice President of Investor Relations responsible for the large- cap company’s financial communications and US investor relations.

Prior to Skanska, Ivan oversaw investor relations services for companies listed on the New York Stock Exchange. He also advised pre-IPO emerging market companies on investor relations, designed and managed educational programs for listed companies, and was the NYSE’s representative to the UN’s Sustainable Stock Exchange Initiative. As Executive Director in the ADR Group of JP Morgan’s Corporate and Investment Bank, Ivan led a global IR advisory team comprised on members in New York, London and Singapore. The team advised corporate clients on investor relations and financial communications strategy, investor marketing and IR best practices. Ivan also led the Group’s global marketing and corporate communications and authored the bank’s IR Best Practices Guide, among other publications.

Ivan began his career in the Latin America Group of Georgeson & Co.’s investor relations practice, which was acquired by Thomson Financial, where he advised the firm’s Europe-based clients. He holds an MBA with honors from Fordham University.

 

To learn more about ESG

InspIR Group regularly posts blogs on ESG, among other topical investor relations and capital markets issues. You can read our blogs here: https://inspirgroup.com/en/insights/

 

To learn about InspIR Group’s ESG practice: https://inspirgroup.com/en/esg-integration/

 

To contact InspIR Group about your ESG needs

Please call or email us to if you would like to learn how InspIR Group can help on your journey to achieve best practices in ESG reporting and integration.

Ivan Peill, New York – ivan@inspirgroup.com, +1 212.710.9296 

Fabiane Goldstein, São Paulo – fabiane@inspirgroup.com, +55.11.98103.0201