VICTORIA GEDDES, Executive Director

This year the headline topics at the NIRI (National Investor Relations Institute) Conference were ESG and the importance of Purpose. The US has, like Australia, been generally late to the ESG party compared to Europe so understanding the issues at the forefront of driving change has relevance for Australia.

Ron O’Hanly Chairman and CEO of Boston-based State Street Corporation, one of the five most powerful index managers globally, shared his views about what companies and IROs should be focusing on regarding ESG.

Alignment of corporate strategy and ESG – the horizon for ESG is long term as is the development of a company’s corporate strategy. Together they provide the framework for value creation and sustainability and cannot be dealt with in isolation.

It was clear from his comments that going through the motions of delivering a beautifully crafted ESG report, created by the marketing or comms team with no connection to the company strategy and with no substantive engagement by the board, will not cut it.

It’s all about the Board – as an index investor State Street thinks a lot about board effectiveness, strength and diversity. When you are effectivelya long term, compulsory investor disconnected from the financial performance of the companies in which you invest, this then becomes the proxy for effective stewardship.

ESG disclosure standards – these are new and evolving with different standards in place all over the world. In Europe it will come down to regulation that will be enforceable and while the US isn’t at that point yet, the experience of MiFID 2  provides a worrying precedent (from the perspective of the US) for the European model becoming the global standard.

In addition to the EU, the SEC has just released its draft standards on ESG disclosure and the ISSB (International Sustainability Standards Board) is currently seeking comments on its exposure draft on the General Requirements for Disclosure of Sustainability-related Financial Information. Aside from the central issue of defining materiality, which all three have to address, the number one concern of both investors and corporations is the proliferation of frameworks, terminology and methodology and gaining alignment on these has to be the end goal.

The threat of rising ESG litigation – there is no doubt that the risk of litigation informs the urgency around standardisation of disclosure, particularly in the US. In May 2022 the SEC charged Vale S.A., a Brazilian mining company and one of the world’s largest iron ore producers, with violating antifraud and reporting provisions of the federal securities laws by making false and misleading statements about dam safety in the company’s sustainability reports and other environmental, social, and governance (ESG) disclosures.

The lawsuit is the first SEC enforcement action focusing on false and misleading ESG disclosures since the agency created its Climate and ESG Task Force in March 2021. It highlights the SEC’s increased focus on ESG matters and underscores the importance of taking care when preparing sustainability reports and other ESG-related disclosures.

The power of proxy advisers and the importance of investors exercising their vote – State Street’s view was that putting proxy votes in the hands of a few people to determine the outcome of a vote is problematic. They encourage investors to take direct control of voting. In this context it was noted tha the rise of ETFs is becoming problematic.

There was also a recognition that,as a group, the large index investors hold a lot of power and by default can end up carrying the flag for the broader stakeholder group. State Street’s approach is to focus on what will drive long term value and to do this they concentrate on the G in ESG. In their view, by applying a laser like focus on board quality and governance, that can be a proxy for the creation of long term value which in turn can take care of the E and the S.

The rise of Social as the next frontier – this is becoming an increasing focus following the world’s collective experience around managing Covid, the increasing political division playing out globally, and the war in Ukraine that permeates our screens and paradoxically puts munitions manufacturers at the front of the defence of democracy. We can add to that the recent overturning of Roe vs Wade with all its implications for women’s health and social division in the US.