Fasken
Okay, so Victoria, we were chatting, and we've done previous webinars about this topic. And we were saying that Clermont, over the years has probably helped hundreds of companies, “in some form or fashion” was the terminology you used on on a variety of different ESG projects, across a variety of different company sizes, and then touching every different sector. And so probably one of the best people to have on this podcast, I'm really excited for it.
And I think the other reason I'm excited for this podcast is because I basically had to do zero preparation for it, because your team pulled all the questions together, because we thought that might be the best format, which is what are the most common questions that you get about ESG? And so thank you for doing that.
And so the first question that we have is, how do I improve our current ESG? Ratings?
Sivrais
Yeah, hey, it's great to do this with you, Mark.
You know, I would say just to give him a primer for some of the questions that we pulled together, they come in many forms or fashion. And they come in various hierarchies in terms of what the most important are, but the way that we think about the way that we pulled together, these questions are really the ones that have the highest velocity of being asked. And so there's other areas that go into it.
But if you start to kind of look at how do I improve our ESG ratings, again, we will really look at it from a very pragmatic point of view. And it's really kind of understanding the most heavily weighted factors across the rating agencies, not one Sustainalytics or MSCI, or ISS, or Refinitiv, but it's really looking holistically across those rating agencies. And so what we will do and what our clients will do in some form, or fashion, and we'll jump in and in different ways is look at the most material factors or key issues that are impacting those scores, to really evaluate kind of what is holding those scores back. Or, alternatively, kind of where's the low hanging fruit, that if it's just a matter of not disclosing it, that you're not getting credit for trying to make sure we get some of those basic policies out there. That exists today. So if you look at that, once you do that kind of what we call a key factor analysis across the rating agencies, quickly, it will bubble up to the top 10-15 factors that could, in theory, enhance your score. Now you have to understand once you get those factors, whether or not you're doing some of the things and have some better exposures, but from a very basic standpoint, you are sometimes just not getting credit for him because you have not put them somewhere that can be that can be publicly scraped. And that's the reason why you're not getting credit for it. So anti-slavery policies, things along those lines, that of course, you have a policy internally, but you're not getting credit for it externally. Because it's not on your website. It's not in real time, okay? It's not somewhere where it can be publicly scraped.
So we take those key factors and look at it in three different buckets, near term priorities: easy, quick wins that we can put on there. Midterm priorities, things that you are doing, but are fully developed quite yet. And you kind of have to figure out what the policy is going to be. And then longer term priorities that may take change to actually have a policy that you can you can disclose publicly.
Fasken
Awesome. So correct me if I'm wrong, just start breaking that down into some steps;
- It's understanding, what are the key factors that are making up the scores?
- Looking at where some of the areas that maybe you're falling short?
- And then sort of stack ranking them in terms of, I would say, like level of difficulty. But also, to your point, determining are there things that we have a low rating on? Because we actually just haven't published our policies?
Sivrais
Yeah, exactly.
So like, the reason that this process came to fruition four and a half, five years ago, when we started doing this work is because most of our clients were coming to us and saying, " there are so many rating agencies, there are so many frameworks. There are so many investors asking different things. I don't have anything out there, where do I start?" And so our idea was, "oh, and by the way, I have no budget and no team to help me do this. So where do I start on my ESG journey?" And it really this is how our key factor analysis was born.
Like let's start with the rating agencies. So that is what could potentially impact the allocation of capital by institutional investors. So let's start there.
And then let's look across the commonality of those rating agencies. Oftentimes, they're there. Well, most of the time, they're driven by a relative scoring model within your industry. And so there are specific factors that are going to impact you based on whatever industry that you're sitting in.
And then there's commonality, not always, but a lot of times across all the rating agencies. So that lets us boil down to okay, you have X dollars of resources to commit to doing this you have X amount of time to commit to doing this, here is how you rank factor the work that you can do to start on that journey.
Now, that is how to start it. There is, very generally speaking, most of our clients do that annually, because it will change because again, because it's a relative scoring model, oftentimes, it will change year to year. So we'll run that key factor analysis each year with our clients to make sure that we are course correcting our ESG disclosures to make sure we're we're maximizing our scores in general, it's not all that different than when you're just talking about an investment thesis that you'd have to course correct when you're talking to your investing community. And it changes from, you know, quarter to quarter or year to year.
Fasken
But I imagine that some of the ratings agencies, they would also change the rating framework over the years too, right. So you've got to always be revisiting it making sure that it's accurate.
Sivrais
Yeah, ISS seems to have done that a lot in the last probably 18 months, same with MSCI.
Fasken
Yeah. They're just trying to keep things interesting, right? Yeah. And so question two is: we receive a lot of requests to fill out questionnaires, which should we focus on?
Sivrais
Yeah. So I mean, this is, this is a big question.
Generally speaking, today, CDP is probably the most widely used from an environmental data platform, with about 19,000 companies responding to the request to complete the CDP questionnaire should be prioritized, since failure to actually comply with it can lead to a score of an F. So start there, if you don't do it, you start with an F. So that's tends to be what's getting prioritized the most.
The other the questionnaire that we're getting, and this is really around supply chain, is EcoVadis. So I think a great example is GM has laid down a mandate to its suppliers that you have to have a certain score to be able to be a supplier to GM. So EcoVadis is really kind of the scoring system, and the questionnaire that you have to fill out to be rated in a certain way that you are you are ramping up from a supplier standpoint. So like that goes beyond kind of the scope of probably this conversation of public versus private. If you're a private company, and you have a public company, customer that we're going to be asking you to do that. So we generally say CDP EcoVadis, probably the two that you should be filling out.
Fasken
Okay, great. Question three, I feel like it's a big topic is How do I get my company on board [with ESG]? How do I get the budget? Right? How do I get to spend the time and pay attention?
Sivrais
Listen, I think that probably the easiest way is to lay out for them why ESG matters. So like, I'm gonna say what is probably not politically correct. But like to be fair, ESG no longer is kind of trying to save the world. It is trying to mitigate risks, to drive financial performance, to mitigate risk and drive financial performance to things as it relates to the investment community. Now, they may care about saving the world, but a lot of their questions and their driving force in terms of capital is around how it's going to drive valuation for them. So understanding how capital is being allocated to not only ESG dedicated funds, but ESG integrated funds is probably the first step for a public company to get their management team or their board, to their their board on in the same realm of why ESG has to be part of the investment thesis.
I think the other piece is competitive landscape. A, you know you a lot of the work that we'll do in terms of starting the journey with some of our clients is looking at what their disclosures are versus their peers. And this goes beyond the institutional investor, your customers care about it, your employees care about it. It's not it's no longer kind of in one siloed version much the same as investor relations was 15 years ago, it was just invested in community. Now it's a multi stakeholder piece of view.
The other piece of it that I would bring up is what you're starting to see a lot is activism, not just related to E&S, but using E&S as a as a foothold into drive change in other ways. So finding environmental disclosures, social, social risks within your business or lack of disclosure, is the way that activists are starting to come in more often than not last pieces, regulatory changes. I mean, we all know what's coming down the pipe from the SEC. Climate disclosure rules, human capital cybersecurity. At this point, you can't avoid it. And so now you're going to have to put it into your filings. So it has to be verifiable, it has to be at some point auditable to be able to put that out there, and that doesn't happen overnight.
Fasken
And it's a big undertaking. And so are there just on that note, are there any, I don't know reports that you ever point clients to that are sort of proof points, where somebody can say, hey, I mean, to your point, like, hey, this peer has obviously done a better job of this, or even instances where there are reports saying, you know, companies who have invested in in their ESG strategy have performed better than peers who haven't? Are you doing that on a company by company basis?
Sivrais
You know, well put this as a side note, because I have to find a report. There's, there's a lot more research now, around the materiality of ESG, and how it drives financial performance and valuation than there was five years ago. But there's one, there's one report out of someone from Northwestern that really did multiple kind of tranches of looking at how valuation is driven by ESG. And so that you'll have to add it in the show notes. Yeah, that's probably the most interesting report that I that I send clients to, I mean, then you also just kind of look at Fund flows.
I mean, you can get that on any major news website, but I think what's interesting is you're seeing a lot of backlash around ESG, saying it's coming from and leveraging the data point that fund flows are coming out of the passives, around ESG. But if you look a little deeper, and something that we actually are doing internally, where the fund flows are going for ESG, integrated funds and active funds, is rising. So like people are taking one not unlike or news media in general, they're taking bits and pieces of information to pass along their story.
But there's just no way that ESG is going away. And so that's what I look to the conversations that you're having with institutional investors, which not may not say, What are you doing from an ESG perspective, but they may ask you about your culture, they may ask you about your turnover, they may ask about how you're validating and reviewing what your supply chain is doing. It's all ESG. They're just not using that term anymore. Right?
Fasken
Yeah. Okay. So the four ones I took away from that is:
- Positioning as a way to mitigate risk and optimize financial performance,
- Doing that competitive analysis to see where your peers stack up.
- Discussing the risk of activism,
- And also highlighting fun flows.
And so then we'll try and find that report and share it.
Sivrais
And the regulatory changes to be fair, I don’t think you said that but that's a huge component of it.
Fasken
Yep. Might just be that you just have to do it.
Sivrais
There’s no choice anymore.
Fasken
Yes. Okay. Question for which ESG framework should we report?
Sivrais
Yeah,I mean, I think that this is a, this is a big, bigger question. But I mean, I really tend to look at again, because it's a relative comparison, but I tend to look at what our peers, your peers are using from a framework perspective. But I mean, the easy ones are SASB, TCFT. SASB. ratchet up to ISSB, which is coming out with a broader framework, but it will take in in the climate side of it. And so I'm generally speaking today, SASB and TCFD are the two that we look at. And we usually push clients that way, although TCFD is a multi year project, which there's a stopover at CDP. So there you know is every acronym you can think of but that's probably the three that we look at SASB tends to focus on the materiality and it's by industry, and it's easier lift than say a TCFD which is a much bigger multi-year lift.
Fasken
So do you typically then see companies who sort of start with SASB? Yeah, that they get in our head or…?
Sivrais
Yup, as a starter pack it’s SASB. That's the easier one to do, then I think CDP is the next heavier lift and TCFD is the bigger lift.
And I think if you look at kind of institutional investors, those have historically been the three that you see get cited the most. Now, I know there's other frameworks and that other that companies use, but I think those are most often cited by the institutional investor community.
Fasken
Great. Question five, what ESG materials should my company be developing?
Sivrais
So this is a staged question not staged, and that we planted that, but we kind of did plan to it, but it's more along the lines of where are you in your journey.
So companies that are just starting out, we like to say, Okay, let's get the bare bones of the ESG narrative on your investor website, or in a slide or two in your investor presentation, or in kind of a subset. But like, that's the basics. It's usually one page, scroll down, we again, leverage the key factor analysis that we talked about earlier, to develop what that initial narrative looks like.
I think the second step of that, or the second phase of that is thinking about your SEC filings. So you think about your 10k, you think about your proxy, what can you layer into those in terms of your ESG practices and disclosures,
Then I think as you start to go down the pipe, you have an investor focused ESG presentation, dedicated presentation, you have a dedicated portion of your website. Now most companies have a dedicated portion, I feel like at this point around something sustainability, but it's not necessarily tied to the things that institutional investors care about.
And then I think that there is, moving down the path, there is a CSR sustainability report light. So a couple pages maybe glossy, maybe not. It's on your website, maybe printed, unlikely given the the climate side of it.
But then I think you get to the full blown sustainability report, which is multi stakeholder, which is focused on a number of areas. It's not just the institutional investment community, but then that comes down and flows back into the other materials. But there's a bunch of things depending on where you're at with the process.
Now, to be fair, we have plenty of clients that come to us and say, “Hey, we've done our first CSR report. Now, what do we do?”
So we go, we just kind of go back the other way, when we're thinking about the institutional investor community, again, they don't want to read a full blown CSR report, they want digestible pieces, just like they do on their investment thesis. And just like they do on the corporate narrative of the areas that matter most to them. So that's when you start to go back to those material factors. SASB is a great way to kind of figure out if you're not going to do that key factor analysis based on the ratings, going back to understanding what SASB defines as material factors, or looking at your top 10-15 institutional investors. Most of them have their own statements on their websites about what they look at the most, and trying to take what you've created from your broader CSR paper and put it in a digestible format.
Fasken
Okay,
Sivrais
That's a lot. Sorry.
Fasken
Yeah my head spinning a little bit on that. And so what I sort of got out of that, though, which is, one is you can do a lot.
And so but it seems to me as though the lowest hanging fruit is, if you haven't done a CSR report, is to start with adding a section on your website, if you haven't already. Yeah. And ensuring that all of the materials and policies, everything you've created are there and available. That seems to be just step one.
Sivrais
Yeah, I'll put it a different way for you, Mark. I have a client who shall remain nameless, who still believes ESG as a fad, but they knew that they had to put something out there. So they started really basic, they put, I think it's one page in their 10k. It's one scrollable page on their website, and one slide in their investor deck. They actually had really great things to disclose but like we boiled it down to the pieces that like they felt was palatable to put out there publicly.
Fasken
Yeah. So I feel like that website, whether it's a one page or a whole section, and the investor presentation, whether that's one slide or 10. And that seems like the starting point. And then to your point, and then if you go the full CSR approach, then maybe it's coming back and saying, “Okay, let's start to refine that, based on what we know investors are asking about.” Right? And that's looking at maybe investor websites, I'm sure that also comes from a lot of the conversations that clients have, right, and just looking back at their notes, and what are the common questions that are coming up?
Sivrais
Absolutely, yeah. And I mean, we've started to do something really cool as we develop our reports do is we keep a running lists for all the things that we wanted to disclose, but we weren't quite ready to disclose. And so we just keep a running tally for the next year. And so in between the sustainability reports, we kind of started it, whether or not they needed change within the organization to happen, or we just quite weren't quite there to disclose it. We keep it and we develop it as we get into next year. So like, it becomes a cyclical process, which we can expand on.
Fasken
Awesome. Okay. Question number six. What ESG topics should a company prioritize ahead of the many new requirements proposed by the SEC?
Sivrais
Well, I mean, I think, first and foremost, if you don't have more oversight for ESG specifically defined, that's probably number one within the proper committee charters.
Also, I think, if you think about the kinds of disclosure rules, proposed rules that are coming down the pipe, I think that everyone that we talked to in some form or fashion that's coming down, I think the big question continues to be Scope Three, and we all believe it's going to be litigated. So the adoption time period might be longer or compliance time period might be longer, but all the same, everyone believes it's coming. So if you haven't already started to begin to collect some of that data, or don't really know where to start, we've been doing some interesting kind of blueprinting work within our clients that are not collecting that yet to figure out what they need to be able to collect Scope One and Scope Two emissions, that at a bare minimum seems like an opportunity just to kind of see what you have in place from an infrastructure standpoint and a reporting standpoint. So then in '23, you can start to kind of collect on the Scope One and Scope Two emissions.
I think the other piece is developing a climate risk statement. So you have to conduct a climate risk assessment to do that and develop the corresponding disclosures as it relates to it, drafting the financial impacts of those climate events, and, and re-integrating the climate risk into your overall enterprise risk management and strategic planning. So that's the other piece.
And then I think the last one is really as it related to cyber related disclosure rule: and that is to create a cybersecurity task force with protocols and define the board's role in that cybersecurity risk.
And then I think the last last piece is really around CDP and TCFD. So if you plan to kind of go down that path, which is very aligned with what the SEC disclosure rules are, that's also something something to be thinking about.
Fasken
Okay. Summary:
- Board Oversight,
- Climate disclosure…
The Climate Disclosure one is also interesting, because I feel like it relates back to sort of the first question, which I imagine you run into it a lot, where companies are so overwhelmed, and they're like, “Oh, how am I going to start collecting all this stuff?” But a lot of the time they already have, they already are collecting it in some way. It's just a matter of finding it and getting it all into a single place.
Sivrais
I mean, that's honestly, that's the blueprinting that we were talking about, which is figuring out what exists today and where they need to collect from and putting in the mechanics of how you're going to collect that data and then report on it. It's not even the collection of it. It's really just planning to collect.
Fasken
Yep. Okay:
- Board Oversight,
- Climate Data,
- The Climate Risk Assessment
- The Cybersecurity Task Force,
- and CDP / TCFD
Sivrais
That’s great, I just, you know, wax on, you're great at summarizing it up.
Fasken
You should see what the notes look like. They're terrible, but I understand them.
All right. Question seven. What are the three things we should do [for ESG] in 2023?
Sivrais
Yeah, so I think a lot of this We talked about, but I think it is understanding where you sit today as it relates to the proposed SEC rules. So understanding what you haven't collected, what you can, what you shouldn't be collecting, what you already have collected, and how you're going to disclose it. That all encompasses the first piece.
The second piece, we didn't really talk about it, but I kind of mentioned it, but it’s looking at your CSR report and where there's gaps and where you can enhance the disclosures from that perspective, if you're already doing a CSR report.
And then I think the last pieces we definitely hit on, which is revisiting your ESG scores. And really understanding how you benchmark and how you perform against your peers from a radiance perspective, to figure out how you can enhance what you're disclosing from an ESG perspective.
Fasken
Like, we just came up with a content idea for like your New Year's ESG. resolutions, which I'm sure many people are totally loving right now.
Sivrais
Yeah I love it!
Fasken
That's awesome. And so we have, we have a couple other questions here. We're almost up on time. And so of the others that you're seeing here, is there. Is there one or two in particular that you really want to touch on?
Sivrais
Yeah, I mean, I think that the one that I would touch on is how we present our ESG progress to institutional investors.
And I think that is important in that we really do it from compliance roadshow perspective. So this isn't all that different than the offseason governance roadshow, except for the fact we tend to break it into two different outreach groups. So in the fall offseason, we'll do more of a listening tour. Like, “here's the changes we made, here's where what we're thinking about from an E, S and G perspective”, and get feedback from your top 10 investors, top 15, whatever the number is. And then in the spring, if you're able to get in touch with them, again, it's not always easy when you're in proxy season, being able to disclose and show the progress that you have made based on those conversations, I think that that's incredibly well received, it also shows that you really care about what they're talking about and what they're thinking about.
Fasken
Do you ever see companies actually publish [ESG compliance updates] anywhere? Like on their ESG website? Like they're here, goals here, things that we want to achieve? And here's sort of a timeline of things that we've worked on?
Sivrais
So we have done, and I'm not going to tell you the client because I can't remember if it's still up there or not, But we have done reviews of the outreach.
Of course, you have the shareholder outreach that sits in your your annual filings, and how much you're reaching out. But we have actually posted sanitized feedback from investors and what we are focusing on in the next 12 to 18 months on the IR portions of the websites as it relates to ESG. Right. I don't think that they all do it. I think that that was more progressive, but this company in particular really wanted to show the progress that they were doing. And so when they were at a very early stage of it, because I think a lot of the times investors just want to see momentum, or or your your commitment to change, they don't necessarily expect change overnight, which I think is an important reason, which is why I think that is a great way to do it.
Fasken
Awesome. Victoria, this has been great, as always, very practical. Lots of great tips and tricks. Also big topics. So maybe we'll do this again sometime but really appreciate you taking the time. Thank you. Awesome. All right, thanks so much.
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