Home / BlackRock calls for better ESG disclosure for investors

(pictured: Pru Bennett) 

In an increasingly risk conscious investing world ESG factors have come a long way since the mini-boom in ethical funds of the early 2000s. And, according to one of the most experienced investors in the field, Australia stands tall as a “mature” market for ESG and related practices.

Pru Bennett, the Hong Kong-based regional head of BlackRock’s ‘Investments Stewardship’ team, who has been working in the field for nearly 30 years, says ESG has become a good measure of how companies are managing all their risks.

For instance, a 2012 study by Deutsche Bank collated 160 academic studies and demonstrated that companies with high ratings on ESG factors have a lower cost of capital. Separate research has found that greater transparency by listed companies in disclosing non-financial data results in lower volatility.

BlackRock has produced a paper, “Exploring ESG: A Practitioner’s Perspective”, which discusses the challenges for investors and concludes with a set of recommendations for policymakers aimed primarily at encouraging better information and its standardisation.

Three key challenges are:

• Reliance on self-reported data to questionnaires and industry bodies. Company-disclosed information is sparse and disparate across industries and regions. There is no accountability or overarching governing body ensuring accuracy of reported information.
• Inconsistent collection, management and distribution of ESG data. It is difficult for investors to systematically compare companies across industries and regions.
• Disparate approaches to measure and report ESG information to investors. Index providers and fund managers report ESG considerations inconsistently too.

BlackRock argues for the coordination and consolidation of a standardised ESG factor reporting framework. The paper says: “We see the potential over time for convergence towards a more holistic, integrated approach to managing, reporting, and analysing business performance. Although some companies now issue a separate sustainability report, we believe that ESG issues of relevance to business performance should be integrated into fundamental company communications, publication and disclosures.”

While the paper does not say this, big super funds should also integrate ESG thinking and policies with their overall investment strategies and insist that their managers do likewise. While the situation is getting better, there are still criticisms of managers who sign up to UN PRI and then do very little else.

Most super funds do, though. That was what brought the mini-boom in ethical funds to a halt in the 2000s. Several big managers had launched ethical funds and several big super funds bought them to include in their investment options. The members didn’t buy them, though, and that’s when super funds started down the integration route. Most commercial ethical funds from mainstream managers were shuttered.

The BlackRock paper includes a six-point set of recommendations for policymakers. They are:

• Encourage standard ESG factor disclosure by companies within a consistent global reporting framework, like the international accounting standards.
• Establish safe-harbour provisions to protect companies from retrospective litigation when they initiate ESG factor reporting.
• Monitor to ensure that, where regulation is in place, it is designed and implemented to achieve the actual prescribed policy objectives and doesn’t require unnecessary compliance.
• Review, understand and remove barriers to ESG factor integration and reporting by both companies and investors, such as conflicting definitions of fiduciary duty.
• Clarify how ESG considerations are part of the fiduciary duties of both investors and companies.
• Require that investors report whether they integrate ESG factors into their investment analyses and how.

Pru Bennett said at a briefing in Sydney last week that most Australian boards were “on top of the issues” from a governance perspective. Elsewhere in the Asia-Pacific, though, it’s more a “boiler-plate, compliance reporting” approach, compared with the principles-based approach generally accepted in Australia.

She said that the ‘G’, for governance, was the overriding concern at the company level and that the ‘E’ for environmental and ‘S’ for social tended to follow on from that. For instance, in its dealings with companies the BlackRock Stewardship team, which consists of 22 investment staff around the world, tends to engage with a company’s board on governance issues and with its management on environment and social issues.

Bennett, an Australian, joined BlackRock in 2010 to head up the Asia Pacific ‘stewardship’ unit. Prior to that, she was head of corporate governance at Regnan, a corporate governance agency started by the late Erik Mather, and before that she was a long-time director or proxy advisor Corporate Governance International, now a part of Glass Lewis.

BlackRock splits ESG integration into three sections: traditional investing, involving fincancial analysis of stocks, usually meaning a negative screen; “sustainable investing” involving explicit inclusion of ESG objectives, or a positive screen, and; “investment stewardship”, which involves engagement with companies through dialogue and proxy voting on behalf of investors.

The big manager late last year launched a new fund called the “BlackRock Impact World Equity Fund”, which is available to Australian institutional and retail investors. It has already gathered about US$700 million in assets globally. It consists of three funds: one which is benchmarked against the commonly used MSCI World equities index; one which is benchmarked against the increasingly used MSCI ACWI (all countries index) and an American fund, benchmarked against the Russell 3000 index.

Joanna Nash, a quant manager and vice president in BlakcRock’s Sydney-based equities team, said the fund looked for alpha opportunities from ESG principles. An example of an opportunity, she said, was the recent move to disclose individual companies’ carbon emissions. “We believe that this is a proxy for productivity,” Nash said. “If you compare two companies with the same output and one is doing it with less energy, then that’s a good sign.”

The strategy includes both positive and negative screens, as well as the “impact” space, where companies specialising in or highly exposed to positive environmental, health demographics (including research) and good corporate citizenship are analysed.

Because of its benchmarks, the fund invests only in listed companies and therefore has no liquidity issues, which most impact investing strategies suffer from by their nature.

– Greg Bright