Environmental, social and corporate governance (ESG) issues have moved to the forefront of activist investing, and the topic was the focus of a panel at the The Deal’s Corporate Governance 2019 conference in New York last week. The panelists were: Charles Penner of JANA Partners, Kal Goldberg of Finsbury, Rick Hansen of General Motors, and Veena Ramani of Ceres.
Penner said they have been seeing growth in demand for their ESG fund at JANA, but he also believes that only time will tell whether ESG will remain a long-term viable business model. He said their focus on ESG is on how these issues will affect a company’s long-term roadmap and create value for shareholders.
What does value investing really mean? Q1 2021 hedge fund letters, conferences and more Some investors might argue value investing means buying stocks trading at a discount to net asset value or book value. This is the sort of value investing Benjamin Graham pioneered in the early 1920s and 1930s. Other investors might argue value Read More
Governance over environmental and social
Goldberg said they've also been seeing increased interest for ESG options, especially coming out proxy season. However, he also said that right now there is a strong split between the ES part of the trend and the G part. He estimated that about 60% of the shareholder proposals which were filed this year were related to either environmental or social issues, while the remaining 40% were related to governance issues. He also said the E and S issues tend to be the ones managements don't want to talk about.
"There's a couple of things about the E and S issues in particular that I think are unique," Goldberg said during the panel. "One, they are tough for companies to talk about; the other thing to talk about is that they are all topics that can be in a sense driven around you by other stakeholders apart from your shareholders, but stakeholders your shareholders pay attention to as they make decisions, and that's a pretty challenging dynamic."
He explained that companies are speaking to their shareholders through these other stakeholder groups, but many managements aren't learning how to do this effectively. Goldberg also noted that some market participants like BlackRock actually believe the correct order for the letters should be GES because corporate governance issues have thus far been leading the charge for change.
Social responsibility reports
The panelists were also asked about disclosures and social responsibility reports. Penner noted that reports aren't really needed to see the most obvious problems because we already have the information we need.
The panelists also noted that companies are spending quite a bit of money on resources and corporate responsibility to build long-term value, but this pressures their short-term profits. Quite a bit of money is being spent on developing the reports, but what's especially important about ESG issues is results.
When discussing reporting standards, the general consensus was that there is no one-size-fits-all method for social responsibility reporting. Ramani said each method caters to a different audience, so companies must figure out what their message is and who their audience is and then pick their story and see how the framework works. She added that sometimes there's a worry that corporate responsibility becomes a bit like "the tail wagging the dog," with the emphasis being put in sustainability reports rather than strategies to fix the issues, which is what investors will actually respond to.
This article first appeared on ValueWalk Premium