ESG Risks and Opportunities Facing Investee Companies

The following post comes to us from Rakhi Kumar, Head of Corporate Governance at State Street Global Advisors, and is based on an SSgA publication; the complete publication is available here.

As part of our active ownership process, State Street Global Advisors (“SSgA”) considers environmental, social and governance (“ESG”) matters while evaluating and engaging with investee companies. SSgA believes that ESG factors can impact the reputation of companies and can also create significant operational risks and costs to businesses. Conversely, well-developed corporate social responsibility (“CSR”) programs [1] can generate efficiencies, enhance productivity and mitigate risks, all of which impact shareholder value.

SSgA engages with investee companies on a host of issues including their ESG disclosure and performance. In addition to our conversations around specific environmental and social shareholder proposals, we conduct active engagements with investee companies outside of the proxy season. SSgA has developed proprietary in-house screening tools to help us identify companies for active engagement on sustainability issues and to assess how our portfolio holdings are managing their sustainability processes and practices. The broad framework used for analyzing companies considers several factors including:

  • The quality of a company’s ESG disclosure;
  • The relative performance of a company’s sustainability program compared to that of its peers;
  • The underlying economics of its sustainability initiatives; and
  • The level of board involvement and oversight on the company’s sustainability practices.

Actions Taken by SSgA Based on our Analysis of a Company’s ESG Practices

Through our engagement in this area, we hope to understand the following:

  • The extent to which the company has considered key ESG risks and opportunities and how these materially relate to the core business;
  • The progress that the company has made and how it is overcoming challenges in the area of sustainability;
  • The company’s CSR program compared to that of its peers; and
  • The level of board oversight and understanding of ESG issues.

Our evaluation of a company’s ESG disclosure and practices informs our voting decisions particularly with regard to shareholder proposals on ESG related issues. In addition, our engagement in this area helps us identify possible ESG risks facing a company, which we factor into our long-term discussions with management and potentially helps us escalate the matter to the board.

Guidance for Management and Boards of Investee Companies:

Below, we have provided guidance questions to help investee companies develop and review their CSR programs.

Suggested Questions for Management Developing ESG Policies & Procedures

  • What processes do you have in place to help identify the material ESG risks facing your business? What ESG opportunities can be leveraged that create shareholder value? How are these opportunities identified?
  • What are the strategic objectives based on the material ESG risks and opportunities identified? What policies are in place to help achieve the objectives? How are these articulated in the company’s CSR program? How are these objectives communicated to employees?
  • How does the company monitor and measure the progress of its CSR program?
  • How is the value of the CSR program being communicated to investors?

Suggested Questions for Directors Reviewing ESG Policies & Procedures

  • Are there appropriate skills on the board to provide the oversight needed on sustainability risks facing the company?
  • Does the company’s CSR program address the key ESG risks identified by the board?
  • How does the board keep abreast of evolving regulation around the ESG risks?
  • How is the long-term strategy and goals of the business integrated into the company’s CSR program? How does the company’s program compare to that of its peers?
  • Are the strategic ESG goals laid out by the board a factor in determining executive compensation?

The complete publication is available here.


[1] A company’s CSR program encompasses all of its ESG policies and practices.
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