Executive Summary

In this post, we analyze how the language used in the capital markets is evolving as a result of trends in ESG investing. We suggest that traditional index investors can no longer be described as passive, due to their active engagement with corporates. Further, we analyze how activist engagements are beginning to hinge more and more on ESG themes. We then describe the dependence of ESG analysis on vast sets of unstandardized data. Finally, we contend that management teams must have a strategy around the data they disclose. We believe it is imperative for corporates to evolve alongside the changing tide emerging within the capital markets.

We recommend the following seven action items for evolving with the markets:

1. Take time to understand the data already being utilized by ratings providers along with the outputs reflected in investment analysis (i.e., SSGA R-Model, Blackrock Aladdin Climate, etc.)
2. Ensure ESG disclosures are on topics material to economic reality rather than those that tell an easy marketing story—PR marketing and Investor marketing is analogous to Oil and Water
3. The corporate sustainability report as it is known today is a great start, but it represents only the second inning of the ballgame—evolution is required to take control of the narrative
4. Recognize that commitment to one framework is not enough – investors treat frameworks and ratings as a mosaic and use proprietary methodologies to piece together and measure differentiators
5. Realize that ESG disclosures in their current form do not provide the underlying context required to properly value intangibles, implying a disconnect in firm value
6. Understand that replicating peer efforts does not provide a unique perspective and in most cases compounds the “echo chamber” concern, especially at the board level
7. Invest in a comprehensive cybersecurity program, as it is critical both to financial and to ESG performance, and is probably one of the next “shoes to drop”

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