July 13, 2020 - From the July, 2020 issue

Investors Growing Interest in ESG Accountability & Return to Work Challenges: ERM’s Mike Wallace

Environmental, social, and governance (ESG) metrics offer transparency and accountability for corporations by measuring their impacts on a range of criteria. TPR sat down with ERM (Environmental Resources Management) Partner Mike Wallace to discuss how investors are responding to the business interruptions caused by the COVID pandemic and paying increasing attention to the value of future planning, risk management, and the human and environmental benefits that result. Despite a new rule proposed by the US Department of Labor attempting to limit pension fund ESG investments, Wallace asserts that valuing ESG is more than just good business sense, but that a resilient and sustainable enterprise necessarily interweaves ESG standards throughout its structure and practice.


Mike Wallace

"The COVID issue has woken everybody up to business interruption, and the climate interruption that we're going to experience is going to be even bigger."—Mike Wallace

Mike, you've been an advisory to corporations, investors, stock exchanges and regulatory agencies on ESG issues for over 20-years. How are today’s corporations and investors now planning for returning their workers to the office in a healthy productive way? 

Mike Wallace: As you know, now that I work for ERM—a global environment, health and safety, sustainability consultancy—we have operations in over 50 countries. ERM has been in business for over 50 years, and has over 5,500 experts and scientists across the world. As a partner, I'm regularly hearing from fellow partners in various countries about the global drive to “Return to Work.” Since health and safety services are a core aspect of our consultancy, we walk the talk: how do we make sure our people, our clients, and their workforces are healthy and safe when we all return to work?

I was talking to stakeholders in the field about Return to Work plans, and a number of Bay Area companies were having regular phone calls to collectively share best practices and plans for contact tracking, entry and exit procedures, testing and temperature needs, as well as shift rotations and strategies to handle additional waves. All of these can be connected to sustainability since we’re talking about how you’re planning (governing) your business over the long-term, how you’re treating your people and society, and how you’re preparing and managing a healthy and safe work environment.

Across the global economy, certain industries are deemed essential and are rapidly moving to come back on line. For instance, the tech industry is essential, and many in that industry quickly adapted and returned to work during this period. This is partly due to their experiences with global supply chains and having operated through other major, global health crisises. Intel, for instance, has a Business Continuity Plan easily found on their website (transparency) that explains their plans (governance) in case of major business interruptions, such as a pandemic.  I know some of the people at Intel and asked them about the pandemic plan in their business continuity plan. They said that they had been working on it for more than 15 years and that they have entire internal working group that's always thinking about the worst-case scenario. That's basic business continuity and enterprise risk management.

So, if I am an investor in the markets, I am diversified across a range of sectors. If I’m doing my due diligence on my portfolio and wanting to understand who is prepared and who is not, Intel’s Business Continuity Plan would be one clue. As an investor, this is a demonstration of both transparency and governance. I want to be able to see that you're thinking about the future, and governing your operations well.

Mike. Elaborate on what's included in pandemic and corporate continuity plans. 

In that case, you'd be thinking about previous instances where we've had smaller scale pandemics or outbreaks of viruses or diseases, and the tech sector has lived through that. A lot of those business interruption moments have occurred over time in Asia, and in key supply chain origination zones. Just like you and I would diversify our investment portfolio, we would then start to diversify our supplier portfolio. Maybe I don't want all my suppliers in one country if there are health and safety issues at the regional or national level, and we see that with supply chains today.

If you're a global operation, every country—just like our states—is coming back online in different ways through policy and regulation. In some cases, we have clients who are working across 100 countries and we’re rapidly reviewing local and national regulations interpreting their specific issues and identifying and implementing best practices. In most cases, companies want to go ‘beyond compliance.’ They want to avoid the next business interruption. Companies need to take care of their people, get back to work, and make sure that they don't contaminate or infect others around the community. 

Expand on the investment community’s increased interest during the COVID-19 pandemic in business interruption planning.

When COVID hit, I was coming back from a conference in Arizona.  It was a great event and 2020 was really feeling like the beginning of some significant momentum in the ESG field.  The conference brought the finance and corporate communities together and facilitated fascinating discussions about the sustainable flow of capital between these parties. Companies need to sell goods and services, but they also have shares of stock, and the investment arms of the biggest players were in the room—Morgan Stanley, BlackRock, State Street, Wells Fargos, and Bank of America—explaining how they are looking through the ESG (environmental, social, and corporate governance) lens. Companies are thinking well out and beyond into the future, and this entails assessing ESG risks and opportunities, as well as being able to effecitively report ESG performance to the markets.

COVID hit and it was almost like the investors reinforced their committments. In March and April we saw BlackRock and State Street both make connections between their ESG strategies and COVID.  Morningstar also reported repeatedly how ESG oriented investment portfolios were outperforming non-ESG portfolios. Why? Because COVID is an ESG issue and companies that were already considering ESG risks were a little better prepared for interruptions.

Intel and the technology sector is one example, but we also heard amazing stories from across a range of sectors.  In fact, L’Oreal has an occupational health and safety philosophy, "Safe at work, Safe at home.”  They want their employees to take their workplace safety practices and awareness back to their homes and communities.  It is also this philosophy and culture that inspired L’Oreal to think about commutes to and from work and through their communities.  It’s what influenced shift sizes and shift rotations and flexible work schedules.  This was more than just about taking care of the business but taking care of the workers and communities that provide the business with human, social and economic capital.

As a panelist at VerdeXchange annual conferences over the last decade in Los Angeles, you often brought with you representatives of the major stock exchanges. What is their current interest in this ESG work?

When I first participated at VerdeXchange, NYSE (New York Stock Exchange) was probably the leader in the US on their engagement in these topics. They would host events to cultivate and facilitate conversations, and they put out their commitment to being a good corporate citizen.  This connected to their brand status as well and was a way to engage in sustainability / ESG in a strategic manner.  They were, in essence, educating their NYSE listed companies and others on the business relevance of ESG. 

Ownership of NYSE changed and then NASDAQ stepped up to fill that ESG void.  NASDAQ companies tend to be some of the most well-known technology companies, like Intel. These types of companies tend to be strong ESG performers already and many had lived through other global issues that impacted their supply chains. So, they had already embraced and/or embedded many ESG strategies and techniques just as part of doing business.

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In both the NYSE and NASDAQ situations, both organizations produce their own sustainability reports, regularly engage in the ESG dialogue, and are actively helping to elevate ESG awareness among their listed companies and across other stock exchanges.  They are both involved in the United Nations Sustainable Stock Exchange Initiative and the World Federation of Exchanges ESG initiative.

What’s changed in the decade-plus that you've been involved in ESG consulting?

We first met more than 15 years ago, and at that time I was representing a company called TruCost. They were just coming to the North America from the UK and I was meeting with various asset owners, like CalPERS and CalSTRS about their interest in and use of ESG data. We also met with many of the largest asset managers and even the mainstream rating agencies, like Standard & Poor’s.  This was back in 2005/2006 when the phrase ESG was just being coined.  Up until then we were talking about Socially Responsible Investment (SRI) and then Responsible Investment (RI).  The United Nations’ Principles for Responsible Investment (PRI) was founded in 2006. 

Standard & Poor’s bought TruCost in 2016 and just this year they bought RobecoSAM, the research entity behind the Dow Jones Sustainability Index (DJSI).  These developments are very significant because we now have the world’s most influential rating agencies now actively acquiring ESG specialists, and not only integrating ESG into equity ratings, but also into credit ratings.  Just like you and I have a credit rating that influences our cost of capital when we buy a house, corporations have a credit rating. In essence, S&P, Moody’s, Fitch and other recognized rating agencies (i.e., NRSROs) are assessing the ESG performance of tens of thousands of companies, both Public and Private. This field has become much more serious and mature than most observers realize. 

Right now in the financial and business sections, the headlines are about COVID. What’s next for risk management and climate change?

Many, if not most, of the ESG or sustainability issues can be tied to business continuity and risk of business interruption. Climate change is such a business interruption issue that many global corporations are already assessing through recognized scenario planning techniques.

The TCFD (Taskforce on Climate-related Financial Disclosures) that Mike Bloomberg and Mark Carney put together has a lot of teeth and a lot of momentum. It brought together not just investors, but corporations, the rating agencies, lenders, insurers,  and stock exchanges.  Just have a scroll through the Supporters pages of TCFD and consider why they have all come together around this major global issue – risk management.

It's the most diverse coalition I've ever seen come together around a single issue – Climate Related Financial Disclosures. Historically these ESG oriented coalitions have either been groups of investors seeking greater transparency or groups of companies taking a collective position on an issue.  These “Supporters” realize their need to access capital, invest it, lend it, borrow it, and insure against major losses.  They all also realize that they need to have a better understanding of the inherent risks that are being caused by climate change.  

The VerdeXchange conference has included panels about corporate and board liability for risk related to ESG reports for the last two years. What currently is the risk that corporate boardmember's face—during this pandemic— if they are not being responsive to their stated ESG obligations?

Most immediately are the reputational risks that are hard to quantify and monetize, but we all know that companies are very serious about their reputation and branding. We've also seen a record number of shareholder resolutions come out over the past few years, and we're in that season now. A growing nuumber of shareholders are supporting corporate disclosure on ESG topics and board level involvement in sustainability issues. Proxy Monitor is a good source of this type of information and allows users to search for the latest shareholder activity on a range of issues and across a large number of companies. Boards are more closely monitoring how their companies are turning up in these types of proposals, as well as monitoring the growing number of ESG ratings and rankings. Boards and companies can use this information to help develop their own strategies by examining the issues that are coming up within their sector, as well as for their customers and across their own supply chain.

Mike, in closing, highlight a corporate best practice model of good ESG planning and execution.

I've mentioned Intel many times. They win all sorts of awards in a traditional business sense, as well as in the ESG field.  Their CEO has been ahead of most of the recent issues from COVID to the racial tensions across the country.

I think the other place to turn to is JUST Capital, a nonprofit organization that has a really interesting model that basically asked tens of thousands of Americans: "What do you think makes a just company?" Respondents, in essence, voted through this poll and JUST Capital created a methodology around the responses and is now assessing corporations as to how much they align with public sentiment.  Now, JUST Capital has a Top 100 list it comes out with every year, and it's worth a look to understand the methodology and the resulting lists.

This year, because of all these COVID-related activities, JUST Capital put a methodology together of who's really having a positive impact in the world. Now, there's a Just list that came out in Forbes last week that talks about some of the best company responses to COVID. It talks about return to work, treatment of employees, healthcare, sick leave, etc., all sorts of creative ways of keeping your talent with you while we go through this really challenging time.

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© 2020 The Planning Report | David Abel, Publisher, ABL, Inc.