European Audit Committee Leadership Network, October 2021
Many institutional investors now view sustainability as a critical driver of operating and financial performance and assert that a company’s ability to integrate environmental, social, and governance (ESG) issues into its strategy is key to value creation. ESG matters are increasingly becoming a boardroom priority for public companies, including those represented in the European Audit Committee Leadership Network (EACLN).
Institutional investors are demanding action on sustainability and concrete evidence that companies’ business models are becoming more sustainable. And investors are prepared to act if companies fail to keep pace: they are voting against director nominations and for shareholder proposals and, in some cases, divesting their holdings. Recent developments in Europe may mean that the sustainability actions that companies take today may impact future access to and cost of capital. For audit chairs, the pressure from institutional investors and the growing number of requests for ESG information raise serious concerns about reporting practices and processes.
On 2 September 2021, members of the EACLN met virtually to discuss investor perspectives on ESG reporting with two guests: Caroline Le Meaux, head of ESG research, engagement, and voting policy at Amundi; and Sabahat Salahuddin, director, investment stewardship for Europe, the Middle East, and Africa, at BlackRock.
EACLN Members and their guests discussed the following topics:
- Institutional investor focus on ESG is not a passing fad
Amundi has fully integrated ESG data and analytics into its global investment platform. BlackRock views sustainability risk—including climate risk—fundamentally as investment risk. Both guests noted that their clients—pension funds, endowments, and the like—are increasingly focusing on environmental and social issues. Ms. Le Meaux added that ESG has now become an “investment constraint” and that directors should expect that the pressure on companies will only grow in the future.
- Institutional investors seek consistent, succinct reporting
Ms. Le Meaux pointed to the principal adverse impacts and key performance indicators (KPIs) in the European Union’s Sustainable Finance Disclosure Regulation (SFDR) as “a baseline that is a minimum for disclosures” and to the climate-related targets from the Science Based Targets initiative as preferred standards. Amundi expects issuers to provide concise statements of intent, materiality matrices, and quantitative KPIs. Both Amundi and BlackRock are interested in sector-specific information that enables them to compare companies. Ms. Salahuddin said that BlackRock expects milestones that enable monitoring of progress. Both guests noted that companies should consider not only how risks like climate change impact the companies themselves, but also how company activities may impact key stakeholders.
- Investors expect stronger assurance on ESG
Both guests recognized that standards, regulations, metrics, and strategies are evolving, and that today, assurance for sustainability disclosures is often limited to a few metrics. Over time, however, they expect stronger assurance, including from third parties, on sustainability disclosures. Ms. Le Meaux said that since KPIs can trigger investment decisions and can be used for portfolio construction, Amundi wants boards to “make sure that the methodology used to gather information is explicit and robust and that there is an internal audit.” A member observed that it took decades of education and practice to reach robustness in financial reporting and that ESG reporting might require similar time to mature. Another noted that audit committees are usually chaired by a financial expert who might not have strong ESG-related skills or experience.
- Investors expect businesses to invest in transition
Ms. Salahuddin and Ms. Le Meaux encouraged companies to be transparent about the challenges they face, especially in carbon intensive sectors like oil and gas, and to explain how they are trying to address them. Ms. Salahuddin encouraged companies to work with peers to find solutions and technologies that could assist in their transitions. As technology continues to evolve and the world transitions to a net-zero economy, BlackRock expects companies to review their emissions reduction targets in the short-, medium-, and long-term. Ms. Le Meaux said that Amundi anticipates that profitability may not be optimal during the transition but expects this to change as the price of technology solutions falls and as carbon emissions become more accurately priced.