The Business Ethics and Legal Studies Department and Reiman School of Finance host symposium
It was almost like the four panelists were discussing a toddler—using words like ‘young,’ ‘messy’ but also ‘vitally important.’
Instead, they were painting a picture of ESG—environmental, social and governance—the items investors can use in judging if companies are doing the good they say they’re doing. Are businesses being environmentally conscious, responding to climate change, promoting human rights, corporate political accountability, and the like?
Turns out, ESG has become a burgeoning industry all its own and now has plenty of issues some describe as messy, so the Department of Business Ethics and Legal Studies (BELS) and Reiman School of Finance hosted a symposium on the topic March 5. The event drew nearly 100 attendees, mostly students, but also staff, faculty and members of the public.
By some estimates, there are 230 organizations today that rate or rank companies on ESG factors. Professor John Holcomb, chair of BELS, said ESG groups primarily gather data on companies to advise investors. “But they’re also starting to consult with companies on ways to improve their ratings, which can create conflicts of interest,” Holcomb said. “And the industry now is professionalized, too, with jobs in sustainability and companies hiring directors of corporate social responsibility.”
Case in point: one of the panelists was Jennifer Leitsch, the vice president of corporate responsibility at CBRE in Denver, the largest commercial real estate services and investment firm. She leads the company’s sustainability and corporate responsibility strategy and disclosure, and answers surveys from many ESG organizations.
Leitsch told the audience that ESG became an even larger blip on companies’ radar screens in January when Larry Fink, CEO of BlackRock—the world’s largest money manager, announced that his firm would avoid investments in companies that “present a high sustainability-related risk.”
Another reason for ESG’s spread: “Because we live in a different economy today,” said panelist Chris Hughen, associate professor in the Reiman School of Finance. He said for stocks in the S&P 500 Index, intangible assets have increased from 17% in 1975 to 84% in 2015.
“Our economy has increasingly become a knowledge-based economy with soft assets like patents and copyrights,” he said. “It’s challenging to value companies today; in the 1950s it was easy, but today, not so much.”
Hughen said this has led to a large increase in ESG reporting. “By the end of 2015, 81% of S&P 500 companies issued some form of social responsibility or sustainability report, up from just 20% in 2011,” he said. “Survey fatigue is real … I would hate to have her [Leitsch’s] job.”
Leitsch chuckled at that and added that more companies need to be disclosing ESG data. She said today, about 86% of Fortune 500 companies are sharing data. “There’s still a huge opportunity to disclose so we have a long way to go.”
Another ESG issue is measurement, Holcomb said. “ESG is driven by rankings and ratings. But we have to understand what can be quantified and what can’t. Quantifying reputation is a bit dicey. And how do you measure culture or openness? These are a little more difficult. Are we ignoring some of the more important issues just because they can’t be easily quantified?”
Another panelist, Tricia Olsen, assistant dean for Research and Academic Affairs and a BELS associate professor, agreed with Holcomb and asked how to quantify the extent of and serious impact of human rights violations or abuses? Olsen, who’s currently collecting data on claims of corporate human rights abuses from 2000 to today, mentioned companies that face allegations of human rights abuses can see loans dry up.
Holcomb followed that with thoughts on banks, which he said aren’t often considered a problem for the environment. “They don’t make a lot of things,” he said. “But what if they are making loans to companies that do have environmental impacts? Should we hold banks accountable for their loans?”
Hughen said he talked with owners of small energy companies. “They are freaked out by this idea. If they don’t get loans, they’re in serious trouble. Energy has taken a beating and not having access to loans will hurt them even more.”
Hughen then offered this thought on ESG: “Even though it’s messy and complicated, everyone should be interested in this because it influences how investors act and decide where to put their money.”