On September 27, the Institute for Corporate Governance and Finance hosted a three-panel conference that explored the importance of environmental, social, and governance (ESG) factors in investing, and what they mean for investors, corporate boards, and investment management groups.
In his introductory remarks, Edward Rock, Martin Lipton Professor of Law and director of the Institute for Corporate Governance and Finance, noted that ESG factors have evolved from goals championed by activists to mainstream investment considerations. “I have seen ESG transform from [being] merely a worthy cause to [becoming] risk factors,” Rock said. “And any board that is doing its job needs to consider risk factors.”
In a panel titled, “Implementation of ESG Investing Strategies,” Michelle Edkins, global head of BlackRock's investment stewardship, said that the increasing regulations to combat climate change, for instance, have made incorporating sustainability into a business model important to a company’s long-term success.
“Ultimately, if you're operating a manufacturing plant in a water-stressed state…and you're wasting water, you will find that regulators and local government, who give you, literally, the license to have that operating plant there, may rescind that right,” Edkins said. “And that makes this a business critical issue.”
In a panel exploring the academic and legal aspects of ESG, Ronald Gilson, a professor at Columbia Law School, noted that from an investor perspective, ESG-conscious investment is a two-part concept.
“On the one hand, it’s investment based on values,” Gilson said: Investors choose companies whose values mirror their own. “And on the other, it’s impact investment,” with investments being aimed at boosting some value-aligned good or concept. Gilson noted that while there is an increased investor demand for ESG-conscious investment opportunities, the direct impact of a particular investment is very difficult to measure.
Robert Eccles, a management professor at the Saïd School of Business at Oxford University, said that a growing body of empirical research suggests that companies that follow Global Reporting Initiative (GRI) Standards, which provide benchmarks for an organization’s environmental, societal, and economic impact, have greater long-term success than companies that do not appear to follow ESG sustainability guidelines. “What you’ll see is that over time—and the over time is important, the lag seems to be six to seven years—their financial performance measured in terms of stock price returns or accounting returns tends to be superior,” Eccles said.
A panel moderated by Martin Lipton ’55, a Law School trustee and name partner of Wachtell, Lipton, Rosen & Katz, examined ESG’s impact ontop-level management. Panelist John Hess, chief executive officer of Hess Corporation, said that goal-setting and transparency with shareholders promotes long-term trust that results in increased shareholder value.
Hess said his business produces a yearly GRI-based sustainability report, detailing its efforts to pursue diversity in hiring, minimize corporate carbon footprint, and promote educational initiatives in the communities where the company operates. “Sustainability is definitely good business,” Hess said, “but it also drives shareholder value.”
Posted October 23, 2018; updated August 22, 2019