February 3, 2020
In the 1830s, English author Edward Bulwer-Lytton coined the phrase “The pen is mightier than the sword.” Almost 200 years later, it accurately describes the situation every time a Board of Directors or CEO receives an ESG/sustainability letter. And the letters are coming fast and furious.
In the month of January, there were at least two notable letters that went to thousands of corporate executives and Board members.
BlackRock CEO Larry Fink wrote this to CEOs: “Last year BlackRock voted against or withheld votes from 4,800 directors at 2,700 different companies. Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable… we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
State Street Global Advisors CEO Cyrus Taraporevala wrote this to Board members: “Beginning this proxy season, we will take appropriate voting action against board members at companies in the S&P 500, FTSE 350, ASX 100, TOPIX 100, DAX 30, and CAC 40 indices that are laggards based on their R-Factor scores and that cannot articulate how they plan to improve their score.” The R-Factor is State Street’s proprietary ESG/Responsibility rating system. State Street also reinforced its previously stated position that “a company’s ESG score will soon effectively be as important as its credit rating.” And State Street believes questions about the business case for ESG and sustainability performance have been resolved: It’s “a matter of value, not values.”
Reactions from across corporate America have been wide-ranging – from fear and scrambling to resolve and quiet confidence.
Dix & Eaton’s recommendation is to learn everything you can from each letter and engagement. Use the ideas to inform your ESG strategy and communications – just like you consider other inputs such as company culture, materiality, ability to impact, realities of the business, etc. Read the letters as free consulting advice on what investors expect and what ESG standards and guidelines they value – the BlackRock letter specifically mentions the Sustainability Accounting Standards Board (SASB) standards and Task Force on Climate-related Financial Disclosures (TCFD) reporting.
But don’t overreact, don’t do something that doesn’t match your strategy or culture, and don’t live in fear. These are form letters that are designed to speak to everyone, not target anyone in particular. As the headline for a recent Harvard Business Review article by lecturer and consultant Mark Kramer noted, “Larry Fink isn’t going to read your sustainability report.”
It would be an oversimplification and overreaction to go “all in” to respond to, and comply with, every suggestion in an ESG/sustainability form letter. That will never be proactive or successful. You should know your company better than that and be able to manage your unique ESG/sustainability journey. Besides, the letters are going to keep on coming, and every one of them is likely to ask for at least a bit more than the previous one.
Looking for that feeling of quiet confidence the next time you see one of those ESG/sustainability letters? Contact me so we can help plot your company’s ESG journey.
