In late May, the highly regarded Ceres organization, which advocates for sustainability leadership, partnered with BlackRock, the world’s largest asset manager, to issue “21st Century Engagement: Investor Strategies for Incorporating ESG Considerations into Corporate Interactions.” Cornerstone Capital is proud to have contributed to this publication. Our article is reprinted below.
The smartest people we know, know how little they themselves know. That includes Wall Street sell-side analysts, strategists and economists. In fact, Socrates taught that “the only true wisdom is knowing that you know nothing.” That might sound a bit harsh, but the reality is that the very best investment analyses start with a question investors are struggling with in the context of their decision-making processes, and a pivotal question about which analysis will give greater predictive insight into investment decisions and economic outcomes. The bottom line is that great sell-side research is often “a question of questions.”
Most analysts are trained to start their stock calls to portfolio managers and analysts with their “conclusion first.” They start by telling investors what to do with their money. From our standpoint, why would investors possibly listen? We argue that analysts have to “earn the right” to offer advice—the right to be heard above the barrage of noise.
More specifically though, it’s not just research into any questions that matters. It’s research into the most pivotal, difficult, complex, global, sector- and macro-based issues that need to be addressed at any given time. In other words, what is truly “material”— such that a reasonable investor needs to absolutely consider it in the context of making a buy or sell decision? There is a vast distinction between questions that are related to the “here and now,” and questions that offer critical insights into longer-term corporate strategies, tactics, and ultimately stock price performance.
We circle back to the problem of retraining Wall Street analysts to not focus on sharing all that they know, but rather to be transparent and constructive about what they don’t know. What they don’t know, they might try to obfuscate or simply avoid. Respectfully, we argue that this is a poor strategy. It will be found out by savvy investors who, collectively, represent much of the information that’s already reflected in the price of a stock.
From where does that information advantage come? In our view, it could come from the earnest, objective analysis of the broad swath of subjects covered in seeking environmental, social and governance excellence, or lack thereof, in the corporate sector. In fact, that enhanced version of investment analytics captures almost everything one can think of when making an investment decision. We argue that a lack of the systematic analysis of ESG factors implies poor due diligence in the investment process deployed by the analyst—an inadequate evaluation of risk-adjusted returns to express to investors.
With regard to understanding precisely which ESG factors are most critical to a particular company, we would suggest that an industry-based or sector-based approach is essential. The book is still being written with regard to the establishment of “standards” for the disclosure of these factors, notably by organizations such as SASB (the Sustainability Accounting Standards Board) in the US. This critical piece of “infrastructure” is a starting point for inquiry in what matters most, by sector, to analysts and investors.
The bottom line though, is that just because an analyst can’t yet answer pivotal questions doesn’t mean they shouldn’t try. Shouldn’t analysts at the very least look at scenarios of possible share value destruction associated with stranded assets for oil and gas companies if a carbon policy were put in place to deal with climate change? Isn’t it worth noting which companies can best articulate the value of optimal employee engagement, succession planning and great corporate governance? Wouldn’t it be valuable to know which companies are optimally evolving their business models to embrace the potential of social media, big data, and demographic shifts? Absolutely. In fact, we state again that the best investment research is indeed a “question of questions.”
So, without attempting to be all-inclusive, we turn to some sectors and specific questions below that can be posed by investors and analysts to build a more robust and comprehensive understanding of risk and value creation—those questions that raise even more important questions that analysts should be exploring.
Moreover, we would argue that all these questions might better be posed in a more systematic way than is currently the norm. The questions, and others that are beginning to become part of the dialogue in the mainstream of the capital markets, represent a material enhancement to the current analytical process. They represent a more nuanced basis from which to triangulate the answer to the question of whether to buy, sell or hold.
“21st Century Engagement: Investor Strategies for Incorporating ESG Considerations into Corporate Interactions” – a new guide for U.S. institutional investors on engaging with companies and policymakers on sustainability issues; with tactics and case studies from 37 engagement experts spanning six countries.
For more on the Report, visit the Ceres site.
John K.S. Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Group. Prior to Cornerstone, he was the Director of Corporate Governance at TIAA-CREF and the Director of Socially Responsible Investing at the Christian Brothers Investment Services. He is also an Adjunct Assistant Professor at the Columbia University Graduate School of Business.
Erika Karp is the Founder & Chief Executive Officer of Cornerstone Capital Inc.
Jerome Lavigne-Delville of the Sustainable Accounting Standards Board (SASB) is a recognized expert in corporate sustainability, blending nearly 15 years of experience in corporate law, investment banking and social responsibility.