FOCUSING ON “S” IN ESG
Over the last number of years environmental, social and governance (ESG) reporting has gained momentum and we have now arguably reached the point where ESG reporting is considered a mainstream priority. This year, in addition to board diversity, executive compensation and board shareholder engagement topics, all of which fall under governance, or “G” in ESG, Larry Fink of BlackRock and Cyrus Taraporevala of State Street Global Advisors are pulling ESG further along with a heavier focus on social, or the “S” in ESG.
PURPOSE AND CULTURE
Larry Fink’s 2019 letter to CEOs asks for clarity on purpose and Cyrus Taraporvevala’s letter to directors asks boards to engage with investors about their company’s culture.
The two letters have three significant things in common: they both challenge CEOs and directors to lead on social issues, they both acknowledge that these are difficult concepts to describe and measure and they both tie these concepts to long-term shareholder value.
Underpinned by the observation that “society is increasingly looking to companies, both public and private, to address pressing social issues”, Larry Fink says that in order to lead, a company must understand its purpose, or its ultimate reason for being. Purpose, says Fink, “guides culture, provides a framework for consistent decision-making, and, ultimately helps sustain long-term financial returns”. BlackRock’s engagement priorities for 2019 will continue to be governance topics including diversity, strategy, capital allocation, compensation, environmental risks and opportunities and human capital management, all of which promote long-termism and within that, they will be speaking about purpose and how it aligns with culture and strategy.
Similarly, State Street is focused on the long-term, and in 2019, will be tying company culture to its ability to deliver results over the long-term. “It is the focus of long-term value that drives our engagement around effective, independent board leadership; board quality including cognitive diversity enhanced by better gender diversity; and environmental sustainability.” According to Taraporevala, culture – the “company’s ability to promote the attitudes and behaviours needed to navigate a much more challenging business terrain” – is a key value driver.