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It’s Proxy Season, and All Eyes Are on ESG Reporting

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May 19, 2021

Environmental, social, and governance (ESG) matters are getting more face time at annual shareholder meetings, with questions for CEOs and companies.
  
As proxy season rolls on, Workiva Senior Director of ESG Mandi McReynolds talks with Marty Vanderploeg of Workiva for a CEO’s perspective and with Financial Services Industry Principal Arthy Kumar for what individual investors can look for in a company’s sustainability reporting. Watch the video:

 

Mandi: Hi, everybody. I'm Mandi McReynolds. I'm the director of Environmental, Social, and Governance here at Workiva. We are in the middle of annual shareholder meeting time, and there have been articles going all around the news about CEOs who are standing up for their social, environmental policies and practices in their companies, shareholders voting on them, as well as some talking about the complexities that are happening.  

I really wanted to pull in Arthy, who has some expertise in asset management and financial planning, and our CEO, Marty, who can really help us unpack how we simplify this process for all of you. So, together, we're going to riff a little bit on this topic of annual shareholders and how we can help our young investors and executives work through their own journey, just like we are here at Workiva. So, Marty, I'm going to turn it over to you. So I see all these headlines. We have these headlines go through our company, people sharing articles. And I was like, I got to hear Marty's take on this. So we have multinationals, big entity companies, that are kind of saying this is too complex. I've got to find a way that I can simplify, and each company can set it up on their own. What are some of your thoughts as these multinational companies try to tackle ESG and their shareholders are asking them questions about it? 

Marty: Well, I think that to start with, the idea of ESG really has to be a mindset of the executives where they're going to manage their company using those metrics. It's not just something you report at the end of the year for shareholders. Really, it's been shown that things like making your building more environmentally friendly also is financially friendly. Trying to be diverse and equitable and have inclusion is also helpful at the bottom line. So executives have to buy into the fact that managing a company with all these different metrics in mind is actually better for the shareholder in the long run.

And I think once that has happened, the second thing that we're trying to do at Workiva is really figure out what are the things—and each business is different obviously. All businesses, outside of financials, everybody's financials are somewhat similar, but outside of that, the metrics get very different based on each industry. And what's more important changes in each industry. So take the lowest hanging fruit in terms of the biggest improvements you can make, and slowly develop your ESG management philosophy. And then the report will come from that. And, of course, there's tons of people out there right now—consultants, technology providers—all are going to help in this process. So don't do it alone either. That's the other advice I would give.  

Mandi: I love the idea of not doing it alone and thinking deeply about who are your stakeholders. As we're on our own journey here at Workiva, we're really trying to figure out who's the priority stakeholder? Whose voice are we going to listen to most? And as we listen to some of the dialogue in annual shareholder meetings, some of that's the debate. I may prioritize, as a CEO, my customer. Or I may prioritize my employees, or I may prioritize my shareholder. How is that going to play out for different CEOs? So what do you think? Do companies need to consider their stakeholders? Do they need to consider a prioritization of it? How do you view it from your seat as the CEO?  

Marty: One of my favorite lines from the day I've started is that the CEO job has more bosses than anybody. We have, like you said, all the employees, all the customers, all the shareholders. It's a lot of people you're answering to. And I think that if you have happy employees and happy customers, the rest is going to follow. I think the way I look at it is that you really do have to index on employees for long-term success. You have to index on the employees and the customers. And that's what builds a strong organization.

Obviously, you want to listen to the shareholders, but it's pretty clear what the shareholders want in general. Obviously, that's changing now some. But I think everybody will be on board once they realize that multi-stakeholder capitalism is actually the best of both worlds. Not only do you get better corporate financial performance from doing those things, in the long run, you also become a much better global citizen. All of our organizations—be it corporations, government—everybody has to start stepping up and being good global citizens for the good of the entire global community.  

Mandi: Arthy, what do you think about some of Marty's comments? We're working with young investors, and you, you're working with financial planners. We were talking about this the other day, and we were saying, how do we help this next generation or mid-level managers really understand the complexity, and what are some tips and tricks? What would you say to that group?  

Arthy: Yes. So, I liken the jump and the traction and the record number—I mean, there was like $51 billion that went into sustainable funds. It really doubled in 2020, than 2019. And sometimes when I have this conversation, I say it's the young investors, but it's also people that go and say, "Oh, I'm going to go focus on a plant-based diet," and then they jump right into the bandwagon. And that's really kind of the interest we're seeing in ESG investing. But the key is really to think about their goals and see if it aligns to their values. And I think that's really the key that every investor of any age needs to look at. And really looking at diversifying their portfolio and seeing if what they are thinking about aligns with both their investment philosophy and what they're looking to accomplish, but also with the values that they're looking to do.

One of the things that I have always recommended to any investor of all ages, but especially with the younger investors, who jump on something that's so on trend and they're so passionate about, is really to do the research. Look at a fund's prospectus, look at what's the objective of a fund, what's the strategy, what companies are they investing in? And determine if those companies meet your values. Something to keep in mind is that the reporting and disclosures and what's available out there is varied. They really need to put in extra research before they decide that that's the right investment for them.  

Mandi: I love it that you're talking about consumers taking stands with their feet and being educated and doing the deep work. Marty, it's no different from how companies, how we're even approaching our own journey here at Workiva for ESG. There's a point where a CEO has to take a stand and really say either, "I'm for this," or, "I'm against this," so that employees will buy in or future customers know, do your values as a company match mine? What are some of your thoughts as we think about ESG reporting and how that can help CEOs think about taking some stands and where data can back them up?  

Marty: Well, I think it's going to become pretty clear that the younger generations are going to demand it. CEOs that don't get on board, their companies aren't going to be performing as well. I mean, they can go all the way down to consumers boycotting. It can get to that level. The point I really want to emphasize again is that it's been shown over and over that these different techniques for being a good global citizen, be it in the environmental space or diversity and inclusion or good corporate governance, all of them lead to a better outcome. If CEOs don't believe that, then I think that they're going to be antiquated CEOs, to be honest.

So I think you really need to understand that, study it, believe it, because it is true. Then in terms of the journey—I like that term, because ESG is a journey—I don't think anyone has it down yet, just how to measure and manage these things. The reporting is a first good step because reporting at least gives you a baseline of where you're at. And that's going to be the things we see come into our reporting realm fairly soon. So I think CEOs have to take a stand. I think that they have to report how their organizations are behaving and how they're, like I always say, being good corporate citizens. So I think that it's a must in the future. I think not only employees, but the actual customers, consumers, if you're selling to consumers, are going to respond.  

Mandi: Arthy, what do you think of that notion of progress over perfection? I can remember sitting on an investment management team at my old firm and talking through some of these complex issues around, hey, sometimes it's better to stay engaged and meet companies where they are and follow them in their journey of progress to perfection and embrace, like Marty said, the baseline and the authenticity. What are you seeing from your seat as to how we support people understanding it's a journey and not just they're going to get there overnight?  

Arthy: Yeah, absolutely. The bottom line when we are getting into this interest level and the conversations is that it is still in its very early days. So although ESG investing is on everybody's mind right now, it's very, very early. So it is going to be a journey. It is going to be an evolution and getting better and looking at companies, even looking at different aspects of how to incorporate this into their culture. When an investor is looking at it, or the companies as they work on how they are going to develop this, is that the issues really vary. And not all issues matter equally as a portfolio manager is picking companies to invest in or a fund is investing in a company or then the actual investor who's investing in a fund. It's across all industries.

I see how technology, for example, has its own different values that they're going to incorporate to be compliant and also just incorporate the values. The relevance of ESG issues varies from industry to industry and company to company. So, for example, fuel efficiency has a big impact on the carbon footprint. But also bottom line, it's for an airline more than for an investment bank. So as investors look at this, as companies look at this, one thing to keep in mind is an ESG portfolio that you pick doesn't need to be tied to one single idea. Instead, ESG investing is kind of a new way of thinking that's going to continue to evolve and to really give time for that as long as the value is there to see how that's incorporated over time.  

Mandi: You got it. I like how you talked about thinking about technology, how technology will help investors think about their values and the future of their decision-making. Let's round this riff out with that kind of conversation for both of us. Marty, I'm going to start with you. What do you think from a CEO's perspective and boardroom perspective, will technology do for ESG?  

Marty: Well, I think that getting timely information is the only way you can manage an organization. If we're going to try to manage organizations with other metrics than just financial, we need to modernize those reporting flows and chains just like we do financial. Right now, all the financial reporting is in the middle of a digital revolution. Everybody is re-architecting their reporting systems. The same thing is going to have to happen with ESG if you want to get that type of data soon enough to make good, informed decisions on how to manage the company. So I think technology will play a big part in this. I don't really think it'd be possible without technology, to be honest. We've got to make the data collection as automated as possible, as little human opinion involved in it. It's very much going to be tied to the ability to have vast digital systems create information for executives to make decisions.  

Mandi: Arthy, what do you think? How will technology revolutionize the way that ESG will look for our future investors and your world? 

Arthy: Marty hit it right there on it, right. Everyone is going to be looking for information and timely information. So it comes down to data-driven accountability and auditability. That's going to be critical, which is where technology plays a huge part for a company to be able to do that and for investors to be able to get that information. Also, just to be able to keep on par as they are comparing different companies and different firms. Is it all kind of meeting around the same standards that they can actually look at and see how the results, if you want to say, "pass the smell test." But how are other competitors doing their reporting, and is that comparable and on par? But it's going to come down to timely, accurate data and auditability and having that at the fingertips for someone to make a decision.

Mandi: I could not agree more. And I think one of the things that I think about from my seat is, is the data trusted, and then how do we show up as our authentic self? The worst thing an environment, social, governance practitioner wants is greenwashing or purpose washing. And we want to make it easy, seamless, so that we can drive strategy for the business, and ultimately, as Marty opened us up with, add business value to the bottom line. The only way I can do that is if technology enables me to move forward and move as quickly as the board, as our leadership, employees, investors, and consumers are demanding. So I look forward to the day that it's simplified, and I look forward to the day that strategy can be accelerated. 

Thank you so much. It's a great season to watch annual shareholder meetings together. I love the perspective from your seat, Marty, as CEO, Arthy, thanks so much for your wisdom from asset management to investor, and for me as a practitioner in ESG to just soak it all in. Many thanks to you, and we look forward to the next riff we have another time on an ESG topic.

 

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