Moving the ESG Needle within Multinationals

If you plug the term “ESG” into Google Trends, you’ll see search interest in it started to rise significantly in January 2022. While you can likely credit this to the impact of COVID-19, social justice movements, a looming economic crisis, and/or a rising concern for the environment, ESG is clearly our future.

To get a quick take on ESG and how investors can act responsibly or even influence the actions of large multinationals, GLG’s Sam Stopps hosted a teleconference with Markus Barth, CEO of Anatase Ltd. and former Managing Director and Global Head of Investment Products and Indices at DWS Group Services UK. What follows is an edited and condensed version of the teleconference.

Can you give us a quick overview of ESG from your perspective?

ESG is probably the most prominent investment topic for the last three to five years. And if you ask somebody to define it, you might hear little more than buzzwords: environmental, social, and governance. But a challenge arises when it gets down to measuring these things.

Let’s say you’re a stock analyst and you’re analyzing the annual reports of a company. You can look at income statements, balance sheets, cash flow statements, and footnotes. All of these are regulated and must abide by accounting standards. These standards have some leeway, of course, but in the end, you can’t define “earnings” in more than one way. There are absolutely zero standards for the measurement of ESG. Every public company can basically report whatever they want and define it in whatever way they want.

An oil company reporting on its carbon footprint might claim 60 trillion cubic tons of CO₂ from all its global processing plants. The next quarter, they may think that that’s too large a number, so they divide that number by their revenue, which gives investors an idea of their carbon footprint per dollar of revenue. There is no requirement for them to disclose that they’ve changed it, or even to define how they measure it. They just report a number.

So, everybody should go in with eyes wide open when they look at this. Governance is not quite as open to manipulation of numbers as environmental numbers are, but when it comes to governance, you have to ask things like: How many women are on the board? How much percent ownership do the board members have?

There are many companies that measure ESG and sell the data, but they work on different criteria. What’s a B+ is the United States may be a D rating in Switzerland. So my advice to everybody is just know what you’re looking at. When you’re talking to providers of ESG ratings and providers of ESG data, dig deep and find out how they do things.

What options do ESG investors have to put pressure on corporations to change policy?

Individual investors who don’t own large blocks of stock don’t really have a voice at a company annual meeting. Companies are going to pay attention to large voting blocks of shares. So, if you’re a large institutional investor and you own 4.5% to 5% of the company, your voice is going to be heard at a shareholder meeting. And the company managers are going to listen to you because you’re a big owner of their company. If you’re a retail investor or a small investor who owns 1,000 or 2,000 shares, your voice isn’t likely to be heard. So how do investors that don’t have large blocks of stock and the kind of clout that company managers listen to get involved in this? Well, you look for external parties that are already going after these kinds of companies and try to become part of their activities.

With this in mind, can you provide a brief overview of how Unilever was successfully pressured to overhaul its nutrition disclosures?

Unilever is one of the market leaders in terms of ESG overall. They’re very environmentally sound. They have a lot of green initiatives. They’ve got a pretty good scorecard when it comes to certain aspects. But they also manufacture a lot of unhealthy foods in terms of nutrition, especially for children. They’ve always used their own nutritional scale of what’s acceptable and what’s not acceptable. During COVID, people started becoming aware of the dangers of obesity or poor nutrition. People who weren’t nutritionally sound or who had bad nutrition had weaker immune systems. And they tended to succumb to COVID easier.

During this period, Unilever came under fire from several “action groups.” One, called the Access to Nutrition Initiative (ANI), is basically a third-party nonprofit organization that tries to improve nutrition in schools and in food products at the retail level. They lobby against retailers who carry unhealthy foods. When they started talking to Unilever, their concerns initially fell on deaf ears. So, they went to shareholder meetings and created a shareholder initiative that urged Unilever to do something about their nutritional standards.

Unilever pushed back a little bit. But finally, because of a combination of the ANI and their shareholder pressure, they finally announced that they are revamping their nutritional scales for what is and what isn’t nutritional. And they said they would report according to those requirements as provided by the government.

Now, remember, Unilever’s one of those companies that fall on the good side of the ESG scale. So, for them to make this change wasn’t a big deal. You start trying to do this to big, ugly multinational companies who aren’t good ESG players, and I think you’re going to find a steep uphill battle.

What options do ESG investors have to put pressure on multinational corporations to change policy?

Google it. There is a plethora of bodies out there — institutions, educational institutions, nonprofit institutions, for-profit institutions — that specialize in assembling class actions to try to implement change at the company level. That’s one way to go, especially if you don’t have a big block of stock.

Governments are also getting involved. In some countries, they are starting to push for companies to change the way they do things. They’re providing tax breaks for companies that are willing to make the changes on the environmental side.

There’s pressure coming from shareholders. Pressure needs to be put on the board. Some hedge funds have bought large blocks of stock and then formed initiatives to unseat board members who weren’t friendly toward ESG so they could replace them with board members who were.

Start with the board. Find out how many board members think that ESG is important and that it’s also important to create policies for a greener planet or more equitable treatment of women and minorities. Where you have board members that you think are ineffective, you work to try to get them replaced. Again, you can’t do this by yourself — you need large numbers of people.

Do the research. If you are considering an investment opportunity, you need to dig into the company’s financial statements, their annual reports. You need to look and see if there is any information in their annual report that gives you an idea as to how they define ESG, what they think is important, and what they’re doing about it. Believe me, any company out there that has any kind of ESG initiative is blowing their horn as loud as they can all over their annual report.

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About Markus Barth

Markus Barth is an experienced ESG investor and the owner of consulting firm Anatase. Before this, he was Managing Director and Global Head of Investment Products and Indices at DWS Group Services UK. In this role, he directed all aspects of a quantitative and systematic investment products business based on the Deutsche Bank CROCI Research valuation model. He provided executive-level leadership, mentoring, and strategic direction to a diverse team of index and product R&D teams in London, New York, and Mumbai. Before that, he was also Global Head of Equity Structuring Proprietary Indices at Deutsche Bank UK.