The issue of environmental, social and corporate governance has emerged as a mainstream concern for investors and corporations and was a major topic of conversation during recent energy finance-focused conferences, particularly as rating agencies incorporate ESG into their analyses.

"One out of every four dollars of investments in professionally managed assets in the United States is invested according to some sustainability investment theme," Amanda Cimaglia, managing director for ESG at Solebury Trout LLC, said while moderating a June 18 panel at REFF Wall Street in New York.

Cimaglia pointed out that this marks a 38% increase in U.S. ESG investment from 2016 to 2018, with global ESG investing totaling upwards of $30 trillion.

Key to that uptick in global ESG investment are strategies to decarbonize. In 2017, Caisse de Depot et Placement du Quebec, or CDPQ, committed to reducing its carbon footprint by 25% by the year 2025. As of 2018, the institutional investor had reduced its carbon footprint by 10%, Alex Bell, a director of energy private equity at CDPQ, told a panel at the SuperReturn Energy conference in Boston on June 11.

"We're not just doing this by ourselves," said Bell. He cited CDPQ's participation in the Investor Leadership Network, a collaborative G7 initiative that provides training to senior public-sector infrastructure managers to accelerate implementation of climate-related disclosures, as well as to increase diversity within the leadership ranks of corporations and institutional investors. Fellow participants include the Alberta Investment Management Corp., Canadian Pension Plan Investment Board and the California Public Employees' Retirement System, according to Bell.

Growing rating agency role

"It's very clear that good governance attracts investor money," Diana Glassman, CEO of Integration Strategy Inc., an ESG-focused consultancy, said at the private equity-focused SuperReturn Energy conference in Boston.

"[S&P Global Ratings] is now separately measuring contribution of ESG factors," said Glassman, who noted that Moody's and Fitch Ratings plan to do the same.

"You're all being noticed by the raters," Glassman told the mostly private equity crowd. "You may not have enough information to have a rater but the raters are all watching you and they are going to be rating you."

However, Katherine Neebe, senior director of ESG and Global Responsibility at Walmart Inc., speaking on Cimaglia's panel at REFF Wall Street, said logistical kinks persist in ESG scoring.

"I've worked in the field for over 20 years on a variety of environmental and sustainability issues and, in my current role, I could spend all of my time, plus three other people's, filling out surveys," Neebe told conference attendees. "We need to get to a place where a company's public disclosures can be folded into decision-making tools and the variety of benchmarks that are out there."

There is also a need for increased communication between companies and raters, Neebe said. "In addition to the survey proliferation, I think there is a little bit of a need for more of a conversation between the investment community and the ESG rating community and the companies themselves. There is a huge push for me to be transparent and not a lot of transparency in return."

Evolving rules and norms

As corporate players and investors survey the ratings landscape, many are still weighing how ESG will be regulated.

"A lot of the public discourse is dominated by the two poles. There's the 'Drill baby, drill' crowd and there's the folks who want to outlaw the entire energy sector," Michael Cappucci, senior vice president for compliance and sustainable investing at Harvard Management Co. Inc., said at SuperReturn. "We need to find the middle path and the best way to get there is through sensible regulation."

However, even at Harvard Management Co., which is owned by and manages the endowment of Harvard University, reporting requirements for ESG are still taking shape.

"Literally, we ask the question, hopefully to every manager, 'Do you have an ESG policy, yes or no?' and that's the minimum requirement. There's actually no wrong answer to it, whether you answer yes or no, you should be getting a follow-up call from someone on our ESG team trying to better understand your approach to the investments," Cappucci said.

Like other university management companies, the Harvard endowment manager is increasingly focused on long-term engagement, which Cappucci says follows a play out of the private equity playbook, even as the company operates without formal reporting requirements.

"What we're looking for is 'How are you using our assets, are you acting as good stewards on our behalf?' and hopefully that will show itself in periodic reporting," Cappucci added. "We don't always have the ability to mandate [reporting requirements] from our GPs, but usually they're receptive to, if not written reporting, at least to including that in some kind of periodic discussion."

Even as the ESG space grows and institutes norms, ESG standards are rapidly becoming mainstream, in Glassman's view. "The perspective I have is that in one or two years, max, we will not be even talking about this," he said.