Sustainability and IR in emerging markets

Companies that are incorporating sustainability strategies into their core business are likely to be more attractive and better evaluated by analysts. An increasing number of investors are using ESG analysis as a way to improve the quality of the information used in portfolio evaluation.

But information asymmetries between investors and companies are limiting ESG analysis, mainly for companies in emerging markets. Although sustainability ratings agencies have developed very sophisticated databases of companies from all over the world, the information they are providing on emerging markets is restricted to a handful of companies. In addition, even when available, this information can be difficult to access and analyze as companies are not providing enough relevant ESG information.

This lack of ESG information is mainly a consequence of the lack of integration between sustainability managers, financial managers and IR teams, which often have different strategies, objectives, targets and metrics. In order to solve the problem of ESG-related communication between investors and companies, the first step must be to fully integrate the corporate management of sustainability.

In the case of Brazil, one of the largest emerging markets, environmental and social issues have not been integrated into the IR strategy of most companies. Only 34 percent of the top 100 companies and top 20 banks in the country provide access to adequate ESG information via their websites. Even though most companies have adopted the Global Reporting Initiative’s reporting guidelines, none has clearly disclosed financial results related to the company’s sustainability strategies.

Companies’ ESG communication to the market is limited to facts on joining or remaining on BM&FBovespa’s Corporate Sustainability Index or on the Dow Jones Sustainability Index. Only 18 percent of the firms surveyed included some ESG information in the quarterly reports they released in 2013.

Moreover, some companies reported material ESG risks in their 20F forms or similar documents. Of the 120 companies and banks surveyed, 16 percent say they disclosed an integrated report, which might signal a trend in sustainability and financial reporting.

How companies in emerging markets can increase access to responsible investments

Communicating proactively with investors on ESG issues is a powerful strategy to increase access to capital. With that in mind, companies in emerging markets should improve their communication and adopt a development process based on:

Finding the right investors
Companies with sustainability strategies should seek investors with long-term perspectives that actively support sustainability strategies

Understanding ESG analysis
The first step toward successful integration of sustainability and investors relations is a clear understanding of how ESG analysis works, its basic definitions and performance factors. Mapping potential investors and their ESG methodology is another important step to bridge the gap between a company’s sustainability policies and investors’ expectations

Providing data on the business environment
Companies can provide comprehensive information about regulation, consumer behavior, competitors, civil society influence and other social, environmental and political issues that might affect business performance. This would also facilitate ESG analysis by investors

Focusing on local sustainability issues
Sustainability materiality of companies in emerging markets should be based on global industry materiality standards, yet it should also be adapted to the local market, society and environment. Corporate strategies and operations have to be defined, prioritized and designed in response to industry sustainability issues, the local context and the specific risks and opportunities of the company’s business

Demonstrating the value of sustainability
Demonstrating the competitive advantages that result from sustainability strategies is a strong argument to attract new investments

Providing greater transparency
Generally, integrated reporting is all the communication analysts need. Sustainability and financial information must be related and coherent to enable integrated ESG analysis. Other transparency practices include publishing sustainability performance indicators and relevant facts in quarterly reports and statements disclosing financial data related to the company’s sustainability management model

Meeting sustainability standards
International sustainability standards are the universally accepted way to gauge sustainability results and to provide investors assessing ESG performance with an easy-to-understand and comparative framework

Adopting governance best practices
Both publicly and privately held companies should adopt governance best practices. Use of more quantifiable key performance indicators and targets, plus incentives like remuneration policy, is important to assure systematic management of sustainability goals

Managing stakeholder relations
The company’s stakeholders are an important source of reputation and information for investors. Formal and continuous relationship channels, such as panels, consultations, grievance mechanisms and formal partnerships improve companies’ credibility

Making ESG work

The increasing adoption of an ESG perspective in the investor’s decision-making process is a great opportunity to enhance corporate sustainability performance. Companies must adapt to this new investment market trend, however: new metrics, management and governance systems must be created to solve the problem of asymmetric information at both company and market levels.

At the internal level, companies must integrate sustainability into business and investor relations strategies. At the market level, and mainly in emerging markets, providers of ESG data and research must improve the quality of the information on social and environmental issues by adapting it to the local context.

Transparency is a basic condition for enabling market development, and integration of social and environmental objectives into the business’ objectives depends on new metrics and institutions focused on driving market decisions toward sustainable investing.

Regi Magalhães and Raquel Carlesso work at Uniethos, a non-profit business sustainability consultancy, based in São Paulo, Brazil. This article is adapted from a longer article originally published in June 2014.