Addressing investor inquiries on environmental and social issues
Forty-nine percent of shareholder resolutions in 2016 addressed an environmental or social issue and the path to these resolutions often began with an initial inquiry that ended unsuccessfully. The process typically starts during the fall, when investors send requests to companies for more information on a specific sustainability topic as the start of a shareholder engagement. When they find a company lacks progress, attention, or desired practices the investor will engage further and may even file a resolution. However, through positive engagement, proposals can be withdrawn and sometimes avoided altogether.
This fall, you may have been one of the companies to receive an investor request on your firm’s sustainability activities. This first inquiry is an opportunity to have a conversation and avoid escalation. It can be a chance to identify, understand and meet interest within the investment community for more information on a specific topic. Rather than playing defense, how can you turn this situation into a positive platform for your company and avoid having this inquiry escalate into a resolution at your AGM?
Protecting and creating value
Through proactive dialogue you can share your story to increase investor understanding of your company’s actions and efforts. This approach protects and creates value for your firm. It can protect your reputation and brand, current access to capital, and preserve diversification of your investor base. For a number of companies, open interactions with investors lead to positive relationships, increased goodwill and recommendations on how to move into a leadership position on a particular issue.
The following common mistakes can lead to shareholder resolutions or divestment:
- A failure to respond: Companies may disregard requests they deem trivial because of the topic or because of a shareholder’s size. Remember that active shareholders are the tip of the spear when it comes to investor interest. Their actions can garner support from larger funds through proxy ballots and dialogues with management
- A defensive approach: A defensive approach can set a contentious tone for a dialogue and derail the opportunity for a collaborative discussion. ‘This request is a waste of our time, we’re already doing a lot on the issue and what they are asking for doesn’t make sense for us’ began one of a number of similar conversations I had with a portfolio company as a senior governance analyst at TIAA-CREF. In this case the company had better sustainability practices than their peers, but they had never considered sitting down with the investor and had never disclosed information on sustainability activities publicly. They had been defensive since the first inquiry from their shareholder and were now facing a proposal at their AGM asking for a sustainability report covering topics that weren’t a good fit for them. A very easy solution was in reach: I recommended to general counsel that they share their sustainability activities, which topics were a good fit for a potential sustainability report, and commit to reporting in a reasonable time. The general counsel followed these steps and the proposal was withdrawn.
Actions to leverage the opportunity for a positive outcome
The following actions can lead to a positive outcome:
- Responding in a timely and informative manner: Delayed responses can have consequences. For example, companies that ignored inquiries on human rights issues by the Norwegian pension fund have found themselves defending company actions to the fund’s investment committee as part of a divestment review. A timely and thoughtful response can help avoid these escalations
- Understanding and clarifying the concerns: Evaluate the request to identify the explicit and implicit drivers behind the concern. If you are questioned about your trade association dues, ask yourself why that may be. Is it because the investor believes that a trade membership undermines your leadership position on change? Focus on this concern and how you can address it in your messagingUnderstanding the investor’s cultural lens: A request from a Northern European fund may have more of a moral and ethical focus than a US or UK firm interested in understanding your risk management strategies
- Evaluating the current situation: Work with your sustainability team to better understand what you are doing on these topics, what strategies are in play, how you can improve, and why you have taken this route. Assess current disclosures and actions by industry peers and benchmark your firm against best practices. Discuss what actions you are willing to take to address the issue at hand
- Present information in a framework that reflects the investor’s perspective: Investors care about the management of these issues through an institutionalized framework (policies, practices, commitments and strategies) and how you are performing against the chosen approach. Prepare clear messaging that discusses business value – for example, discussing the risk management of community impacts or how water practices positively impact the bottom line. This information may draw from, but will differ from, the reporting provided in either quarterly earnings calls or sustainability reports
- Listen: Then resolve through proactive and open dialogue. Come to the table with solutions and a willingness to listen. Having worked on both sides, in my experience, where there is the opportunity for value creation, a resolution is within reach. Educate instead of defending. If you disagree with a request explain why it is not a good fit and offer an alternative solution that addresses the investors’ concern. Tell your story. Share where you see risks and opportunities and your actions to address them. Be open about challenges and obstacles. Engaging positively and openly demonstrates a willingness to participate in a dialogue, and an interest in improving management and practices.
How to address and prevent future internal and external concerns
As investor interest in these issues continues to grow, open lines of communication allow investors to raise concerns and receive responses without filing resolutions. Ahead of the resolution filing season, consider holding calls with investors or organizing a roadshow specifically on ESG issues. Ultimately it is key to understanding the investor engagement cycle and establishing a communication plan that reflects their needs, identifies specific engagement opportunities and actions.
Sonal Mahida is director, CSR & sustainability practice at Indelable