Advisory intelligence: Evaluating your investor-facing ESG story
The rise of ESG investing strategies has been well documented, but the continued performance and demand for ESG information during the Covid-19 outbreak underscores how important it is for IR teams to have a compelling investor-facing ESG story.
Almost $31 tn in institutional assets were invested sustainably in 2018, according to a biennial study from the Global Sustainable Investment Alliance, representing a 34 percent increase from the two years prior. During the sell-off the immediately followed the Covid-19 lockdown, ESG ETFs saw more inflows than any other ETF, according to analysis from Nasdaq IR Intelligence, indicating that ESG investing is seen a positive investing strategy even during a downturn.
‘Almost every investor out there now has some form of ESG strategy,’ says Meagan Tenety, lead adviser, ESG advisory at Nasdaq IR Intelligence. ‘With the rise of passive investing, active investors have to find ways to differentiate themselves and find new and unique data points, which ESG enables. Everyone’s looking at ESG, but the breadth and depth differs – which can make it quite tricky.’
Some investors view ESG through the lens of risk mitigation, while others see it as a way to generate alpha. But what is almost universal, Tenety says, is the pressure that investors receive from their own clients to add an ESG lens to their offering.
ESG data providers
As a result, IR professionals need to build an understanding of the ESG reporting and data landscape to understand what information their investors do consume, and what information they’d like to consume, Tenety says.
A key component of investor relations is managing the company’s equity story, and that can be challenging without an understanding of the ESG ratings providers out there – including MSCI, Sustainalytics and ISS Corporate Solutions. It’s important for issuers to understand how these ratings providers gather information; if they do so passively, IR teams should know which disclosures they gather their information from, whereas if they actively send questionnaires to companies, IR teams should know who receives and completes the questionnaire.
Tenety says that this is possibly a larger concern for small and mid-caps. ‘A lot of the ratings agencies skew towards large cap companies because they require reporting that only a company with a lot of resources can provide,’ she says. ‘It’s a burden for a mid-cap company – the requirements don’t change but the resources do.’
Tenety adds that it’s helpful for IR teams to understand how their investors use this data in their decision-making, something that she works with Nasdaq clients to understand. ‘What’s important for IROs is knowing that investors are looking for financially material decision useful information that they can provide with their own analysis,’ she says. Active investors are typically using this information to drive decision-making, she adds, but will add it to their own analysis.
The disclosure dilemma
This places a greater emphasis on ESG disclosure. For instance, some ESG data providers score companies negatively for not reporting on a metric that they could easily make public. By understanding which metrics have an effect on your ESG score, you can shape your ESG disclosures.
But the ESG disclosure landscape can feel equally confusing for IROs who are less familiar with the different providers. This year, BlackRock’s Larry Fink encouraged issuers to use the Sustainability Accounting Standards Board (SASB) for ESG reporting, but other investors have expressed a preference for Global Reporting Initiative (GRI) reporting.
In addition to this, the adoption of the Taskforce on Climate-Related Financial Disclosures (TCFD) has gained significant momentum for reporting on future environmental risks. The framework now has more than 1,000 organizations supporting – including investors, issuers, politicians and civil servants.
Tenety encourages IR teams to ask their investors which framework they prefer. ‘The onus is on the companies to tell a story that makes sense to them and it ultimately helps to have conversations with investors,’ she says. ‘If an investor asks you why you haven’t disclosed a statistic, then you might be able to able to point to what you consider to be a more meaningful statistic.’
Tenety also encourages issuers to look at how their peer companies are reporting. As the ESG data and reporting landscape continues to evolve, investors are increasingly grasping for consistent and comparable ESG data. By using the same framework in a sector – Tenety cites the Global Real Estate Sustainability Benchmark (GRESB) as an example – it makes investors’ lives much easier.
Tenety concludes that the Covid-19 outbreak has shown that ESG is not a bull market luxury, as some had suggested, and that issuers can enhance their IR program by expanding their ESG reporting and engagement around material issues that relate to their business. By doing so, they can alleviate the concerns of investors that are looking to alleviate risk in their portfolio, and potentially appeal to new investors that are using ESG to generate alpha.