As ESG became an increasingly important buzzword in 2022, the inevitable backlash hit. A few dozen anti-ESG shareholder proposals were filed in the US and a movement against what’s been dubbed ‘woke capitalism’ made headlines.
That said, the dollar amounts of funds invested using ESG criteria continued to climb. Global ESG assets were on track to surpass $41 tn by the end of 2022 and to reach $50 tn by the end of 2025, according to a report by Bloomberg Intelligence.
With ESG leaving its exuberant adolescence and entering maturity, IROs are increasingly attuned to ESG issues and how they should be reflected in shareholder communications. To tell a compelling corporate story today means incorporating ESG into the mix. Below are some global ESG trends experts have identified, along with some tips for how IROs might respond.
1. ESG will continue to capture the imagination of both institutional and retail investors
The BlackRocks and State Street Global Advisors of the world have taken ESG to heart. In early 2022, BlackRock CEO Larry Fink escalated the push for climate-friendly practices by asking companies to set near, medium and long-term targets for greenhouse gas reductions. Meanwhile, State Street CEO Cyrus Taraporevala has said that, starting in 2023, the asset manager will vote against the governance chair of any company in the developed world with a board that comprises less than 30 percent women.
At the same time, ESG has gathered momentum among retail investors. According to a 2022 study by Accenture, 84 percent of retail investors surveyed plan to buy ESG products within the next year.
Takeaway: Because ESG is of interest to both institutional and retail investors, IROs must make their communications accessible to investors who span a range of sophistication levels. Infographics, charts and other strategies for crafting a strong narrative can help.
2. Investors and regulators are increasingly keen to see the end of greenwashing
Regulators in both Europe and the US are taking steps to ensure ESG funds live up to this designation. In Europe, the Sustainable Finance Disclosure Regulation led to Morningstar removing the sustainable label from more than 1,200 European funds in early 2022. Meanwhile, in the US, the SEC recently proposed rules that would require greater consistency for funds and advisers that market themselves as having an ESG focus.
Takeaway 1: Gone are the days when IROs could use vague language about community service and valuing ‘our people’. Today’s IR professionals run the risk of alienating shareholders when they speak in platitudes.
Takeaway 2: The more ESG can be woven into your company’s financial strategy, the better. A 2022 survey by BNP Paribas found that two thirds of companies integrate ESG into their financial strategy, while almost half go a step farther and define ESG KPIs. Setting ESG KPIs for your company – and then following up with progress made toward meeting these goals – are important steps for any IRO seeking to provide decision-useful information to stakeholders.
3. Clarity will keep growing around ESG ratings
In the early days of ESG, ratings firms sometimes seemed to operate with a Wild West mentality, to the consternation of IROs who had to answer for the consequences. Today’s major ratings firms – MSCI, ISS ESG, Sustainalytics and FTSE Russell, to name a few – are far more rigorous in their analyses and there are fewer instances of a company getting a stellar rating from one firm and a dismal grade from another. This convergence in expectations is likely to continue.
Takeaway: Forging relationships with advisory firms is more important than ever. An IRO who regularly communicates with the major ESG arbiters can correct the record when mistakes are made and may even have an opportunity to explain the rationale for policies and practices that might otherwise have been misunderstood.
4. ESG will become more of a political football in the future
The anti-ESG backlash in the US started getting attention this year. In 2022, for instance, 52 anti-ESG or conservative shareholder proposals were filed, double the 26 filed in 2021, according to proxy solicitor Georgeson. Since the Republicans gained control of the US House of Representatives in November, that backlash could intensify.
Harvard Law School’s corporate governance blog notes that most of the anti-ESG proposals have been easily defeated and yet warns that ‘the level of anti-E&S activism is likely to continue to grow in the coming years.’
Takeaway: Communicating about environmental, social and governance initiatives is a good way to win investor confidence. Many IROs now host ESG roadshows to make sure stakeholders know about the positive steps being taken.
5. Communicating about ESG will claim a larger share of IROs’ time
According to a recent Global IR Pulse Survey from Nasdaq, heading into 2022 nearly one in five IR professionals served in a lead ESG role. In addition, almost 40 percent of IR professionals had an ESG-focused remit.
Takeaway: Investors want to know more about ESG and so does your board of directors. Assuming a key role in ESG communications is a winning move for IROs eager to make their corporate stories relevant and compelling to institutional and retail shareholders alike.
Richard Carpenter is CEO of advisory and content agency Bladonmore