Investor relations and corporate sustainability officers must work together on ESG to ‘bring it out of its silo’ and integrate it into the CEO’s long-term plan, according to leading experts.
Method of production of long-term plans – a new report by CECP and its Strategic Investor Initiative (SII) – looks at the increased investor demand for more and better long-term sustainability and governance information. The report builds on a letter sent to CEOs of public companies from the SII leadership – including William McNabb of Vanguard, Erika Karp of Cornerstone Capital and Jonathan Bailey, head of ESG investing at Neuberger Berman – encouraging a longer-term focus.
The letter proposes seven long-term considerations for public companies. They are:
- Key risk factors and mega-trends over three to seven years
- Capital allocations to manage financially material business issues
- Employee engagement in corporate purpose and long-term strategy
- Human capital requirements and strategy
- Practices on share and stakeholder engagement
- The composition and diversity of the board
- The engagement of the board in setting strategy and incentives and overseeing management.
New operational processes
Brian Tomlinson, research director at SII, says: ‘Developing and delivering a long-term plan to investors involves cross-team collaboration, particularly between investor relations and corporate sustainability, reaching a mutual understanding of what’s material, and taking ESG out of a silo and integrating it into the CEO’s description of long-term strategy. These cross-functional collaborations have to move from ad hoc and sporadic in response to particular requests to ongoing and structured.’
Cross-functional collaboration is about the learning experience, adds Mike Krzus, independent researcher and senior adviser at BrownFlynn, and co-author of CECP’s latest report.
‘IR and communications people learn how sustainability people see the world,’ he explains. ‘They begin to understand societal expectations about the role of the company in society matters. They begin thinking about how to integrate a sustainability perspective more broadly in corporate decision-making.’
Tomlinson goes on to describe examples of corporations that have put together new operational processes to deliver a long-term plan and also those that are leveraging existing processes and governance structures already built to integrate sustainability into the business.
In his observations, CEOs have three primary motivations for delivering a long-term plan:
- Frustration that the existing short-term-oriented architecture for corporate reporting doesn’t allow for the corporation to talk about issues that drive value over the long term
- Wanting to build on expanded reporting efforts and do it in an investor setting
- Demonstrate leadership on a key issue for corporations and their stakeholders.
‘We think this report provides some common-sense guidance for companies to help reorient their reporting toward the long term, with further evidence that the higher quality the long-term plan presentation, the more forward-looking, more specific and higher the market reactions,’ Tomlinson says. ‘A long-term plan can supplement the investor relations toolkit, helping to meet the informational needs of long-term investors.’
Pointing out that you can’t present a long-term plan unless you have a long-term plan, Krzus lists several recommendations: build a long-term plan, develop medium and long-term metrics that support the long-term objectives, and control the company’s story by communicating and engaging with shareholders and key stakeholders.
Meanwhile, Mifid II is starting to change behavior among investors and IR professionals. Asked how the report responds to the regulation, Tomlinson starts by acknowledging concerns that it ‘may be hollowing out the sell side, seeing drops in analyst coverage and perceived quality of sell-side reports.
‘Given that, it’s all the more important that companies are highly intentional about setting out their long-term strategy and narrative, particularly to those structurally long-term investors that will be the largest holders of their stock,’ he concludes.
CECP is a CEO-led coalition formed in 1999. It believes a company’s social strategy – how it engages with key stakeholders including employees, communities, investors and customers – determines company success.