ESG is one of the most talked-about topics within the investor community today. The good news is that ESG-focused investors are driving companies to tackle climate change and address hot topics such as diversity and inclusion. Regulators worldwide have been crafting a plethora of frameworks and regulatory standards to help investors understand how seriously companies take their ESG commitments.
The bad news, however, is that those frameworks are too many in number and they vary across geographies. Also, in many countries, regulatory standards are still in the making and, as rules are yet to be finalized, companies have been left hanging.
While everything is still taking shape, IR teams and ESG professionals need to be agile and navigate the ESG landscape even without a clear guide.
For Alexandra Deignan, head of IR and corporate sustainability at Lazard, investor relations is the first line of communication in a company’s ESG narrative. It’s paramount for IROs to understand the role they play in the ESG ecosystem.
‘IROs are responsible for communicating the overall ESG strategy of their company to the investor community and, in turn, providing feedback to management on what is top of mind for stakeholders,’ Deignan says.
Top three ESG challenges
Developing a company ESG program can be daunting, even more so for IROs who are new to the role. Deignan says the top three challenges IR professionals can encounter are focusing on what matters the most to investors, delivering quality responses and being consistent.
‘The first challenge is focusing on meaningful matters,’ she says. ‘The ESG ecosystem can be overwhelming between ratings agencies, standards providers and special interest inquiries. An IRO who takes the time to understand the most frequently asked questions of the company and its industry will be able to narrow the field considerably as to what is most relevant.’
On the difficulties around delivering quality responses, Deignan notes this is due to many ESG disclosures still being voluntary in countries like the US, for example. Despite that, ‘IR professionals need to work with internal subject matter experts to craft a comprehensive and accurate narrative, ideally one that includes qualitative and quantitative information,’ she adds. Continued consistency can also prove challenging but building a ‘robust ESG profile is paramount as markets and business conditions evolve.’
Mindful of those challenges, IROs can take the following steps to successfully craft their company’s ESG program.
‘Start by analyzing ESG survey questions, factors that drive your company’s ratings and relative rankings and the questions you receive directly during shareholder engagement,’ Deignan suggests.
‘In addition, IROs should consider issues of high concern to stakeholders even if the company does not deem them material. Demonstrating why a factor is not particularly relevant can also be insightful.’
The next stage is to set long-term objectives and explain them to existing and potential investors. An effective way to provide a comprehensive ESG integration outlook to shareholders is by collating company ESG-related data and information in a report. For Deignan, sustainability reports are the way to go.
‘Sustainability reports are an opportunity to deliver differentiated insights on the company’s business, competitive landscape and long-term outlook in a way that enhances Gaap financials and regulatory requirements,’ she says. ‘Many investors are indifferent as to what metrics a company holds itself accountable to as long as it provides consistent disclosures.’
Avoiding the ‘greenwashing’ label
As demand for ESG-related products and strategies grows, the scrutiny of companies’ environmental performance widens. ‘With rising interest in ESG, we’ve seen both companies and investment managers being called out for greenwashing, which is essentially overstating a sustainability profile,’ Deignan explains.
Greenwashing has become an issue of huge concern for investors, and industry experts have described accusations of greenwashing as ‘reputationally toxic’ for companies.
‘ESG was not intended to be a marketing concept,’ notes Deignan. ‘ESG factors are means to provide increased insight into enterprise operations, strategic planning and the impacts of an evolving landscape on long-term performance. Be clear about what your company does well and where it intends to make progress.’