The IR opportunity to communicate sustainability
Two thirds of companies believe their firm’s ESG performance matters to investors, according to a recent global study by NASDAQ Advisory Services of 500 publicly listed companies. Information on CO2 emissions, climate change risks, executive compensation or health and safety standards in the supply chain – to list just a few – are being monitored by an increasing number of investors.
There are, however, significant geographical differences across markets. In Europe, all UK and French respondents to the survey say ESG performance matters to investors, while only 75 percent of German and 60 percent of US companies agree.
Underpinning this trend, our research suggests global SRI equity assets under management have quadrupled since 2010, having reached the $2 tn mark in 2014. The growing presence of investors that have effectively integrated ESG into their investment strategies is felt across all sectors and geographies, although it is higher among European stocks where SRI investment already represents more than 10 percent of institutional investors’ ownership.
What are investor relations officers currently doing to communicate ESG performance to investors?
Many European companies already interact with SRI investors in one way or another. From a merely reactive standpoint, nearly all Scandinavian companies regularly complete sustainability surveys, compared with around 80 percent in the UK, France and Germany and a more modest 50 percent in the US.
The transatlantic divide increases when it comes to communicating ESG proactively. In Europe, nearly half of listed companies integrate ESG messages into their regular investor communication and also meet SRI investors during specific sustainability events. French companies, in particular, lead the way when it comes to ESG investor engagement with 80 percent taking part in SRI investor events. Not surprisingly, two thirds of these companies employ at least one person whose main responsibilities include communicating around ESG issues.
This contrasts with ESG communication practices in the US where only a fifth of companies have incorporated explicit ESG messages into their regular investor communication presentations and just 8 percent take part in SRI investor roadshows.
ESG communication best practices: what companies should aim for
While the survey shows some encouraging signs of the growing importance of communication between corporates and investors on ESG issues, most companies would benefit from a more structured approach to ESG communication with investors.
The ongoing ESG Investor Briefing Project, led by the United Nations-backed Principles for Responsible Investment (UNPRI) and the UN Global Compact, provides excellent insights from companies that are taking their first steps into the world of ESG communication. The initiative has aided a structured and cost-effective way for companies to establish a discussion between SRI investors and ESG research providers through a webinar session. Eleonora Pessina, sustainability officer at Pirelli, one of six companies participating, praises it as a ‘constructive way to communicate our ESG performance facilitating a dialogue between companies and investors.’
In addition, Zurich-based ESG consultancy Contrast Capital has developed the ESG value driver framework, the key analytical tool being used by participants in the UN project to structure and communicate their ESG activities. ‘The results show there is a great opportunity for companies to communicate their ESG strategy and performance, and translate that into financial value,’ Rodrigo Amandi, partner at the firm, recently told NASDAQ Advisory Services.
The ‘who’ and ‘what’ of ESG communication: the ESG communication plan
Shareholder identification analysis will allow a company to know who its SRI shareholders are, which is the starting point when planning ESG communication. It’s also just as important in knowing what’s relevant to your investors.
Understanding investors’ expectations related to the different levels of ESG materiality for a company and sector (such as the potential impact of ESG on the bottom line of a business) is crucial in the process of optimizing investor communications. Alongside this, a further analysis of the company’s ESG strengths and weakness will be required in order to build a solid ESG equity story.
An ESG communication plan will detail specific engagement opportunities with both current and potential SRI investors. These targets should be reviewed regularly following changes in the shareholder base and the feedback received from investors.
Finally, an ESG engagement report, such as the one conducted by Repsol in 2013, should present the breadth of ESG communication activities and the effectiveness of the overall ESG communication plan. The Spanish oil & gas company has pioneered communication with SRI investors in recent years and has embedded ESG into its overall investor communication strategy. Victoria Velásquez, deputy head of IR and responsible for ESG communication at Repsol, recently highlighted SRI investor feedback as ‘a valuable source of our self-evaluation process leading to improvements in the company.’ Organizations listening to SRI investors find the dialogue helps them shape their strategic focus.
As the number of investors with a long-term investment horizon integrating ESG continues to grow, companies should seize this opportunity to learn what matters to them, reach out to them in a structured way and use their feedback to improve the company’s strategy and operations. The opportunity for communicating sustainability and translating this into financial value is here.
Miguel Santisteve is an associate director of NASDAQ Advisory Services in London. He focuses on responsible investment and ESG insights for investor relations.