IROs are often told they need to take ownership of the ESG story. The growth of environmental, social and governance issues as not just social concerns but also material risks for investors means it’s simply not enough to leave them to the sustainability experts. But as investors have sought after more information and companies have sought new ways to showcase their ESG credentials, so the market for – and IR burden of – ESG questionnaires has grown.
The amount of data required by providers whose ESG rankings investors often rely on – or at least incorporate into their own analytics – can be daunting, even overwhelming. It’s an important area to understand, however, because you’ll likely be ranked whether you get involved or not. And that’s before you even start thinking about indexes: the questionnaire for the Dow Jones Sustainability Indices alone runs to between 80 and 120 questions so, while the length varies, one IRO at the IR Magazine Global Forum in October said that for his firm, it ran to 150 pages.
Handan Saygin, head of IR at Garanti Bank in Turkey, says the number of questionnaires the team completes has grown by five or 10 in the past five years, and now stands at around 20 a year. All in, the ESG process, including sourcing data from different departments and so on, as well as filling out the questionnaires themselves, leads her to estimate that around 2,000 working hours a year are spent on these questionnaires.
‘They’re mostly from investors or ESG ratings agencies such as Sustainalytics,’ explains Saygin. ‘But in the past year, international financial institutions such as Goldman Sachs have also started sending out their own questionnaires that are very similar to those [from companies] doing ratings.’
And it’s not just the number of questionnaires that has grown. ‘The content and depth have evolved a lot,’ continues Saygin. ‘And I think the approach they follow has also evolved’, with Garanti Bank seeing more engagement on top of the questionnaires, to validate or build on publicly available information.
Even for a company like Garanti Bank, with a large team, the resources and a committed ESG strategy (this year it produced its first 456-page integrated report), as the number of ESG questionnaires has increased, completing them has become more of a challenge.
So what’s an IRO to do? While Garanti Bank makes a point of responding to all ESG requests (with Saygin noting that responsiveness itself often makes up part of the final rating), that isn’t necessarily possible for all companies, especially those with small teams and strained resources.
The first thing to do, advises Eric Fernald, director of issuer relations at Sustainalytics, is to distinguish between the questionnaires that make you look good and those your investors are using to make actual decisions.
‘It’s important to differentiate between the types of requests you get because there’s only a few of us who actually serve institutional investors,’ he explains. And even within that market, some carry more weight than others. ‘To be frank, MSCI and Sustainalytics are the two dominant players in the market,’ Fernald continues. ‘The others are very decent and do good work but they’re just not as big or prevalent. So if IR professionals want to make sure they cover their investors and the ESG research those investors are using, they definitely want to ensure they cover the most important firms.’
While there might be investment products based on indexes like FTSE4Good or Dow Jones Sustainability, for Fernald, inclusion in these is more about good PR. ‘It’s a good accomplishment and it’s important but it’s not the same as providing data to investors,’ he stresses. ‘Companies have to make decisions on what they think is most important.’ Making those decisions comes down to experience. ‘I would emphasize learning about the market, differentiating and then planning,’ Fernald adds. ‘A firm has to decide where it wants to target its resources.’
It’s also about making decisions based on the goals of the company – or perhaps the existing and future strengths of the firm. If your company is doing a great job on ESG, it makes sense to get the message out there. If there’s a lot of room for improvement, however, now probably isn’t the right time to dedicate effort to the Dow Jones Sustainability questionnaire. The ratings agencies are another matter, however, because, as Fernald points out, ‘you’re going to get scored anyway. You can be scored by us and the other ratings organizations with whatever information we can find.’
Get your public house in order
One of the issues with providing ESG data to so many different parties – or even only the five or so ESG ratings agencies – is that the questions aren’t standardized, though Fernald does say they are quite similar.
In fact, he points out that Sustainalytics doesn’t even do a formal questionnaire.
‘What we have is an ESG ratings report that has a set of score indicators covering the gamut of ESG issues relevant for the company,’ he explains. ‘Our analysts will do all the research initially – from publicly available information – and then send that report to the company to review and essentially give it the opportunity to correct some data, add some additional data if the analyst couldn’t find it in the public sphere, and comment on it or ask questions.’ This process is similar to what MSCI does, he says, though others do things differently.
This highlights the importance of publicly available ESG information. ‘It’s crucial that a company tells its story well and has good data that’s publicly available,’ says Fernald. ‘In some instances we will take private information as well, but being able to tell that story is crucial because no one else is going to tell it for you.’ He advises IROs to familiarize themselves with the frameworks that have been developed to help guide reporting on ESG issues. ‘It’s certainly worthwhile understanding what the reporting standards are around issues like carbon, for example,’ he says.
But getting your story to translate into ratings essentially comes down to understanding what these firms are looking for and putting the work in, down to granular detail. ‘And that’s where a certain amount of commitment pays dividends over time because if somebody takes the time to really understand what the ESG research provider world is looking for, then he or she can tailor communications to that,’ says Fernald. ‘So it’s easy for the two to speak to each other and progress is made.’
Making sure the information you put out is working hard for your company has other benefits, too. While many investors clearly use the information and ratings gathered and published by the likes of Sustainalytics, this tends to provide a basis for further research from the buy side – which will also be looking at your information.
Lauren Compere, managing director and director of shareholder engagement at Boston Common Asset Management, which has $2.7 bn in assets under management, explains that while the firm uses ratings from a number of different providers, including ISS, MSCI, Vigeo Eiris and RepRisk, this is just one of many inputs into Boston Common’s ESG research process. ‘We are mindful of the providers’ ratings and reports, [but] we carry out our own proprietary, independent ESG research, developing our own in-house ESG view of a company, as we often find we disagree with some of the underlying assumptions [made by ratings agencies],’ she explains.
When it comes to this additional ESG research and engagement, Compere says that ‘often, this includes encouraging more robust disclosure on material ESG issues, including the governance of sustainability.’ So what would she like to see when it comes to ESG reporting? ‘Reporting on standard metrics would be helpful in order to compare companies better,’ she says. ‘We would like to see companies discuss how ESG issues shape their corporate strategy and encourage companies to consider integrated reporting. When done right, this changes the way a company assesses ESG issues but also manages them.
‘For companies, especially European ones, that demonstrate advanced ESG reporting at the group level, we would like to see more relevant disclosure on how global policies and processes are implemented at a local level in key markets. This is especially important given how the local context of food systems, water stewardship and climate change greatly impact local implementation.’
So is all the work worth it? For a company like Garanti Bank, the answer is an unequivocal ‘yes’. Not only is sustainability index inclusion tied to investor relations KPIs, but the Istanbul-headquartered bank has also seen an increase in both dialogue around ESG issues and investment from ESG-focused funds.
Ten years ago, Saygin says, ESG conversations centered on specific projects. ‘Now there’s a story around all our ESG efforts so we’re actively filling out these questionnaires and trying to get into the indexes because the effort is also to increase our visibility in these indexes and attract ESG-specific funds, which are very sizable – and definitely growing.’
And so far the plan seems to be working. ‘We have increased the ESG share in our shareholder base,’ says Saygin. ‘Seven years ago 35.6 percent of our free float was held by ESG funds. Today it stands at 44 percent’.