Author
Kevin Eckerle
Senior research scholar and the director of corporate research and engagement at the Center for Sustainable Business, New York University (NYU) Stern School of Business

Opinion: Why you should discuss ESG on the earnings call

May 27, 2020
Kevin Eckerle and Brian Tomlinson share tips for discussing ESG and long-term performance goals on earnings calls

This has been an extremely difficult earnings season. The universal uncertainty driven by the Covid-19 pandemic and resulting economic shutdown has made the job of communicating with the market fraught with complexity. IR teams have had to adjust the mix of information they share on the earnings call to respond to the core risks and scenarios presented by this crisis.

Prior to the Covid-19 crisis, ESG was, at best, a small part of the earnings call. But in the most recent earnings season, ESG content has gained more prominence in the earnings calls of more issuers and been given lines in the script. This elevation has been induced, at least in part, by the impacts of the crisis on the safety and pay of employees, the treatment of suppliers and broader stakeholder issues at a time of increasing expectations for corporate behavior. In addition, given the challenges of forecasting, more issuers are withholding financial guidance.

But the increase in ESG content in earnings calls during the Covid-19 crisis extends and accelerates broader ESG disclosure trends. More ESG information is appearing with greater frequency in proxy statements, 10Ks and, supported by the adoption of the Sustainability Accounting Standards Board (SASB) standards, across a variety of other disclosure formats like investor day presentations. Investor-focused ESG calls and webinars are becoming more common, too. IR teams have also been encouraged to adopt ESG approaches by NIRI, reflecting the growing investor pressure for more and better ESG information (direct from company disclosures, rather than secondhand through ratings providers).

But integrating ESG issues into the earnings call can be hard. In our recent collaboration on integrating ESG content into earnings calls, which was conducted prior to the crisis, our conversations with sell-side analysts highlighted several challenges. Limited or low-quality disclosure on ESG made meaningful discussion and analysis difficult, the time horizon and inter-period availability of ESG information made it harder to incorporate ESG data into valuation analyses and there was an expectation that discussions of ESG themes in earnings calls would be cursory at best, and therefore represent more of a time-consuming distraction from the core financials and commentary required to update valuation models.

A concomitant set of worries on the corporate side (expressed by IROs and sustainability professionals) included disrupting a long-standing, well-orchestrated dialogue with analysts, finding time for ESG content in an already crowded agenda and the much-repeated concern about the comparability of relevant ESG metrics (though those of the SASB and the Task Force on Climate-related Financial Disclosures were widely seen as part of the solution to that).

Stemming from our pilot project, we offer a number of recommendations to issuers looking to integrate ESG data and the impact of ESG execution on corporate earnings and long-term value creation into the content of earnings calls.

First, establish the foundation for success by getting C-suite support, conducting a materiality assessment to identify the most financially material ESG issues, developing a robust strategy and execution plan to mitigate the risks and capture the opportunities presented by those most financially material issues, and implementing the technical systems that will enable the recording, auditing and reporting of ESG information.

Second, build toward the earnings call by integrating ESG and long-term strategy content into existing disclosures in a sequential manner (from sustainability reports, proxy statements and investor day presentations to ESG-specific webinars/presentations and earnings calls) to build comfort and confidence with the investor base, as well as management.

Third, share ESG-specific questions with your sell-side analysts to shape the Q&A discussion and more regularly bring ESG and long-term strategy into the conversation.

Finally, develop a plan for how you will use each of the four earnings calls in the fiscal year. For instance, provide quarterly updates on key ESG performance and financial measures in three of the four quarters, but use one of the four calls (either Q1 or Q4) to provide a deeper discussion of ESG and long-term strategy and how recent performance compares with expectations. By acting on these recommendations, the objective is to make ESG and long-term strategy content, including the impact of ESG execution on financial performance, a consistent component of your value creation narrative.

By sharing ESG information, issuers are able to provide a more comprehensive understanding of their long-term value frameworks. Such an outlook is inherently forward-looking and provides insight into the capabilities, adaptability and resulting resilience of the firm as it plans to navigate huge mega-trends such as the transition to a low-carbon economy, our aging societies, unprecedented automation and – even – the rise of zoonotic diseases. Institutional investors expect issuers to demonstrate an increasingly sophisticated understanding and plan for addressing these issues, across the disclosure ecosystem.

The socially charged context for issuers also affirms that the audience for the earnings call is arguably no longer just sell-side analysts and their institutional investor and hedge fund clients. The emerging stakeholder paradigm means disclosures across formats need to reflect the purpose-led, stakeholder approach a company seeks to follow (and must do so credibly and consistently), as companies such as Nestlé have begun to do on their earnings calls. The retail investor is also engaging with earnings call content, when given easy means to do so.

As ESG moves to the mainstream, its crisis-induced appearance on the earnings call can and should continue.

 

Kevin Eckerle is a senior research scholar and the director of corporate research and engagement at the Center for Sustainable Business, New York University (NYU) Stern School of Business. Brian Tomlinson is director of research at CECP’s CEO Investor Forum.

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