Despite its controversies, environmental, social, and governance (ESG) performance and disclosures remain important to many investors. As a result, investor relations (IR) professionals have an opportunity to pay more attention to these metrics in shareholder communications.
Over the past decade, ESG has grown as a global investment trend. Between 2012 and 2022, sustainable investment assets under management (AUM) in the U.S. increased 125% from $3.7 trillion to $8.4 trillion, representing 12.6% of all U.S. investment assets< according to the US SIF Foundation. While polarizing viewpoints and continued political attacks have added uncertainty in the U.S., the scale of ESG as an emerging asset class is difficult to ignore. Similarly, ESG investments outside the U.S. grew 130% from $9.5 trillion in 2012 to $21.9 trillion in 2022, driven by strong demand in Europe and Asia, according to the Global Sustainable Investment Alliance.
As ESG has become more mainstream to institutional investors, regulators are applying pressure to both investors and companies to provide more transparency and consistency on how they disclose ESG-related information, including measurement of goals and targets. IR professionals looking to prepare themselves and their companies to effectively communicate relevant ESG information to the investment community should bear the following considerations in mind.
More ESG responsibilities for IR professionals
Our client advisory work shows an emerging trend of IR professionals taking ownership of ESG responsibilities, such as ESG disclosures - even in companies with a designated ESG or Sustainability team. We too often see a disconnect between the IR team and ESG team, however, with insufficient collaboration between these two critical stakeholders. It is imperative for IR professionals to take a proactive approach to understanding ESG regulatory disclosure requirements, as well as different ESG engagement approaches and priorities, in order to better communicate with current and prospective shareholders. IR professionals should also understand the ESG topics that are most material for their company and industry and how they are being integrated into the business for long-term value creation. The benefits of increased collaboration between IR and ESG teams are twofold, ensuring that consistent ESG narrative and messaging reach all of the company’s stakeholders and provide ESG teams with an important channel for shareholder feedback.
Greenwashing accusations
Accusations of greenwashing – when a company provides misleading information or an unproven claim about the positive impact their products or services have on the environment – often occur when there is no disclosure transparency on ESG integration into the company’s strategy or actionable and timebound ESG goals and targets. More simply put, if the business case is not strongly articulated, potential for greenwashing increases. Edelman’s 2021 Trust Barometer Special Report on Institutional Investors shows that 82% of global investors and 86% of U.S. investors question the accuracy of companies’ ESG disclosures. These investors believe that companies frequently overstate or exaggerate their ESG progress when disclosing results. At the same time, 72% of global investors and 62% of U.S. investors do not trust companies to achieve their ESG commitments. The days of companies making grand ESG proclamations about goals and commitments are over. IR professionals can build trust with investors by helping them understand the company’s unique ESG risks and opportunities, and by consistently sharing proactive updates on their ESG programs and progress on ESG goals and targets.
ESG ratings and rankings
With an influx of ESG investment in recent years, a host of ESG raters and rankers have emerged – including key players like MSCI, Sustainalytics, ISS and Refinitiv, among others – that assess companies based on their ESG performance, risks, and opportunities. Investors use these reports to help inform their investment strategies; some funds are tied directly to scores from a particular rater, whereas others incorporate ratings into their own proprietary analysis. These ESG raters and rankers use different methodologies to evaluate companies. Thus, a company may receive a high score from one institution, while receiving a low score from another institution. The IR team can support ESG strategy and disclosure refinement by identifying the raters and rankers that shareholders care about most in order to help ESG team incorporate key concerns from ESG ratings and rankings into relevant disclosures.
Communicate beyond earnings
IR professionals need to break away from a quarterly update mindset when it comes to ESG disclosure. Investors use ESG factors to manage long-term risks and opportunities of their portfolio companies. It is more beneficial for investors to receive periodic updates on the company’s long-term ESG strategy when the company has something new to share. In addition to a stand-alone ESG report, an Investor Day, for example, provides an excellent venue to communicate alignment between the company’s ESG strategy and its business strategy. Additionally, it is important to incorporate ESG content into financial documents, such as Annual Reports/10Ks and proxy statements, to highlight the integration of ESG strategy into the business. In 2023, we saw a record number of shareholder proposal submissions that focused on E & S topics, totaling 513 proposal submissions compared to 466 in 2022, according to The Conference Board. Understanding investors’ specific ESG expectations will help companies disclose relevant ESG information ahead of a potential proxy situation. Moreover, having a clearly defined ESG strategy can help positively position the company during these situations and other key moments, including IPOs, M&A, and executive transition periods.
Ensure Board and management has the right ESG knowledge
The IR team is a bridge between the company and the investment community; an important channel that provides shareholder feedback to the Board of Directors and C-suite. Between the increasing demand for ESG information from both institutional and retail investors and the prospect of ESG backlash, it is the IR team’s responsibility, together with the ESG/Sustainability team, to inform the Board and management about recent ESG trends, regulatory updates, key topics regularly raised by investors, and the company’s ESG performance against peers. This will help the Board and management navigate investor inquiries effectively amidst a complex – and sometimes contradictory – ESG backdrop.
While the environment is constantly evolving, long-term investor demand for ESG remains strong globally. Companies should understand stakeholder, (including shareholders’), expectations on ESG issues to effectively chart a strategic path forward and provide relevant and high quality ESG disclosures. It is the IR team’s responsibility to keep the Board, management and the ESG/Sustainability teams informed on investors’ ESG expectations and communicate the company’s ESG stories effectively to the investment community.
--Parichat Wrolstad, Senior Vice President (parichat.wrolstad@edelmansmithfield.com)