Investors are taking a growing interest in the environmental, social, and governance (ESG) performance of the companies they invest in, and rightly so. A recent Barron’s article indicated that one-third of U.S. assets are now managed according to sustainable principles. Investors expect that number to grow further under the Biden administration. Whilst over in Europe, more than half the money that flowed into European funds last year went into sustainable products, according to the Association of the Luxembourg Fund Industry. As a result, a record €1.12trn ($1.4trn) in investor cash has now been steered toward strategies that address environmental, social, and governance considerations, according to the study.
Scrutiny is not only coming from the growing market of responsible investors; mainstream investors are also looking more closely at ESG as they begin to look beyond short-term investment horizons to the creation of longer-term shareholder value. Effectively communicating your company’s ESG initiatives is critical to attracting new investors as well as retaining quality long-term shareholders.
Given this backdrop, Q4 recently hosted a webinar to dive into key topics around ESG, including increasing investor expectations and scrutiny on initiatives. Joined by Alicia Ritcey, Governance Advisory Solutions Group, ICR Capital and Douglas Chia, a fellow at the Aspen Institute Business and Society program, Q4’s VP of Global Partnerships and Alliances, Mike Coffey took attendees through the different ways of showcasing an organization’s ESG efforts and best practices for leveraging digital channels to communicate critical information, including hosting an ESG analyst day event, updating your IR website, and more. Here are a few key takeaways from the discussion:
As investor expectations around ESG initiatives continue to increase, climate change and workplace diversity remain central topics for investors this year, which can be seen in the sheer volume of shareholder proposals as well as the support. But regardless of the specific category, recent proxy votes at Exxon, Chevron, and others demonstrate that no company is immune from potential activism, and those who ignore these issues will do so at their peril.
Even so, the spotlight can be overwhelming, especially if a company is relatively early in its ESG journey. Well before a formal plan is implemented, the scrutiny of rating agencies, frameworks, investor stewardship teams, and others in the ESG landscape may already be in effect. The webinar’s panelists counseled public companies to consider where they are in the ESG lifecycle and begin with a focus on understanding their current investor base and prioritizing the development of a clear narrative early on in the process.
In looking at controlling the narrative, it’s critical to embrace the fundamental authenticity of who the company is. Companies will be evaluated based on each investor’s own framework and ESG approach, so the best path is to first ensure that your own authentic narrative speaks to the true value of your offering and then let that flow into the strategies that are attractive to the different funds. And in the process of reflecting on the company’s mission and strategy, the panelists suggest that it’s likely that elements of environmental, social, and governance elements already included in current operations will come into view.
Best Practices in ESG Disclosure
As companies hone their narrative and move into the next stage of the ESG lifecycle, disclosure moves to center stage. Both panelists agree that there’s no one-size-fits-all approach for disclosure but that organizations need to look at all potential vehicles for communicating ESG initiatives, including posting information on the corporate website, building it to earnings reports and investor day updates, or organizing a specific event like an ESG day.
While it’s imperative to clearly communicate ESG information and progress externally across stakeholders, companies early in the process should start small and build from there. The experts on our panel agree that the website is a great place to start promoting your ESG agenda. Because the website is already a platform for communicating corporate mission and strategy, it provides an ideal opportunity to demonstrate the company’s ESG focus and connect it to those high-level corporate objectives. As corporates begin to expand their efforts, they should begin to work toward the development of an ESG report. This can be a versatile document that allows an organization to layout its framework, drill down into the most relevant industry-specific issues, and clearly communicate that narrative to multiple audiences. From there organizations should look at the next steps that can include evaluating rating outfits, surveys, and disclosure frameworks.
As far as ESG’s place in earnings reports, filings, and events, webinar participants highlighted the trend toward integrating financial and non-financial disclosures. Rather than silo this highly anticipated information, look to integrate reporting where possible and profile ESG initiatives in these existing disclosures by aligning with yearly or quarterly actions.
Perhaps as important as what should be communicated is who should drive the ESG conversation. Both Alicia and Doug suggest that members of the management team and board of directors should not only be spearheading ESG elements from strategy creation through execution but should also be in a position to convey this information to shareholders with confidence.
They also noted the trend toward ESG content residing with the CFO. Putting the head of finance at the forefront of ESG initiatives sets the right tone and accurately places information on more equal footing with accounting, which similarly deals with material issues that are audited and verified.
In addition to these and other best practices, Mike, Alicia, and Doug waded deeper into the ESG discussion during this webinar, hitting on a wide range of topics, including the potential double bottom line of disclosure, the future of ESG standards, and how Board composition and the ability to demonstrate the diversity of expertise can contribute to moving initiatives forward. To hear this informative discussion in its entirety, listen to the webcast replay here.