ESG Grows Up: How IROs Can Stay Ahead of the Curve
The answer to who’s driving the push for ESG disclosures can quickly devolve into a chicken-and-egg argument. While determining the leader of the charge is not easy, there is no disputing that ESG has rapidly entered the mainstream within the investing world. And as ESG becomes an increasingly hot investment topic, Canadian IROs are figuring out ways to deliver the information that institutions and analysts desire most.
New research by Edelman shows that investors’ attitudes are changing rapidly. According to Leanne Denman, Account Director, IR and Financial Communications for Edelman in Montreal, 90% of Canadian institutional investors say that their firms changed their voting and/or engagement policies to be more attentive to ESG risks. What’s more, two-thirds of investors revealed that this change took place within the past year.
“Companies need to step up ESG performance and communication,” says Denman. “There’s a positive, halo effect for companies that take these stances.”
According to Edelman research released in December 2018, 96% of Canadian institutions say that addressing societal issues affects trust in a potential investment, while a whopping 91% would consider investing in a company with a lower rate of return if it meant including sustainable or impact investing considerations.
When it comes to how Canadian investors and IROs stack up globally, Denman sees Canadians as “almost on par” with their American counterparts.
“As Canadians we can be quite empathetic. We’re inclined to look at ESG issues and put them under the microscope,” she says. “In Canada we operate in a lot of areas where we do have an impact on the environment and in our communities and these are areas we have to be aware of,” she explains.
Christie Stephenson, Executive Director of the Peter P. Dhillon Centre for Business Ethics at the UBC Sauder School of Business, emphasizes that IR professionals have only recently awakened to ESG issues. “In the early days, the reaction to questions around ESG was puzzlement,” she recalls. “There was a lot of head-scratching from IR teams.”
Today, though, she says, “Investor relations is getting up to speed and becoming knowledgeable about ESG issues.”
What Investors Want to Know
When Ian Robertson, Vice President, Portfolio Manager, and Director at Odlum Brown Limited, is asked what ESG information investors want, he says that first and foremost is a desire for transparency. “When there’s transparency,” he says, “it’s up to the analysts to decide whether the information is material in their view – and then incorporate information into their discounted cash flows or other analyses of the company.” Robertson continues: “Analysts want financially material information, not information that’s ‘feel good’ or a PR piece.”
Coro Strandberg, President of boutique sustainability advisory firm Strandberg Consulting in Burnaby, says that investors want to know “the ESG risks the company faces, the ESG opportunities, and how the company is managing its risks and opportunities.” Going forward, she believes that how ESG itself is governed by individual companies through oversight provided by the board of directors will become a topic for more scrutiny.
A few ESG issues have seized the imagination of investors, leading to a push for greater information and action. “Climate change has started to galvanize institutional investors and also #MeToo,” says Strandberg.
Wendy King, Vice President, Legal, Risk & Governance, for Vancouver-based Capstone Mining Corp., points out that while pressure to mandate ESG disclosures is being applied to the SEC and Canadian regulators, as of now these bodies give “guidance instead of being prescriptive.” Over time, she expects regulators to offer greater clarity about what ESG disclosures public companies should furnish.
As the information investors need comes into focus, King notes that public companies will be able to devise more specific KPIs, allowing one public company to be compared against the next on an ESG scorecard. To this end, she foresees a push for “more data-driven ESG information."
“You need a cross-functional team. It’s not just IR and it’s not just legal,” says King, noting that a well-functioning ESG team does not include members from just a single corporate department.
An important shift, says King, is the Board’s move to measure ESG performance and understand ESG risks: “Investors want to hear from the Board that ESG issues are being managed.” In the past, she says, the Board would work with the general counsel and IR department on ESG issues for the annual meeting and proxy materials. “Now,” she says, “it’s an ongoing outreach throughout the year.”
King views IR as critical because only the IRO has the background necessary to tailor ESG information to each investor. When it comes to ESG, she says, “IROs are reaching out and finding what investors want to hear about and then tailoring communications accordingly.”
Although the emphasis on cross-functional ESG efforts is fairly new, some companies – like TELUS – are walking the talk.
“ESG is a real team effort,” says Christopher Main, Associate General Counsel and Head of Corporate Governance in TELUS’s legal services department. Over time, he notes, his group has broken down silos and has spent more time working with IR professionals and those responsible for creating a sustainability report.
One reason why TELUS has assembled a cross-functional team to handle ESG is that “these issues are part of our business thesis,” says Main. “We use the core business of TELUS to serve a social purpose: benefiting our communities and customers and vulnerable citizens.” Main continues: “We’re making ‘social capitalism’ a big part of our investment thesis, and so we need to be coordinated on what this means and how to talk about it.”
Alongside greater integration of ESG within the organization is greater integration within communications vehicles.
“Sustainability issues are not separate or just an add-on. They’re becoming central,” says Main. “There’s more disclosure on sustainability in our core documents. We’re talking about risks and how we’re mitigating those risks, on targets we have and which specific targets we’re measuring ourselves against.”
Stephenson points out that in “the best C-suites and the most advanced companies, ESG really is being acknowledged as part and parcel of the business proposition and the company’s value proposition.” She continues: “Investors want ESG to be presented as another aspect of company value.”
Room for Improvement
Although Canadian IROs may be increasingly willing to address ESG, investors are not particularly satisfied with the messages they’re hearing. According to the Edelman survey, 87% of Canadian institutional investors believe the way most companies share information for IR purposes is outdated. And in fact, 89% want more visual ways of sharing information, while 92% are eager for more qualitative, forward-looking disclosures.
At the same time, too many IR departments still rely on ESG boilerplate.
“I think there’s a lot of room for improvement around disclosure,” says Stephenson. She points out that the prevalence of boilerplate has resulted in “comical” situations in which companies have used identical language to describe ESG risks in cut-and-paste jobs gone awry.
In its most recently-published The State of Disclosure report for 2017, the Sustainability Accounting Standards Board (SASB) puts the problem quite plainly: “...most sustainability disclosure consists of boilerplate language, which is largely useless to investors...”. SASB has found that “vague, non-specific information” was used more than 50% of the time when companies addressed a SASB topic.
The alternative to boilerplate? An authentic ESG communications campaign, complete with an ESG microsite and a “digital communications plan that addresses ESG issues in terms of investors,” says Edelman’s Denman. She notes that 89% of Canadian investors consult a company’s or an executive’s social media channels when evaluating a current or prospective investment and so social media should be central to a sophisticated and successful ESG communications effort.
Finally, IROs crafting their ESG message should be aware of the very real possibility of activism. Ninety percent of Canadian institutional investors say their firms are more interested in taking an activist approach to investing, according to Edelman’s research – with 95% expressing a willingness to support a reputable activist investor in cases in which the institutional investor deems change necessary. What’s more, the vast majority of Canadian investors – 90% – believe that companies are unprepared for shareholder activism.
While there are many ways that Canadian IROs can improve their ESG efforts, the good news is that models for successful change abound. Odlum Brown’s Robertson points out that while EU and UK companies are ahead of North America in terms of ESG activities, a shift is definitely occurring in North America, too. “There’s a real desire,” he notes, “for Canadian companies to say what they’re doing to help with climate change and biodiversity.”
Gone are the days when more robust ESG practices are something companies can temporize about. “Canadian companies,” concludes Capstone’s King, “are becoming more proactive about ESG because it’s the right thing to do and because it’s what investors want to see.”