Today, $1 in $4 of assets under management globally is managed under a responsible investment (or environmental, social, and governance factors [ESG]) strategy (PDF), including more than half in Europe and more than 20 percent in the U.S. Responsible investment professionals note that engagement on ESG and shareholder activism have increased in the past year in the U.S. (in line with BSR’s predictions last year).
In this context, companies that are not sufficiently communicating their sustainability strategy and performance to investors are missing an opportunity to attract long-term and ESG investors. Compelling investor engagement on ESG starts with a good relationship between investor relations (IR) and sustainability teams, based on a common understanding of shared goals. Some simple actions can help sustainability teams effectively work with IR teams on their sustainability agenda.
On paper, this is a win-win situation, in which both IR and sustainability teams want to provide investors with a fair and informed account of the company’s opportunities and exposures — regardless whether ESG-related — and both teams bring something to the table. IR teams own relationships with investors and have financial expertise, while sustainability teams have a deep knowledge of how their company is addressing its ESG issues in the short, medium and long term.
Unfortunately, the case is not usually this straightforward in reality.The first common barrier is a misconception that investors do not care about sustainability. According to a joint BCG and MIT Sloan Management Review study, while 75 percent of investors see sustainability performance as relevant to their investment decisions, only 60 percent of executives think investors care about sustainability.
As a BSR member company representative once told us, “We hear incredibly mixed messages from the investor community. IR has a tendency to do what they’ve always done and dismiss sustainability issues as niche. Companies care much more about what the fund manager says than what the ESG team says” One reason for this misconception is that investors may not label these issues as “sustainability” or “ESG” but use other terms, such as “operational efficiency” or “employee turnover.”
This leads to the second common barrier: language. As a BSR member told us, “The lack of effective pressure from mainstream institutional shareholders is partly caused by my company’s lack of ability to measure, prove and articulate the business value of sustainability.” Research shows that corporate ESG performance is not communicated in the language investors want. In a survey by PwC (PDF), 82 percent of investors were dissatisfied with how sustainability-related risks and opportunities were identified and quantified in financial terms.
Another frequent inquiry is, “How does this matter now?” Sustainability teams focus on issues that will play out in years or decades, while IR teams must respond to quarterly or annual pressures. This difference in time frames can make it difficult to find shared goals.
With these common barriers in mind, here are some tips for you to proactively engage your IR team and collaborate to plan and execute an effective engagement with investors:
- Show your IR team what your investors see. Investors have access to increasing levels of ESG data on your company, through the Bloomberg terminals or even publicly available ESG score on Yahoo Finance. Help your IR teams ensure this information is correct and offer to put it into context for investors.
- Find out who are your top 20 investors and what is their approach to ESG. It is likely that most of your top 20 investors are long-term investors, such as pension funds, insurance funds and mutual funds, all of which invest on behalf of long-term savers and tax payers. These investors care about long-term value creation and sustainability; they likely will have clear statements on ESG expectations of the companies in which they invest. Help your IR team understand the implications of these statements, and the “buy and hold” nature of their ESG strategies.
- Consider what your ESG ratings and rankings say. Review your company’s results on leading ESG ratings, such as Sustainalytics or MSCI. This will give you a good idea of what you should be focusing on during your engagement with investors.
- Help your IR team anticipate ESG-focused shareholder resolutions. Alert them about shareholder activism in your industry.
- With your IR team, craft messages in language investors can understand. Stay away from sustainability jargon. Put your current ESG performance into context, explain how challenges are addressed and how your company will create value in the long term.
- Focus your engagement on long-term investors. As a BSR member told us, “There are different kinds of shareholders. Long-term shareholders are the ones I like to focus on. This represents a lot of our investors. They want a business that can continue. They also want a business that takes into account a changing global landscape.” There is no point talking to an investor about how your company’s strategy will play out in the long term if the investor has a short-term investment horizon.
- Speak to investors directly. Companies and investors both value direct communication more highly than ESG questionnaires and rankings. PwC found that investors want to engage on ESG through direct communication with companies. This can mean partnering with IR on roadshows, hosting ESG days or integrating ESG information in quarterly earning calls