Introduction
Environmental, Social and
Governance (ESG) has unquestionably becoming the centre of attention in
corporate strategy for organisations across industries and regions. Not that we
have come to the desired maturity of adopting ESG in the overall business decision
making process, but the increase ESG commitment should be taken positive and
applaud. However, how can companies excel in communicating their ESG progress
to one of their most important stakeholders i.e. investors?
Investors are Assessing Companies ESG Management
Recently, the world’s
largest asset manager, BlackRock in a report had identified 244 companies that have not
showcased their mitigation plans on climate change adequately enough through
their business practices as well as corporate disclosures to their stakeholders
including investors. Subsequently, BlackRock has drastically voted against directors
at 53 out of those 244 companies while assuring to vote against the directors
from the remaining companies in the following year if the companies fail to
demonstrate ‘significant progress’ within a year.
This action would have
ripple effect for other managers for sure. It’s important to be reminded that
even before the COVID-19 pandemic crisis, ESG issues have already been gaining
interest from asset managers worldwide. Now that the pandemic has shown great
impact on a large group of stakeholders, and have cause constant social unrest,
it would only mean that companies are pressured to not only initiate to
reaching out to institutional investors and stakeholders on ongoing and future
ESG risks and threats that could (and will) impact the entire value chain of
all businesses regardless of their size.
Following is the overview of some key voting results for 2020 according to the report:
- 2020: 5 environmental proposals passed (0 in 2019), including three large-cap companies i.e. Chevron Corporation, J.B. Hunt Transport Services, and Dollar Tree
- 2020: 55.1% increase in support for employment diversity proposals (38.5% increase in 2019), including for Fastenal Company, O'Reilly Automotive, and Fortinet.
- 2020: 32.5% Increase in average support for Board diversity proposals (18.7% in 2019)
- 2020: Increase in percentage of political contribution-related proposals proportion i.e. 24 out of 27 (37 out of 60 in 2019).
Due to time restrictions because of the requirements for investor and shareholder proposals submission, the majority of the ESG items for 2020’s ballots were issued on quarter 4 or late 2019 i.e. prior to the COVID-19 crisis as well as the recent racial tension and economic inequality issues had peaked. All of these global developments have and will continue to require companies to see the rise in proposals related to diversity and inclusion, racial justice, socioeconomic inequality, health and safety, climate change and other ESG-related factors in the 2021 proxy season.
Understanding and
responding these changes is one thing, but communication is another thing.
During a pressured time like this, it’s important to stress repeatedly that if
stakeholder engagement with investors are not being conducted strategically, frequently
and quickly pertaining these emerging issues, companies could be swamped with
proposals but most severely, with frustrated investors communicating their agitations
through formal and informal channels. Thus, the responsible parties from the
companies such as the Board, Senior Management, and particularly investors
relations, public relations and legal will face excruciating pressure to
address convincingly the companies’ responses to these issues. If not, the
repercussions will turn out to be more complicated that could only mean
companies will be affected financially.
How Should Companies Approach Investor Engagement Process?
Communicating ESG Issues to Investors
Regardless of the size of
the investors, many investors nowadays are well-informed on current and arising
ESG issues. Some of them also care about the companies’ efforts in ESG
management. Questioning of companies’ ESG or Sustainability agenda has becoming
more common and confirms the investors’ keen on the issues. So, when companies
conduct engagement with investors on ESG issues, it is absolutely critical for
companies to be aware of the best approach to take, what metrices are
appropriate and easy to understand in order to monitor ESG performance and also
to evaluate the level of acceptance of the responses by the investors. Making
progress in ESG performance is certainly good to be transparent with the
investors but it is also very important to ensure that investors obtain the
most information on how effective the companies manage their ESG agenda.
A good place to start is
for companies to assess the specific processes and resources that all relevant
investors undertake to assess the ESG policies and practices. The assessment
should cater to all investors, hence there should not be one generic approach
for this. BlackRock for example, are observed to be focused on ‘corporate
purpose’ as well as ESG-related topics. This trend is accelerating as investment
firms with a stated ‘core’ emphasis on ESG would most like consist trained and
specialized function to conduct their own company evaluation.
For some other investors
on the other hand, may not be as robust as they would normally involve
ESG-related engagement to regular and unspecified portfolio management teams.
This will change, as it is demanded in the future that asset managers are to be
familiar with embedding ESG as their mainstream investment portfolio.
Understanding ESG Risks
To achieve productive and
effective engagement with institutional investors, companies must first
establish high level of knowledge and vision pertaining ESG trends and issues
as well as its impacts towards business, including across the value chain,
affecting all relevant stakeholders. Companies should be able to equip
themselves with the resources to manage material ESG risks and opportunities
particularly that represents the substantial ‘risk to value’ issues to the
business and should be strategic in communicating on these issues with investors.
Conventionally, it is
well understood that personnel from the investor relations would undertake the
duty to engage with the investors. Not that this should be necessarily changed
but it is important to note that personnel that drive and support ESG-related
functions (within the organisation and across different levels) would possess the
most valuable input pertaining the ESG issues that the investor relations
personnel may be restricted to, or facing difficulties to convey the response effectively.
In specific ESG issues, ESG personnel should be the key representatives to
address these issues so that more insights and transparency could be presented
to investors.
Oversight and Reporting
As covered earlier,
investors are keen to substantiate companies’ ESG performance and progress
through an appropriate, suitable and standardised ESG performance tracking
metrices, normally via reporting. From the companies’ point of view, it is
agreeable that this is not an easy task especially taking account that there are
widely different services and frameworks that provide ESG-related measurements
and ratings including the widely referred to such as the Global Reporting
Initiative (GRI), the Sustainability Accounting Standards Board (SASB) as well
as the Task Force on Climate-related Financial Disclosures (TCFD) standards,
that has been gaining attraction in developed markets. Recently, the GRI and
SASB had announced a collaboration to standardise the two
standards for better and effective adoption. This is just a proof or subsequent
effect of how complicated these various frameworks is to reporting companies.
However, companies are
still required to find the solution to ensure they can improve their reporting
on ESG performance so that it meets the full expectations and understanding of
the investors. Before adopting a framework, reporting companies must analyse which
reporting frameworks are best suited for their institutional investors. At the
end of the day, as long as the investors could maximise the input from the ESG
reporting metrics, companies would be on the right track.
Now is the Time for Companies to Respond
Another matter that needs
the attention from companies is on the most appropriate time to engage with
institutional investors on ESG-related issues. Companies should never delay on
the opportunity to engage so that communication on ESG matters are always up-to-date
and observed as always one of the priorities by companies.
However, as stated,
companies need to be mindful that prior engagement, they should be prepared and
equipped with ESG issues and future trends as well as its impacts to the
business explicitly on issues that have the highest level of priority and
interest by each investors.
Rather than immediate
financial returns, more investors are eager seeking long-term value creation
from ESG risks so providing them the related information and would portray the
companies are established with robust risk management process, market
expertise, business resilient and overall, considered as sustainable companies
to invest in in the long run. This being said, communicating with them on these
information as quickly as possible, would increase confidence to the investors
as they would view the companies as reliable and as future (or/and current)
industry leaders.
Conclusion
It is a difficult time
for public and private companies to strive in balancing financial and
non-financial sustainability in this current disrupted economy due to COVID-19.
The focus on ESG risks and opportunities is becoming more evident as all key
stakeholders including customers, community, suppliers and governmental bodies
are impacted. Investors should now be engaged more strategically than ever.
Companies need to reset the traditional mentality on short and long-term
targets and must incorporate ESG issues in the long-term targets – and educate
and communicate the investors on the companies ESG ambition. Companies need to
ask themselves, is the current investor engagement process still relevant and meets
the demands for the future?
All views and
opinions expressed on this site are by the author and do not represent any
particular entity or organisation
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