As evidence mounts in favor the benefits of environmental, social, and governance (ESG) investing and the industry matures, more investors are moving to include sustainability strategies in their portfolios.
Despite this embrace of ESG investing, many companies are stumbling when it comes to communicating their activities. According to sustainability nonprofit Ceres, while companies often use annual meetings and other venues to share their sustainability strategies publicly, it can be challenging to create engaging and valuable communications for investors.
Working with more than 25 investors including ESG-oriented asset managers and governance analysts, Ceres researchers produced Change the Conversation: Redefining How Companies Engage Investors on Sustainability , helping companies to communicate their sustainability strategies to investors.
An issue of some urgency for both investors and companies, addressing sustainability issues in the right way ensures that investors have all of the information they need to assess the risks and opportunities of ESG-related approaches. Plus, “[m]ore than ever, what companies publicly disclose and proactively share with investors on ESG issues is critical in distinguishing leadership among sector peers,” according to the report.
With that in mind, Ceres outlines recommendations for better communication that fall within three interdependent themes: integrating sustainability, optimizing disclosure, and engaging with investors.
All about Integration
According to the report, formalizing sustainability integration involves making sure a company’s sustainability team works closely with those in charge of more traditional investor communications, such as corporate governance staff. It also requires that boards make ESG considerations part and parcel of their activities.
Ceres holds up Coca-Cola as a positive example. On its board’s Public Issues and Diversity Review Committee, which addresses sustainability matters, two of the three directors also sit on the Compensation Committee. Another is on the Corporate Governance Committee and the Finance Committee. The result is a constant sharing of ideas that pushes sustainability to become a part of larger corporate decisions.
But boards can’t operate in a vacuum. Corporate governance experts recommend collaborating closely with management. That could entail, for example, working together to pinpoint critical sustainability issues, as well as figuring out how to integrate these considerations into everything from compensation to operations.
Engaging investors, Ceres says, requires using investor-friendly language and tapping the C-suite and board to deliver the message in annual meetings, earnings calls, and private conversations.
The Matter of Disclosure
Naturally, determining what to disclose and where is critical. Ceres recommends focusing on both what is material as well as emerging trends—and not only doing so in places where investors already go for data, such as proxy statements and investor relations (IR) websites, but showcasing that information, too.
That’s not always happening now. In fact, Ceres found that companies often fail to present concise and accessible disclosures on their IR sites. “If [investors] can’t find it, they can’t use it,” Kristen Lang, the report’s author, told TriplePundit. “Companies are making it hard for investors to get the information they need.”
What information needs to be there in the first place? What is most effective, according to Ceres, is presenting both quantitative and qualitative insights. That begins with discussing how ESG investing considerations have affected financial performance. For example, the report describes how last year Nike’s CFO highlighted to investors the results of the company’s eco-friendly Flyknit technology—nearly $2 billion in revenue. At the same time, qualitative information can go a long way toward putting data into context and demonstrating a company’s commitment to sustainability.
Ultimately, Ceres suggests that mastering the art of ESG disclosure has twofold benefits, both strengthening a company’s brand reputation and easing investors’ access to better information that can inform their decisions.
A 2017 Morgan Stanley report called Sustainable Value: Communicating ESG to the 21st Century Investor found that when companies fail to engage investors, they lose control of their message. That’s because investors turn to “noncorporate sources, such as regulatory reports and trade associations and publicly available customer feedback, in pursuit of what they consider unbiased, decision-useful information.” Engaging investors, Ceres says, requires using investor-friendly language and tapping the C-suite and board to deliver the message in annual meetings, earnings calls, and private conversations.
That’s not to say that pushback is unheard of. ExxonMobil recently wrote to the Securities and Exchange Commission in an attempt to stop an investor proposal to set targets for lowering its greenhouse gas emissions. Exxon called the proposal an attempt to “micromanage” the company. On the other hand, the Ceres report notes that Intel shares its sustainability strategies with shareholders using consistent messaging in a variety of venues. At its 2017 annual meeting, the company discussed how it integrates sustainability across its supply chains. Throughout the year, it also holds smaller ESG-focused sessions around the country.
Actions like these help differentiate companies from the pack, showing investors their dedication to transparency and reinforcing their sustainability strategies’ role as a key driver of value.