IR Magazine’s ESG Integration Forum in London on November 7th, the follow-on European event to the inaugural version of the same event held in New York in December 2018, brought together a range of participants in the ESG conversation across buy-side, sell-side, regulators, and consultants, as well as corporate attendees including IR, sustainability, legal, and communications professionals. Obviously, the reason for the diverse audience has both a positive and negative connotation – ESG now touches every part of the investment process and every part of the operations of many companies, but given that there are no hard-and-fast rules for what to say and how to say it in any jurisdiction, there’s plenty to learn for each participant in the process in a fluid market.
IHS Markit led workshops at the event on ESG-focused investor targeting and participated in a panel discussion entitled From Shareholder Engagement to Stakeholder Value. That said, we were there much more to listen than to speak – in a rapidly-evolving ESG environment, no single member of the ESG community has a complete picture of where the market is heading. Below are a few takeaways from what we heard from the stage, from the participants, and, well, at the pub over pints afterwards.
ESG is now a lens for investing across every asset class. While fixed income and equity portfolios might have different time horizons, ESG risks are both long-term in nature, meaning that inside many major investment firms there is no difference between the nature of ESG equity and ESG credit research. If a portfolio owns a security, and that security faces risk that doesn’t show up in the financials, a portfolio manager will need to evaluate that risk with as much information as possible.
Or, taken from a different angle, IR departments are only one conduit for information flow out to stakeholders – corporate treasury departments also face demands for non-financial information from lenders, rating agencies, and fixed income investors. Any counterparty that a company deals with across its value chain will need to understand ESG risks, and having a single message that’s communicated by all parts of the company is increasingly important.
Investors don’t take the ESG ratings data that exists as gospel – and good managers are willing to do their own homework on each company. Several buy-side managers present mentioned their penchant to use existing ESG ratings data only as a “starting point” – even in very broad integration strategies, it’s still necessary to get past the ratings and look at the underlying risks they’re measuring.
Engagement creates value for both companies and investors if done well… From survey results presented at the outset, only 8% of buy-side managers reported that they don’t see value in hearing from companies about their non-financial risks, while 70% of investors state that direct communication is either a “top priority” or “an important part of our research process.” Yes, companies are putting data out there to feed the various agencies and surveys, but a narrative that describes how the company identifies and approaches the risks and opportunities that matter the most to the business may best be delivered in a 30-minute conversation with a tight agenda – and is likely to build trust.
…but it’s possible for companies to do it poorly. Examples of engagements that didn’t go well from the asset manager perspective included companies that deflected inquiries, i.e. “everything’s in the annual report, you go find it,” or companies that present only their strengths and not their opportunities for improvement. Most managers start their review of companies from a risk perspective, so simply rattling off a list of your “E” or “S”-focused programs isn’t going to add value for managers that want to see how you’re attacking material risks to your business.
As impact investing grows, aligning the company with particular targets that achieve a goal can open up opportunities with new investors. Investors and consultants alike described the growth of impact investing portfolios from a nascent stage to one that’s starting to attract asset inflows. Impact portfolios operate with a purpose of producing a particular environmental or societal impact from the aggregation of the targets each portfolio company is pursuing – an example would be summing the total progress of all portfolio companies on improving gender diversity in their collective workforces. If a company is publishing specific and measurable targets while showing progress against them, it’s likely to attract the attention of these portfolio managers. The UN Sustainable Development Goals (SDG’s) were mentioned in multiple sessions as a useful way to classify the company’s goals and KPI’s to aid in broader understanding; in the case of impact investing, aligning with SDG’s may help attract direct attention from this growing asset class.