Sustainability leaders with strong investor-focused reporting are positioned to access larger pools of capital from investors with ESG strategies. That’s because investors see sustainability as a sign of comprehensive, forward-looking approaches to managing business risks and opportunities. As the demand for sustainability information continues to grow, companies will need an increasingly investor-focused approach to their reporting. In this article, we describe how the Sustainability and Investor Relations teams can work together to improve reporting practices and attract ESG investment capital.
The business case for sustainability is clear
A raft of recent studies confirms that sustainability is good for business.
- According to a 2017 Harvard study of 2,400 companies, those companies who performed well on material sustainability topics over two decades outperformed the market by nearly 5% annually.1
- In a 2018 report on ESG ratings from MSCI, Sustainalytics and Thompson Reuters, Bank of America Merrill Lynch found that sustainability performance correlated with higher return on equity, lower price volatility and market outperformance.2
- A 2017 study by Nordea Equity Research found companies with the highest ESG ratings outperformed the lowest-rated firms by as much as 40%.3
- A recent study by Harvard Business Review found that ESG issues were almost universally top of mind for senior executives at nearly 50 global institutional investing firms, including the world’s three biggest asset managers (BlackRock, Vanguard and State Street).4
- In Canada, $2 trillion, or more than 50% of institutional investor assets are governed by responsible investment principles,5 and all major pension plans and asset managers are signatories to the Principles for Responsible Investment.
Satisfying the demand for sustainability information requires a new approach
The correlation between sustainability and financial performance is driving investors to demand more – and better – sustainability disclosure.
In turn, that demand has led to a spike in sustainability information databases, ESG ratings and indices. For example, Bloomberg, Thompson Reuters, ISS, Standard & Poor, MSCI, Sustainalytics, FTSE Russell and DJSI all offer ratings to help financial analysts interpret and assess sustainability performance. Bloomberg terminals alone have approximately 900 sustainability indicators, and subscriptions to the service have nearly tripled in the last three years.
At the same time, companies are striving to satisfy this demand by reporting on their sustainability activities: 93% of S&P 500 companies now disclose sustainability information publicly.
Sustainability managers go to great lengths to align their reporting with frameworks and standards, such as GRI, SASB, TCFD, and CDP.6 However, investors often find sustainability disclosure falls short because it contains too much extraneous information and unreliable data that lacks comparability across companies.
The critical link between the supply and demand of sustainability information is the Investor Relations (IR) team. The IR team can act as a powerful liaison between two different and often disconnected groups – investors and Sustainability teams. The IR team can help Sustainability teams understand what is financially material to investors and identify useful sustainability information to disclose.
In our experience advising institutional investors and corporate clients, Sustainability teams who follow the following six steps report with more confidence and provide investors with high-quality information about what is most important for company outlook and value creation.
1: Promote collaboration between the IR and Sustainability teams
Set up regular meetings and ensure both teams have an understanding of each other’s strategic priorities, shared goals and key milestones. The Sustainability team should be aware of the requirements of the annual IR calendar – the AGM, annual report, quarterly reports, investor calls and events. Similarly, the IR team should be apprised of the sustainability disclosure reporting cycle – questionnaire responses, report publication, ESG rater solicitations.
2: Understand investor ESG priorities
Investors prioritize different information when making investment decisions. Profile your most important investors for sustainability-related investment positions. For example, many leading European institutions are starting to set portfolio decarbonization goals and routinely integrate climate change considerations into their investment decision-making.
Engage with your investors to understand what they consider to be the strongest indicators of sustainability leadership. For example, do they look for a clear link to the business strategy? Do they want to see a trend of improvements in resource efficiency, or are they more interested in an ambitious set of improvement targets?
Also enhance understanding of how investors apply sustainability information in their equity and credit research – what sources of information do they use, who does the analysis and how frequently? Sophisticated investors often apply proprietary sustainability-themed investment screens, while others may rely more heavily on third-party ESG ratings and disclosure scores.
3: Hone your reporting
Once you’ve established what your investors want to know, make your sustainability information clear, concise and readily available for investors and ESG raters. Take advantage of tools such as sustainability microsites and downloadable data charts. Equip the IR team with an information packet for investor roadshows and quarterly calls. This can be a selection of material from an annual sustainability report and scored results from disclosure frameworks, such as CDP, DJSI or GRESB.7
4: Be proactive about shareholder questions
Monitor and anticipate investor questions ahead of proxy season and develop responses proactively. This demonstrates a forward-looking orientation that helps investors understand your plans and upcoming initiatives.
5: Refine the message
Make sure the IR team is able to both speak articulately about your sustainability approach and connect your priorities to how the company creates shareholder value. Practice makes perfect – outline jargon-free messages and use case studies to highlight your sustainability journey and differentiate your firm based on your tangible sustainability actions and achievements.
6: Engage directly with investors to continuously improve
Sustainability provides companies with an opportunity to build relationships with investors by driving new and different conversations about value creation. To maximize this potential, allow investors to weigh in on your sustainability strategy. Ask them what resonates and aligns with their priorities, and get their feedback on what you are aiming to achieve. Discuss your ideas about how the company can innovate and position itself as a future-fit investment over the long term.
Of course, the information shouldn’t flow only one way. IR teams at leading companies will no doubt see the relationship as beneficial too: Ideally, they will be working towards integrating sustainability into mainstream investor reporting, helping the markets integrate material sustainability information in fundamental analysis and valuation.
1Harvard Business School, George Serafeim, Better Information Better Markets, 2017: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575912
2Bank of America Merrill Lynch, The ABCs of Environmental, Social & Governance (ESG), 2018: https://www.bofaml.com/content/dam/boamlimages/documents/articles/ID18_0970/transcript_abcs_of_esg.pdf
3Nordea Equity Research, Cracking the ESG Code, 2017: https://nordeamarkets.com/wp-content/uploads/2017/09/Strategy-and-quant_executive-summary_050917.pdf
4Harvard Business Review, Shareholders Are Getting Serious About Sustainability, 2019: https://hbr.org/2019/05/the-investor-revolution 2/14
5Responsible Investment Association, 2018: https://www.riacanada.ca/research/2018-canadian-ri-trends-report/
6GRI (Global Reporting Initiative), SASB (Sustainability Accounting & Standards Board), TCFD (Task Force on Climate-related Financial Disclosure), CDP (Carbon Disclosure Project).
7CDP (Carbon Disclosure Project), DJSI (Dow Jones Sustainability Index), GRESB (Global Real Estate Sustainability Benchmark).