Isn’t ESG just about having a long-term perspective?

Sallie Pilot, Chief Insight and Engagement Officer at Black Sun and Chair of the IR Society Best Practice Committee, discusses the opportunities for companies to be proactive in setting out their long-term strategies and ESG issues when engaging with the investment community.

When BlackRock Inc.’s Larry Fink sent a letter to CEOs in January, some executives and directors were stumped when he asked companies to explain how their business makes “a positive contribution to society,” beyond financial performance. Dive a bit deeper into this question and you’ll find that he is suggesting that companies demonstrate a strategy for long-term value creation and profitable, sustainable financial performance. However, to achieve and maintain that level of performance, companies must also understand the societal impact of their business as well as the ways that broad, structural trends might affect their potential for growth.

So what are the elements Fink is referring to? I’d say Environmental, Social and Governance (ESG) elements − in his letter, Fink suggests that "Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?” These are just a few of the myriad of questions proactive, effective, future-focused businesses must ask.

Now whatever the views of BlackRock, there is undoubtedly an increase in momentum taking place in the market. Recent research by Morgan Stanley found that 84% of investors were pursuing, or are considering pursuing, ESG integration into their investment process. Why you ask? I think it’s because more investors actually care about sustainability and understand its role in the longer-term prospects and performance of a company. Any investor can interpret the financial numbers, but the real differentiation comes from understanding the strategic drivers of long-term value, risks and opportunities. The term “enlightened investor” is being increasingly used to describe this knowledgeable, future-oriented investor.

Black Sun’s latest research, “Less perfection. More authenticity”*, shows that 74% of FTSE 100 companies have non-financial KPIs this year, up from 55% in 2009. So clearly the onus is on corporates to proactively and effectively answer the growing number of questions from all stakeholders, and to communicate these answers in a clear and effective manner to ensure that its true story gets told. Without doubt, factual and compelling corporate storytelling is going to need to be a focus for companies moving forward, especially with all the attention from government and regulators on the board setting an organisation’s purpose, culture, director’s duties, wider stakeholder engagement, and longer-term strategy. 

I recognise that this is a developing area for many organisations around the world, and companies will be at different stages of the journey. That said, businesses are expected and required to adopt a more thoughtful approach to wider value, and to articulate their influence or impact in this area. As evidence mounts for the importance of governance and overall stewardship to investors, we can all be assured that a businesses’ narrative on value will become equally as important as its finances. I believe that a real opportunity exists for companies to be proactive in setting out their long-term strategies and ESG issues when engaging with the investment community, and I encourage companies to move in this direction. Every step and effort should drive us forward, even if they are small steps. 

Supporting these steps are recognition platforms like the IR Society Best Practice Awards. This year, a new Award seeks to highlight effective integration of ESG elements and recognise companies that evidence a year-round communication approach to investors. This Award places a spotlight on the companies that communicate in a manner that provides insight into how ESG risks and opportunities are identified, understood and proactively managed and measured in order to contribute towards its competitive advantage. The Award has categories for FTSE 100, FTSE 250, AIM, Small Cap and International companies, reflecting awareness of the diverse range of companies looking to the UK for excellence in IR. (Other Awards include Best Overall Investment Proposition, Best Annual Report, Best Digital Communications, and Best Communications around an IPO.)

Challenge yourself to articulate your company’s story for entry into one of the IR Society Best Practice Awards and see how your company’s efforts fare with industry peers. You may just gain recognition for being one of the companies that are already showing the world that they are taking the right steps.

“Less perfection. More authenticity” is the title of Black Sun’s 13th annual research piece, analysing the annual reports of all FTSE 100 companies. Click here for a summary of that research.

Published 5 July, 2018

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