A new decade, a new investor relations
It is a difficult time for the UK and global economy. Richard Davies looks back at the history of the IR industry, and provides insight into the new era – ‘IR 3.0’ – when non-financial criteria are dominant.
While, for the short term, coronavirus is shaping the communications agenda for many UK public companies, capital markets life goes on, though hopes of any ‘Boris bounce’ to the UK economy now look foolhardy in view of the disruption brought about by the virus. With the prospect of a drawn-out global oil pricing war, we are heading into unknown territory.
When and if coronavirus becomes a memory, like the various waves of flu before it, we will return to contemplating how best to handle the new paradigm of investor relations that the post-MiFID II world presents. With or without the challenges of Brexit and MiFID II, the last decade saw a major structural shift in global public equity markets driven by the continuing availability of cheap debt; the shift towards passive investment driven by the perceived expense and relative failure of active management; and the continuing atrophy of most global venues as a result of accelerating levels of delisting combined with moribund levels of fresh investment opportunities via IPOs.
While we should all take time to consider why public equity is important, aside from giving IROs jobs, we should also try to understand why the role of IR is now more complex and challenging than ever.
IR through the ages
In my last column for this journal, I set out the history of the IR industry from its beginnings as an offshoot of public relations in the US defending the reputation of corporate debt, to its position today as a central function of corporate life.
The major step change for everyone in the IR industry from the original paper- based model of IR 1.0 to the more sophisticated 2.0 version was the arrival in the 80s of the personal computer in the workplace, and the decline of the information arbitrage that existed hitherto in the financial markets between professional and lay investors through the widespread supply of financial data via data provider platforms.
The arrival of the internet and the digital age empowered both investors (retail and institutional) and issuers in terms of information sourcing, analysis and reporting. One could argue that we are still in the formative years of the digitalisation process and there is a long way to go in terms of the application of AI and robotisation to markets and investment. However, so-called ‘Black Swan’ incidents like coronavirus show how fragile and vulnerable are all systems in the real world, and AI exists in a world of perfection that the natural world can still render chaotic.
The natural world
Nature is showing itself as having the upper hand over humans in other ways, as we have tragically seen in Australia and the flooding of many parts of the UK. Whatever the reason for these events, climate change (or, to use the favoured word of the environmentalists – and some fund managers – ‘catastrophe’) has given many asset management firms cause for concern in terms of their valuation modelling. Sustainability is now not just a sustainable part of investment methodology, it’s also an integral part of risk management. Fund managers have woken up to the fact that climate change represents a fundamental threat to portfolio valuations.
We have seen a new emphasis in recent years on social issues as part of the investment decision-making process. The focus has widened from gender equality and diversity to the consideration of how businesses treat their internal and external stakeholders as human beings in terms of training, development and well-being. Many investors and analysts believe that how businesses treat their staff, customers, supply chains and even local communities can materially impact their financial outlook.
The ‘E’ and the ‘S’ really do meet the ‘G’ these days for both traditional portfolio managers and the fund specialists. While the amount of money related to dedicated ESG funds may be relatively small in the UK, through growing significantly, most institutional asset managers are using some form of ESG screening or valuation inputs in their portfolio construction. In a 2019 Harvard Business Review survey of senior executives of 43 of the world’s major asset management firms, ESG was “almost universally top of mind.”
As we know, the emphasis on ESG is especially strong at the passive and index investment managers as part of their risk management strategy – and their slice of the share register is near half of all institutional equity ownership in the UK and US. One would expect to see a major swing back to active asset management as a result of the current crisis, as index investment is only useful when asset prices are rising.
Investor relations professionals cannot ignore these structural changes, which provide both challenge and opportunity. We are moving to a market environment in which asset managers are viewing non- financial metrics as intrinsic to their valuation of a company as financials. The clear analysis and reporting of these metrics, and the harnessing of the board to take these issues seriously should very much form part of the IR function now. IR should be the hub of the company’s interface with its stakeholders and the
wider market, bringing together the various corporate communication processes to form a cohesive holistic strategy that engages both portfolio managers and ESG analysts, just as we have seen the convergence of debt and equity IR in many companies.
This formation of a ‘collective engagement’ at the company by the IR team merely reflects the joined-up thinking that now occurs at most asset management firms. One would not argue that IROs should take over the running of the entire ESG function at the corporate but they should certainly be working in close liaison with the specialists in the company, for example, the company secretariat and any CSR/ESG officers, to ensure the maximum efficacy of ESG reporting and market distribution. This needs to be a year-round activity and not just work related to preparing for the AGM.
This joined-up thinking is the next stage of Investor Relations – we are witnessing the arrival of IR 3.0.
Richard Davies is managing director of RD:IR.
This article was first published in the Spring 2020 issue of Informed, the IR Society's quarterly journal.
Published 24 April, 2020