Five things to know and do on ESG

The practicalities of dealing with ESG issues can be a headache. Here Kirsty Collins gives the benefit of her IRO experience to outline the five top tips that IR professionals should heed.

After 10 years with GSK in IR and working on ESG strategy, I have more recently travelled around the corporate stakeholder table – with a stint on the ESG buy side at Aviva Investors and then advising the World Benchmarking Alliance on bringing investors, companies and civil society together to develop corporate benchmarks on the UN Sustainable Development Goals (SDGs). 

Sitting on the other side of the table brings new perspective and I am now working with companies and IROs to bring some context, insight and practical actions to the table. Diving right in...

Annual reporting is not enough 
It can and does form the foundation of your conversation and engagement with investors. I encourage framing your thinking around the context to why investors have pushed for a type of reporting or disclosure – it’s historically been one of the most effective levers to encourage the company or board to take action or have the appropriate discussion to be able to then report externally. IR should watch for and engage on integrated reporting and further disclosure conversations to bring context and insight both internally and externally. 

ESG ratings are here to stay 
I am acutely aware of the number, length of time and discussion of the increasing proliferation of ratings and questionnaires.  However, you can manage this by mapping and prioritising to your particular context. One area in particular continues to drag on in the broader conversation on this out there – the lack of differentiation on the types of research to effectively decide your approach. 

Without further information on your shareholder mix and their feedback you can’t prioritise effectively. Each type involves different external and internal stakeholders (sustainability, secretariat or treasury teams) and latter should be involved in prioritising.  

Funds themselves are now being rated on ESG 
I oversimplify, but these essentially reflect a measure of the funds component ESG scores – for example Morningstar fund ratings in partnership with SustainAlytics. For a corporate IRO this adds a layer of context to how ESG ratings are being used downstream, is a part of the bigger picture on integration and evolution of expectations of ESG performance and shifting commercial landscape in the market. Note the three big credit ratings firms are also significantly upping their ESG capabilities and offerings across assets. 

You can make ESG ratings work for you 
I tend to split this way while others may do differently: ESG sell side; third-party ESG performance ratings for investors; other scoring and indexes of performance for investors; benchmarks and indexes aimed at a broad stakeholder mix with significant investor buy-in. Examples would be: Morgan Stanley; SustainAlytics or Fitch ESG scores; DJSI or CDP; and Access to Medicines Index, respectively. 

Be aware of how each current and new disclosure effort is shaping investor decisions and other stakeholder expectations, e.g. TCFD and TPI. Know which ones your shareholders and targets pay attention to and how they use them. You can use this to help inform your prioritisation and efforts. 

You can take practical action now 
IR is the best place to get the full picture on ESG with investors and the market. You can integrate that into current narrative and shareholder strategy appropriately and ensures effective delivery and co-ordination of efforts and priorities on ESG. On that basis: 

  • Apply IR science to the problem. Map and get to know top shareholder ESG teams and their current thinking on your company, sector and broader market. There’s baseline insight in published annual reviews (PRI reports), online and potentially in an annual letter to the chair. Get to the next level – and having the base knowledge increases the likelihood - by meeting with and talking to them.  Also map the influential but potentially smaller actors which may be further down the register. Some are vocal, some are not but no less influential within the space.  Repeat for targeting list and regional markets which can and do differ. 
  • Know your ESG themes in context of the investor. Not the same way as you might tell your story internally or other external stakeholders e.g. policy makers. Any emphasis should be context specific. NEVER start a conversation with an ESG team or investor with your community investment spend…
  • Don’t assume negative intent when an ESG team engages. They want the company to get this right, have the best interest of the company in mind and will tend to take a collaborative approach. Believe me when I say clarifying an ESG factor can and does make the difference between a choice of two stocks for a fund, continue to be held or whether a position can taken.
  • Remember the ESG lens is on a broader scale. ESG teams work across all asset classes, with all fund managers and across all strategies and markets.  Asset managers and owners are on the receiving end of evolving expectations, disclosure and policy legislation on ESG and sustainable finance that can and will have a knock on effect. Keep an eye on the radar. Expect to start seeing conversation on impact measurement and the UN SDGs.
  • Push your IR advisors to build ESG capability and knowledge of landscape and opportunity. If they aren’t already doing this, they haven’t been paying attention. Ideally, IR advisors will build this into their strategic advice, market assessments, targeting and not have ESG as plug in or regurgitate expertise out there already on reporting, stakeholder expectations - we want market intel. 

And last but not least (and, for the eagle-eyed, point 11!) : have something to say. If IR can’t talk to sustainability strategy or ESG factors meaningfully while the CEO or Chairman can and does, you create dissonance and risk. The great news is that it’s easy to improve. 

Get a handle on who’s who and what they are focused on, agree priorities internally and then build good relationships and ‘credit’ on the ESG side. They’re a friendly bunch – go talk to them. 

Kirsty Collins is a strategic engagement advisor.

Published 25 July, 2019

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