Informed interview: A changing climate for investor relations
Companies will be acutely aware that investors’ interest in climate change is increasing. Notably, it is increasing at a pace faster than the annual reporting cycle. For many companies, the ‘let’s see how it goes this year and do something next year’ response is not a viable option. So, Informed asked Mike Tyrrell, the editor of SRI-CONNECT, to interview James Hulse – an expert in climate change investment issues – and identify the best ways for companies to respond.
Mike: Climate change and investment is such a hot topic that everyone’s claiming to be an expert. Are you really an expert? What are your credentials?
James: I think that the implications of climate change on investments are still evolving, so I’m not sure anyone is an expert yet. However, I do have a bit of experience, having set up the world’s first climate change hedge fund in 2007, and then going on to run the investor team at CDP (formerly the Carbon Disclosure Project) for four years before starting my own consultancy in 2016.
Mike: Are investors really becoming more interested in climate change issues or is it just a story to fill pages of the FT?
James: Absolutely. Interest has been building for years but the Paris Agreement made it clear to investors that governments were serious about action. This is slowly turning into legislation, such as Article 173 in France, under which companies and investors need to report “information on the way they take account of the social and environmental consequences of their activity – including the effects of climate change”.
The other big driver is the Task Force on Climate-Related Financial Disclosures (TCFD) which is a mouthful of jargon that might seem irrelevant but which is actually ‘front and centre’ of the issue for all investors.
Mike: Tell us more about the TCFD – is it relevant for companies?
James: Yes, very! For listed companies, it sets out the following recommendations – currently voluntary but increasingly likely to form the basis for regulation. Climate-related risks and opportunities, and the expected transition to a lower-carbon economy, (materially) affect most economic sectors. Therefore, companies need to disclose relevant, decision-useful, forward-looking information on risks and opportunities from the transition to a low-carbon economy; and physical risks.
Companies should also stress-test their business against possible scenarios – such as a ‘2 degree world’, with all of its policy and practical implications.
Mike: So, what are investors doing and how does this affect companies?
James: Leading investors are focused on driving real change within their investee companies. Some of this is done through private conversations with companies, but increasingly investors are forming initiatives for collective engagement.
Companies should know about two recently-launched but significant initiatives. Climate Action 100+ focuses on the highest-emitting companies and engages with them to ensure that they reduce their emissions. The Transition Pathway Initiative uses public information to assess companies’ preparedness for the transition to a low-carbon economy and engaging with laggard companies.
Mike: So, how should companies respond to this growth of interest?
James: As ever in IR, there are smart ways and dumb ways to respond to investor interest in a particular issue. Let’s dispose of the dumb ones first.
‘Wait and see’ is dumb. Climate change is happening. Investors and financiers are coming under pressure and they are passing that pressure through to companies. The direction of travel is ‘one-way’. Being reactive is dumb. Questions are coming in from all angles at an increasing rate. Getting on the front foot and communicating proactively is much more efficient and puts companies in control. Focusing on ‘disclosure’ alone is dumb.
Mike: Hang on … almost all of the initiatives demand ‘disclosure’ ...
James: That’s true. But disclosure is only one side of the communication process. Companies do need to disclose … but they need to treat that as a starting point rather than an endpoint. Investors need quantitative disclosure of emissions, but they also need these to be set within the context of business strategy and market developments.
Mike: So how can a company construct a smart strategy?
James: First, companies need to establish climate change-related investor communications as a responsibility of the IR department. Of course, the CSR/sustainability executives will remain supportive but as the issue progresses from the margins to the mainstream of company-investor communications, it’s essential that IR takes control.
Then, they need to know which of their investors are interested in climate change and how interested they are. Fortunately, there are a number of reference points that can be consulted to make this a relatively easy task.
Then, I think companies need to consider what will best practice in investor engagement on climate change look like in three years’ time? How can we move our company’s communications towards that?
Mike: And which companies display best practice at the moment?
James: No, Mike. That’s really the question that you should be answering. You’re the guy that deals with company-to-investor communications on sustainability.
Mike: OK. I can’t argue with that … although I’m a bit reluctant to give you a list of names, at present. The reason is that we are currently running the IRRI Survey (Independent Research in Responsible Investment) which asks investors, analysts and companies about their practices and preferences in this area. It enables companies to benchmark their progress against peers and to feed back their opinions on how SRI and corporate governance investors operate. Finally, it asks investors to nominate those companies which are best at communicating on sustainability.
So, can I tell you in June? Then we will have a definitive answer. In the meantime, I do like regularity. Climate change and sustainability are growing trends not temporary fads. So, companies that make sustainability disclosure part of their annual investor communications every year deservedly earn investor confidence.
Finally, I like companies that communicate directly with analysts and investors. Webinars, roadshows and meetings are much more effective ways of conveying strategic change than questionnaires and printed reports.
James Hulse is managing director of Hindsight Consultancy.
Mike Tyrrell is editor of SRI-CONNECT.
Published 23 April, 2019