Signalling sustainability amidst uncertainty

Katya Gorbatiouk of the London Stock Exchange outlines her thoughts on the direction of travel for sustainability communications, the key areas where transparency is expected by capital providers and the implications for the mission-critical role of the IR function.

The speed of evolution of investor relations is highly telling of the mission-critical role this function is increasingly taking on. Effective communications are not just a foundation for relations between companies and investors - this area of best practice has far-reaching implications on the state of capital markets and the strength of the culture of equity investment, so pivotal for the economy to thrive. The direction of travel for this intricate relationship between providers and consumers of capital is transparency. As is true anywhere else, to be conducive to a long-term mutually rewarding partnership, transparency needs to be a two-way street.

Integrated thinking

What is deemed to be best practice in communicating a company's approach to sustainability has been changing at a head-spinning pace. The visible phase-out of the term 'ESG' in favour of 'sustainability' is reflective of a more holistic lens applied by investors when making investment decisions. Going beyond a risk-based assessment of a set of E, S and G factors, in an integrated approach to long-term sustainability the concepts of the overall resiliency, competitiveness and prosperity are inseparable from the concept of a positive impact on the company's ecosystem of stakeholders. In other words, an integrated approach to sustainability embeds economic, environmental and social considerations of the future into commercial decisions of the present.

A deeper definition of transparency

Sustainability is becoming more than a differentiating competitive attribute, but a matter of strategy universally expected by investors. Condensing what appears to be an ever-expanding universe of acronyms, frameworks and guidelines into an orderly set of focus areas for sustainability communications is a continuous challenge for boards and executives. While recognising that each investment case is unique, here are the key areas where transparency will be tested by investors, irrespective of how good a particular year has been.

Proactive gathering of inputs. Company communications should evidence how continuously it considers all the ways it impacts its external environment and, at the same time, key factors impacting the company's long-term health and resiliency. The assessment of the needs and priorities of the company's different stakeholder groups, as the output of stakeholder engagement, should be one of the inputs for setting performance objectives across the business.
Ambitious objective setting. Clear signalling about what ‘good’ looks like within the organisation should include how sustainability workstreams are proactively integrated across all parts of the business, and form part of its overall vision, purpose and strategy. This integrated approach is evidenced by the extent to which sustainability KPIs form part of individual performance objectives across the organisation and ultimately link to remuneration of executives and other decision makers.
Continuous assessment of progress. As important as communicating progress towards long-term and interim sustainability milestones is communicating how any setbacks are evaluated and how accountability frameworks are applied. The ability to be transparent about the lessons learned goes a long way to fortifying trust with capital providers, so vital during times of uncertainty.
Board effectiveness and culture. Signalling board effectiveness starts with an explicit commitment to continuously assessing (and, as necessary, updating) the board-level expertise on sustainability and resilience matters. The level of this expertise is directly correlative to the depth of the board’s assessment of the sustainability-related performance, risks and opportunities, and the effectiveness of decision-making that focuses on outcomes and impact. What is also highly telling is the regularity and timeliness of delivery to the board of the outcomes of stakeholder engagement and other inputs on matters integral to the company's long-term viability. Communicating on how these inputs are considered across all relevant discussion areas (not just in a silo), communicating how strategic decisions are arrived at and how their implementation is tracked by the board - are signals of the culture of commitment to best practice and transparency.
Engagement follow-through. A visionary company uses investor engagement as a resource. Proactively seeking real-time feedback separates companies from their more reactive peers, signalling commitment to anticipating and mitigating risks early. Efforts to engage with investors that are not on the register may open fresh sources of invaluable insights. Communicating to the market on how all this feedback gets considered by the board and implemented by the executive is a tremendous opportunity to stand out from competition.

Communication on sustainability is still a developing area for many companies, and the learning curve has been steep. In an environment where there is greater scarcity of capital, competition for this capital means that businesses are seeking to demonstrate that their internal approaches are being proactively streamlined in sync with the evolving expectations of investors and stakeholders.

A two-way street

Reciprocating this transparency, a genuine commitment from the investor to the depth of analysis and stewardship is imperative, as contrasted to engagement at the lowest cost. It is crucial for companies to have a full view of how investment decisions are arrived at, what drives AGM voting, and even more importantly - real-time feedback on what needs to improve. There will be issues where extensive dialogue will be required to achieve an outcome. There must be both time and resources to do so on both sides. A nuanced dialogue should not be replaced by box-ticking outsourced to proxy voting service providers. What may appear to be a shortcut to lower the costs of investing can cost more in missed opportunities for driving fundamental improvements through stewardship.

Communications are a powerful tool for a company to align its vision and strategy with like-minded capital. What is ‘success’ on this journey? It is about long-term partnerships sharing a mutual commitment to building long-term value, the partnerships that survive different economic cycles, and ultimately fortify the resiliency of the economy to sustain the current and future generations.

Katya Gorbatiouk

Head of Investment Funds, Primary Capital Markets

London Stock Exchange

Published 5 May, 2023