THIS ARTICLE IS PART OF EQ'S SHAREHOLDER VOICE REPORT. FIND OUT MORE HERE.
Investors Expect Greater ESG Transparency From Companies
For all the attention environmental, social and governance principles have received in recent years, many investors still feel companies could do more to explain their approach to ESG.
The EQ Shareholder Voice survey found that 82% of shareholders in the US and UK think companies are responsible for communicating about ESG, but 43% feel they are not doing it enough. A further 34% of investors report intense frustration when a company behaves unethically.
With regulators in both countries calling for more accountability on ESG practices, many companies are strengthening their sustainability reporting. But still, many others are doing the bare minimum to comply.
Failing to address shareholders’ concerns on ESG is reputational risk, as investors can easily amplify their frustrations on social media. Some have even campaigned successfully to oust board members based on their perceived ESG failings or lack of commitment.
By contrast, a slew of recent studies from the likes of research firm Morningstar and index provider MSCI have shown that companies with sound ESG practices are reaping the benefits in financial performance, sustainable value, and share price premium.
Walk The ESG Talk
Getting ESG communication right will go a long way to appease investors, says Richard Davies, managing director at RD:IR, EQ UK’s investor relations specialists.
“Shareholders have become much more vocal on ESG because of issues such as the way companies treated their employees during the pandemic and re-emerging climate change awareness,” says, Davies. “Even some traditional institutional investors call themselves activists and may threaten to vote against companies based on their low commitment to ESG.”
Companies must be much more mindful of investors’ ESG agendas so they can anticipate how they might vote, he says. “Conversely, good communication on ESG can boost shareholder engagement.”
Companies in the UK and the US are appointing board-level sustainability committees, often chaired by the CEO, in response to investor outcry. These committees aim to improve ESG practices, reporting and communication. They also hope to embed ESG principles into board thinking to help avoid accusations of “greenwashing” and of reflexively ticking compliance boxes.
CEOs are also trying to recruit senior sustainability leaders, but there is a dearth of suitably high-quality talent because it is a relatively new discipline, says consultant Tom Rayner, founder of ESG consultancy Sillion. CEOs are also seeking more coaching on the subject, he says.
“There is insufficient understanding of what investors want from corporates in ESG terms. Compared to financial outcomes, there is a lot of variation between institutions in terms of their expectations,” Rayner adds.
Ultimately, boards need to understand that ESG reporting is about openness and clearly defining the firm’s objectives and progress, as opposed to worrying about missing targets as is the case with financial performance, says Rayner.
of shareholders feel that companies have a high to medium level of responsibility to communicate about ESG
Source: Shareholder Voice 2021
Exciting New Structures
Despite increasing efforts to sharpen their ESG tools, companies implementing good practices are not necessarily reporting them well or using all potential communication channels, says Davies.
“Good practice is to have an adequately resourced team focused on keeping shareholders aware of ESG processes and results, including via social media and email, in the same way, finance teams do with financial news and results,” he says.
“Companies will often wait until the annual general meeting to talk to shareholders about ESG…but it should be an ongoing, year-round activity. They could also run a separate ESG investor day.”
The rise of ESG has forced firms to set up a new structure in which investor relations, company secretaries and governance teams collaborate more closely, merging financial and non-financial metrics to align with investors’ new understanding of a company’s value. This evolution requires investor relations to learn how to communicate non-financial metrics.
“Using multiple channels such as social media, online meetings, ESG investor days and webinars can inform investors in a powerful way,” Davies concludes.