There is no avoiding the three letters that seem to be everywhere one looks in the Investor Relations (IR) world at the moment – ESG (Environmental Social Governance). They have knocked the 'other' acronym, MiFidII off the top spot it seems, claiming this year’s ‘hot topic’ award. ESG has been in the background for a number of years, but has recently become an increasingly important element of the IR role, and will continue to grow in importance for the months and years to come, not just for investors, but for wider society too.
Haim Israel, MD and Head of Global Thematic Research, BoAML highlighted the level of focus on ESG at last month's IR Magazine Think Tank when he said “All elements of ESG need to be considered by a company. The growth of investors looking at ESG has increased from 19% in 2017 to 33% in June this year. Generation Z will be the most impactful group going forward; 92% of generation Z are considering the impact of ESG. 83% and 75% of Generation Y and Generation X respectively are also increasingly interested in ESG” as well as a general interest in companies doing good.
Project Heather, based in Scotland emphasises the growing trend towards a more socially focused world. The team behind the project are hoping to build the first regulated investment exchange to be focused on businesses that are making measurable positive social and environmental impact. If the financial world is getting on board with ESG, up in Scotland, the team behind Project Heather are taking it further with impact investing - think of it as ESG+. Where ESG strategies monitor outcomes to find those companies seeking to do no harm, impact investing requires companies to set out to do good. Project Heather is seeking to re-establish the Scottish Stock Exchange, where issuers will be required to report on their impact. Martha Walsh at the Project said:
“By bringing impact investing to public markets, the hope is to make impact reporting as mainstream as financial reporting. Given cash flow statements were only made a mandatory part of financial reporting in the last 20 or so years, the team at Project Heather believe this is the natural direction of travel”.
This movement for a more socially conscious world of investing is also evidenced by the amount of investment being made by the buyside on the basis of ESG. This has grown substantially over the past few years. According to the 2017 McKinsey report, more than 25% of global assets under management are invested in strategies that adhere to ESG – a 600% increase over a decade before. Additionally, a lot of the buyside now offer products that employ ESG criteria, and are also using it as a way to avoid companies that might be deemed as riskier investments based on their ESG policies.
The argument stands that companies who maintain high standards within the ESG remit are potentially ‘safer’ investments. For instance, BP and Volkswagen have suffered massively as a result of poor ESG. BP’s oil spill in 2010 and Volkswagen’s emission scandal wiped a substantial amount off both companies’ market cap. Also, ESG is seen as being as much risk mitigation as it is forward looking strategy development and competitively advantageous. The benefits of a high “ESG score” are widely cited as a corporate having a better relationship with its shareholders, advanced future proofing of the business, opening a new pool of capital where otherwise it would have been screened out, highlights potential risks, influences strategy, mitigates risk of a proxy fight, and allows for a more accurate measure of a corporate’s share price.
As a result of the focus on ESG, IR teams have little choice but to incorporate this into the IR programme. Many of our clients are already focusing on ESG in some capacity, and this is normally either done through sustainability teams, corporate communications teams or IR teams. That said, the majority of corporates are not paying too much attention to ESG just yet. However, when they do, the main bulk of ESG reporting tends to be through a snippet in the annual report rather than as a separate ESG or sustainability report. Some clients have reported undertaking ESG related events throughout the year such as conference calls, meetings and roadshows, yet this still tends to be the minority rather than the norm. Despite the fact that ESG seems to have some way to go in its importance within the calendar, most clients understand the need for better ESG reporting and the benefits this will bring, including leading to stronger relationships with their investors.
The one main challenge most clients have faced is choosing which ESG questionnaire or survey to complete. They state that the difficulty lies in the sheer amount of surveys investors are sending their way. What they would like to see is some consolidation towards a standardised survey and set of measuring metrics. They also state that they are often having to find data on KPIs that aren’t actually relevant to them, but they need to complete nonetheless. What would be helpful is if there was some consideration towards the metrics most relevant to the type of company and its operations.
While ESG is now a mainstream area and no longer a niche one, the extent to which investors are actually making investment decisions based on ESG is unclear. It is most definitely an area that will grow in importance in the coming years, and companies will need to start working on ESG now, so that when it does become more prevalent, companies will be prepared with a lot of the groundwork already done. What is clear is that there needs to be more standardisation in the measurement of ESG across corporates, although a one-size-fits-all model will not work. Some clients are now recruiting for mid-level IROs to focus on ESG within their teams. Others remain in wait-and-see mode, with reluctance to enter this data minefield at present.