Blog Post

Effective ESG or Sustainability communication strategies to address increasing Investor Interest

MACK BHATIA

"The strategy’s quality orientation toward companies with strong balance sheets, high returns, sustainable cashflows and leading ESG profiles helped during the turbulent times", ClearBridge Investments

As global assets integrating Environmental, Social and Governance (ESG) considerations continue to swell, institutional investors globally are increasingly engaging with their portfolio companies to improve transparency and enact change on a broad range of ESG and sustainability-related issues. Companies & ESG marketing professionals (typically working within Investor Relations, Corporate Communications or Sustainability teams) should act now to stay on top of the rapidly changing developments in this area and more effectively control the companies’ ESG related messaging. 

Investor engagement on ESG issues isn’t a new phenomenon. Investors have been coming together for decades to pool resources and draw on collective experience in order to influence practices and behaviours for issues of concern at their portfolio companies. For example, the Social Investment Forum, a coalition of roughly 400 investors joined forces in the late 1990s to pressure clothing manufacturers and retailers to take a tougher stance against apparel industry labor practices. However, such initiatives were sporadic and were composed primarily of a small number of pioneering investors with a sole focus on ESG or those where the end beneficiary was easy to define. 

But in recent years, engagement topics have grown significantly in tandem with the tremendous growth in ESG investing. The list of engagement topics now spans those with global reach including climate risk, gender diversity, and human rights, to very specific and localized issues such as deforestation in South America and opioid manufacturing and distribution in the U.S. 

The explosion in growing investor interest in ESG, is increasingly underpinned by numerous studies showing that good ESG performance can potentially Enhance risk-adjusted returns. Shifting client preferences, including those from millennial investors who increasingly want to link their values to their investment decisions, has also helped to drive the interest in ESG. On the other hand Industry collaborations such as the Environmental, Social and Governance industry collaboration (PRI), and  Sustainable Investment programs by large institutional investors such as BlackRock have gained industry attention. 

Investor's expectations from ESG Communication profiles

In the most recent Q1 2020 commentary by Sustainability Leaders Strategy Portfolio Manager, ClearBridge Investments stated that "The Strategy’s quality orientation toward companies with strong balance sheets, high returns, sustainable cash flows and leading ESG profiles helped during a turbulent quarter". 

Furthermore, many investors are increasingly looking for efficient ways to collaborate and engage with portfolio companies. They help channel issues of concern to corporate management teams, which can improve communication. Many ESG issues are complex, and collaboration allows investors to share resources and build knowledge and skills in these areas. It also gives smaller and resource-constrained investors a way to “punch above their weight” and make their voices heard.

Investors are organizing and looking for ways to engage with portfolio companies on their ESG profiles. These include company-specific engagements, topic-related campaigns such as methane emissions or water management, and to advance their own ESG strategies with certain initiatives such as decarbonizing their portfolios. Investors are also lending support to reporting and disclosure improvement initiatives such as the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). 

Companies cannot afford to ignore these new ESG demands and ESG communication models can make it easier for investors, on the other hand Companies will have easier access to capital.
ESG Communications Mack Bhatia theSustainabilityio teamSIO

Proactive steps companies can take now to be more effective with ESG communication

"If you use sustainability and ESG as a marketing tool, you’ll be found out. If you use it to drive business value, you're going to be successful." David Blood, Generation Investment Management. This is an important message and a core need of the investors. Keeping this mind, a genuine ESG communication profile can certainly engage your investors and in the right manner. The following steps to organize ESG communications with investors are useful:
 
  • Maintain a company-specific radar to track relevant investor initiatives including your investor signatories, ongoing research and regulation overall and in your company’s sector.
  • Monitor investor signatories to your company’s shareholder base and track how ESG initiatives are impacting their presence in your company and sector.
  • Prioritize efforts. Examine issues being raised by the investors in context of how material and relevant they are to the company’s core business. While materiality is in the eye of the beholder, focus first on the issues with the most direct links to the company’s key business and financial performance metrics (revenues, cash flow, operating margins, etc.). Then, continue monitoring the pace of the growth in the others.
  • Consider an initial engagement with investors that have made contact.
  • Analyze how far off you are from fulfilling the investor’s request(s) and the time and internal resources that would be needed.
  • Build your knowledge base. Identify the surveys, reporting initiatives and data that is driving ESG decision-making by key investors.
  • Benchmark practices and disclosures against industry peers and leading practices more generally.
  • With the core investor audience in mind, consider whether any reporting and disclosure enhancements are required and in which formats, such as a smaller, more focused report versus the company’s CSR report.
  • Create a robust ESG engagement plan that is genuine & which focuses on driving business value to ensure that the company gets credit for all of the good things it is doing on ESG.
  • Determine how incoming requests for ESG-related information will be handled before investors come calling. Teams and individuals that should be involved in initial engagements include investor relations, corporate communications, CSR team, the corporate secretary, legal counsel and treasury. Senior executives, and even board members, can be helpful for conversations later on. 

An interesting addition to the above steps is pursuing corporate bond marketing as a strategic addition to engaging your investors. Sustainable finance (or green finance) is growing rapidly and companies can leverage issuance of green bond, social bond or a sustainability bond. As an increasing number of investors search for green opportunities, the green, social or a sustainability label to a bond issuance helps communicate the issuer’s sustainability strategy both to investors, clients and the public.

The above steps require considerable time and internal resources. If you feel that internal resources in your company could be insufficient, contact us. We would be happy to explore your specific needs and how we can help. ESG is a marathon, not a sprint. Through a digital first approach and by taking these steps, companies can stay on top of the rapidly shifting developments in ESG and have a competitive advantage, this is in turn can open up easier access to capital.

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