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Blog: HIGH QUALITY ON ESG DISCLOSURE

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by Simona D’Agostino Reuter

HIGH QUALITY ON ESG DISCLOSURE

 

The world today has certainly intensified the expectations of corporate governance and the transparency of environmental and social performance.

Many investors expect more and more companies to plan beyond the mid-term, disclose their long-term strategies and report how they manage material environmental and social risks and opportunities relating to their business. This is the ‘new normal’ for companies today.

 

THE NEW NORMAL:

  • Investors expect company leaders to plan beyond the mid-term.
  • Companies must also understand the societal impact of their businesses.
  • High-quality ESG disclosure will allow for better understanding for all stakeholders.

(This is one the topic discussed in IR Magazine, September 2019)

But can we say that Institutional investors are starting to turn their backs on companies that ignore environmental, social and governance issues?

For listed companies, the equivalent of this nightmare scenario is investor indifference.

The tide of demand for ESG from investors is shifting to a tsunami, with tens of trillions of dollars in investment funds now reserved expressly for stocks that comply with ESG criteria. The trend has expanded over the past decade from modest beginnings to comprising around a third of all assets under management today – and shows no signs of slowing.

Now some start to say that “Ignore ESG, and a listed company risks being ignored by a third of global investable capital”.

The focus on long term sustainability increases companies’ responsibility and accountability to their stakeholders.

As a result, we’re seeing companies increasingly place pressure on themselves to improve best practices for corporate governance with the goal of enhancing their relationships with stakeholders. The largest attraction for companies to direct some of their attention on sustainability is that it ultimately improves their ability to thrive and prosper in the long-term.

On October 31st, Morninstar launched a new and more advanced Sustainability rating so that it becomes easier to identify a high or low risk ESG portfolio (Davide Pelusi, Morninstar Italia and Iberia).

MSCI, another world’s provider of indices sees the future as becoming increasingly ESG-focused. ESG investing is now the fastest-growing part of MSCI’s operations, and Henry Fernandez, its chairman, is on the record as saying: “MSCI is obsessed with becoming the world’s biggest supplier of ESG tools… there might be a point where MSCI gets defined by ESG’.”

Moreover, BNP Paribas recently announced that it has transformed its entire active funds range to be 100 percent sustainable: one of Europe’s largest financial institutions is now an ESG-only investor.

 

The momentum seems unstoppable, and the growing importance of ESG to investment decisions is uniform across developed and emerging markets: demand for corporate responsibility and disclosure is a global requirement for investors in emerging markets and developed markets in equal measure.

 

So, the practicalities of dealing with ESG issues can be a headache. Reason why, here we have a few top tips that IR professionals should heed.

Few things to know and do on ESG:

  Annual reporting is not enough 
It can and does form the foundation of a conversation and engagement with investors, it’s historically been one of the most effective levers to encourage the company or board to take action or have the appropriate discussion to be able to then report externally. IR should watch for and engage on integrated reporting and further disclosure conversations to bring context and insight both internally and externally. 

  Funds themselves are now being rated on ESG  
For a corporate IRO this adds a layer of context to how ESG ratings are being used downstream, is a part of the bigger picture on integration and evolution of expectations of ESG performance and shifting commercial landscape in the market. Note the three big credit ratings firms are also significantly upping their ESG capabilities and offerings across assets.

   IROs can take practical action
IR is the best place to get the full picture on ESG with investors and the market. IROs can integrate that into current narrative and shareholder strategy appropriately and ensures effective delivery and co-ordination of efforts and priorities on ESG. For instance, on that basis:

  • Apply IR science to the problem. Map and get to know top shareholder ESG teams and their current thinking on your company, sector and broader market;
  • Know your ESG themes in context of the investor. Not the same way as you might tell your story internally or other external stakeholders e.g. policy makers. Any emphasis should be context specific;
  • Don’t assume negative intent when an ESG team engages. They want the company to get this right, have the best interest of the company in mind and will tend to take a collaborative approach.
  • The ESG lens is on a broader scale. ESG teams work across all asset classes, with all fund managers and across all strategies and markets.  Asset managers and owners are on the receiving end of evolving expectations, disclosure and policy legislation on ESG and sustainable finance that can and will have a knock on effect. Keep an eye on the radar. Expect to start seeing conversation on impact measurement and the UN SDGs.

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