ROWAN CLARKE, Investor Relations

At FIRST Advisers, we are increasingly offering advice to companies on how to best position themselves to meet investor demand for ESG accountability. What was once seen as a topic for socially conscious asset managers, is now widely adopted by investors.

ESG was a hot topic at the US based National Investor Relations Institute’s (NIRI) Virtual Conference in June. Several NIRI speakers addressed the evolving ESG landscape and gave some useful advice for company’s starting their ESG journey. In this article, we outline a few of the recommendations provided.

Recommendation 1:

Establish a framework of good governance

Board oversight and a robust governance framework for disclosure is crucially important. For a company to be sustainable over the long term, the board must explicitly prioritise ESG issues as important. This can involve forming a standing committee to regularly review ESG issues or including ESG as part of an extended Risk Committee. ESG must be viewed as a standing agenda item for the board.

Although Governance is one part of the ESG equation, it also informs the Environmental and Social parts as well. When investors talk to companies, they want to understand how leadership is positioned to navigate the ESG challenges over the long term. Covid-19 has blurred the lines of ESG and has shown that what is considered important can change quickly. Quality leadership ensures that companies are well placed to succeed and weather evolving ESG challenges.

Recommendation 2:

Conduct a materiality assessment

When embarking on the journey, it is important to know what a company’s real ESG risks are and what are perceived risks. A materiality assessment of ESG issues allows a company to stay focused on those ESG issues that are important to them. This is what investors want to know from the company.

Companies are advised to break an ESG program down into bite size pieces and address those issues that can be tackled quickly in the first year and delay what will require a longer-term approach. Companies may be doing far more than they initially realise to address relevant ESG risks, so finding the low hanging fruit and disclosing this progress is a good step.

Recommendation 3:

Maintain good disclosure practices

As a rule of thumb, it is advised that ESG disclosure should be reportable, repeatable, and auditable. ESG disclosure must also be transparent. It is not enough to simply have the relevant information available on a company’s website. If investors have trouble looking at a company’s website, if they have difficulty reviewing the relevant information because it is written in a challenging way or presented in a way that reads differently from reality, it will only serve as a red flag to investors. Honesty is the best policy when it comes to ESG disclosure. Companies are advised not to make the current situation a better case than it really is.

If an ESG issue is important to the company, it needs to be disclosed. There are other non-material ESG issues that can become material over time, particularly for the Social part of the equation. If the company is having a conversation with investors and cannot disclose something at the time, it is important to get back in touch with those people when something has been announced on the matter. Disclosure is only as good as the conversations that are had with investors. Giving them the information that they need on the issues that are important to them, in a timely fashion, is key.

There are about 600 ESG rating firms that assess how companies manage ESG risks. The lions’ share of these are irrelevant to companies and investors. The Sustainability Accounting Standards Board (SASB) provides companies with a useful framework for starting to identify ESG issues that are relevant to financial performance across 77 industries. The Taskforce on Climate-related Financial Disclosure (TCFD) provides a framework to report on climate-related financial information and is widely accepted by investors.

Recommendation 4:

Don’t be intimidated by ESG

Disclosure and engagement are important to making a fulsome assessment of how companies are overseeing ESG risks and capitalising on opportunities. Much of the conversation will focus on the company’s journey. This includes the steps taken to put the right infrastructure in place that will help companies understand what ESG issues are material, where data will be collected to assess how companies can drive progress, and what the company’s leadership looks like along with the internal channels of communication. Investors will want to know the lessons that a company has learnt and the challenges they have faced to address ESG issues.

In having these talks, investors know that no two companies are the same. What they want to see is the company making progress to resolve material ESG issues, not that ESG risks are being resolved prematurely.

Conclusion

With leading asset managers like BlackRock making bold aspirations to align their investment mandate to achieve net zero emissions by 2050, and US Congress introducing 267 bills specifically on ESG and climate change between January and May, it is fair to say that this is not a passing fad. These recommendations are positive steps that all companies can make to address questions on ESG from investors.