Sustainable Investing: The Growing Impact of ESG
Environmental, social, and governance (ESG) investors were once perceived as an element of activist communities working to influence distinct aspects of company behavior. Over time, the focus of ESG investors has broadened as institutional investors have identified ESG topics as issues that impact company performance and value. In fact, according to the Global Sustainable Investment Alliance, there has been a 25% increase in assets managed under responsible investment strategies for a total pot of $22.89 trillion since 2014.
The growth of this type of investing creates new challenges for investor relations officers (IROs). During the fall MAPI Investor Relations Council meeting, over half of our members identified engagement with ESG investors as a challenge they face. One member asked how to deal with the sheer volume of requests, and another expressed frustration with different methodologies. This field is large and complex, the funds examining these issues are clearly growing, and yet, there is no single, consistent methodology for company evaluation. There are many standards, programs, data sources, and indices in the market, but most institutional investors have unique interests that drive their inquiries. Over the coming months, the MAPI Investor Relations Council will look at how IROs can use their time wisely to address ESG inquiries. In this blog post, I will share two critical starting points as shared with our group at the fall meeting.
Maintain lines of communication
Investment management companies use upwards of two dozen different data sources to research and analyze the ESG factors of corporate performance. They comb through public disclosures which often are limited to statutory reporting requirements as many companies do not develop nor share Corporate Social Responsibility (CSR) reports. All of this analysis and review may be going on, and you may not even know your company is being analyzed. How can you influence an investor's perspective on your company? As was shared at our meeting last month, you can influence and engage with the investor communities in two ways:
- Be proactive and share the narrative of your company's ESG activities in a CSR report.
- Engage with investment managers when they reach out to you. Creating and maintaining lines of communications will help you provide context around your company and its attractiveness to investors.
As ESGs continue to grow in influence, it is critical that companies find proactive ways to share information on their social responsibility efforts.
Governance, governance, governance
It is becoming ever more evident that while ESG investors focus on three areas, corporate governance has greater scrutiny than environmental or social factors. Institutional investors feel so strongly about the role governance plays in long-term value creation that a group came together in January 2017 to create the Investor Stewardship Group (ISG). The ISG is a group of institutional investors and global asset managers who represent over $20 trillion in U.S. equity markets. They launched two products in January, the first a Stewardship Framework that outlines commitments for institutional investors. In other words, what are the practices institutional investors should follow on issues such as proxy voting? In tandem with the stewardship framework for investors, they launched the Framework for U.S. Stewardship and Governance, a "framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct."
This framework goes into effect January 1, 2018, which will give U.S. companies time to adjust to its standards in advance of the 2018 proxy season. The framework consists of six principles to apply only to U.S. listed companies. You can view all six principles on the ISG website, but it is important to point out principle four. It reads, "Boards should have a strong, independent leadership structure." The combination of the CEO with the chairman of the board was identified as a significant red flag for ESG investors and may impact investment decisions. The ISG framework provides a valuable tool for IROs who are seeking to drive investment and engagement with their companies.
At the end of the day, ESG investors are using these issues to assess how they impact your business performance. Understanding how these investors are looking at ESG issues will help your company better communicate your current activities and adjust your strategy to deliver additional value. The framework set out by ISG provides a guide for looking at your corporate governance, and as we will look at in the future, the guides for environmental and social factors are not as clear-cut.