Using ESG (Environmental, Societal, and Governance) criteria to assess important investment decisions is quickly becoming standard practice for investors. How can IR professionals keep abreast of this new trend?
In the last few years, one major business buzzword has given chills to traditionalists in just about every industry: disruption. The wide proliferation of digital technology, along with social and political factors, has caused big changes in everything from the taxi industry to the dating scene, as the use of apps like Uber and Tinder have become standard practice for navigating the modern world.
One aspect of a company’s operations that you might assume to be “disruption proof” is the delivery of value to its various stakeholders, which is exactly the mindset shareholders have used in assessing their investment decisions for years, often turning a blind eye to any and all factors besides profitability.
Recently, however, a new trend has emerged to disrupt the standard operating procedure: an increased focus on ESG criteria to assess investments.
The Rise of ESG
Investopedia defines ESG as “a set of standards for a company’s operations that socially conscious investors use to screen investments”. Essentially, this means that investors (especially institutional investors concerned about the long term potential of their stakes) have shifted at least part of their focus away from the bottom line, instead focusing on more abstract matters like a company’s social ethics practices and environmental footprint.
While this movement comes during a period of increasing investor activism, it’s more than just a matter of oiling a few squeaky wheels for the benefit of social justice, according to ValueWalk. According to the U.S. Social Investment Forum, “ESG incorporation” by institutional investors increased by more than 60% between 2012 and 2014.
These practices show no sign of stopping, either. From March 2016’s issue of IR Update: “According to a CFA Institute survey in June 2015, nearly 75% of respondents said they take ESG issues into consideration during the investment process. This research debunks several common myths and indicates that these investment professionals are seeking ESG products primarily to manage risk, as well as responding to rising client demand.”
What IROs Need to Do
For IROs, operational transparency and image management is more important than ever before. According to IR Update, ESG incorporation is passive strategy, often requiring little to no direct engagement with a company in order to assess performance. IROs should stay abreast of their corporate image by obtaining research from reports compiled by investment research firms like MSCI.
They should also start employing “integrated thinking,” a wholesale approach to inserting ESG practices within the corporate operating and reporting structure. Especially when long-term, institutional investments are in question, major asset managers like BlackRock weigh ESG factors heavily into projections for future performance, so appearances have a value that’s more than just superficial.
In order to put integrated thinking into practice, IROs can take a few basic steps. First, identify what ESG factors potential investors (and competitors) value the most, and take stock of current performance levels. After honing in on possible issues with current practices, capitalize on opportunities to receive acknowledgment for those ESG factors from both internal and external sources. To tackle these goals effectively, you need to prioritize what should be most carefully managed in order to meet or exceed typical industry standards.
Once you’ve done that, you need to align your biggest ESG priorities with your company’s revenue and performance benchmarks. In order to make these practices more feasible for the long term business plan, work to integrate financial performance markers with ESG-centric performance so that the two initiatives are inextricable from each other.
Reach Your Base Better
When it comes to communicating with current shareholders about ESG matters, transparency and proactivity is absolutely essential if you want to stay ahead of trends. This likely requires a more forward-thinking, tech-savvy approach to IR reporting, enabling up-to-the-minute updates so that the company can always control the narrative. In this regard, disruption can be a corporate ally: by taking advantage of social media networks and mobile apps, companies can reach investors before the news cycle does.
(Main image credit: S. Charles/Unsplash)