3 ESG Topics Investors May Ask You About This Year
With the 2022 proxy season approaching, public companies are passing final committee charter updates, publishing new disclosures, and making sure their ESG stories are as comprehensive as possible before filing the proxy. However, detailed disclosures are merely table stakes when it comes to engaging with investors on ESG topics. Company leadership and investor relations professionals must also be prepared to demonstrate their understanding of the company’s ESG strategy and disclosures, especially when it comes to the most buzzworthy ESG topics.
Here’s my take on the ESG themes most likely to become topics for investor engagements this year.
1. Establishing a climate transition plan
Across institutional giants as well as rating agencies, net zero is a huge topic of conversation. But the current discussion has a greater level of nuance than in the past. Growing consensus points to various pathways and tools for reaching net zero, rather than a single route. Companies will ultimately need to develop a plan that works for them, based on a variety of factors including current emissions, industry, and corporate footprint. Similarly, investors will need to carefully consider how to utilize different tools and strategies to decarbonize their portfolios, rather than relying on a divestment-only approach. For example, while there is no doubt the transition away from fossil fuels needs to happen as soon as possible, the way to achieve that end is probably a mix of divestment, engagement, innovation, and investment in companies with emissions reduction plans that align with a 1.5◦C future.
That last point is crucial, and it means that setting a 2050 target alone is not enough. Though 2050 is decades off, the work has to start now, and perhaps the biggest to-do is to establish a sound plan. Both BlackRock and State Street have expressed clear expectations for companies to establish quality transition plans, and State Street will engage with significant emitters on climate transition plans this year. Next year, State Street will begin using ‘no’ votes for companies that aren’t meeting established expectations. And while these two institutions may be the most vocal, they aren’t alone in their thinking. My expectation is that we will see more and more institutional investors fall in line behind BlackRock and State Street in their demands for greater transparency in the transition to net zero.
Just as investors encourage transition plans, they are also supportive of TCFD reporting. TCFD is expected to influence the upcoming SEC reporting requirements in the U.S., and alignment will go a long way toward assuaging investors’ concerns about a company’s climate risk profile. Companies that aren’t currently TCFD-aligned should begin developing the internal structures to facilitate TCFD reporting right away.
2. Making progress on diversity disclosures and actions
Diversity has become an important point of focus for investors in recent years, and this is not a trend that’s likely to change any time soon. Rather, it’s becoming more apparent that qualitative information alone will no longer satisfy investors. They want to see numbers, as without quantitative data, it’s impossible to measure progress. Disclosure of EEO-1 reports or diversity data aligned with EEO-1 is not an uncommon ask; State Street now expects it from all S&P 500 companies and BlackRock is asking all companies to disclose this information as well. Even small-cap companies should be prepared to field questions on whether they disclose EEO-1 data. If not, they need to speak to what they’re disclosing instead, and why.
Board diversity strategy is seeing more and more airtime as well. From the diversity requirements imposed by NASDAQ to State Street’s ask for companies in major indices to have Boards with at least 30% female representation by 2023, investors’ requirements on this topic are becoming increasingly commonplace. Developing a strategy for increasing Board diversity is key.
Beyond stock exchanges and investors, rating agencies also focus on Board diversity. Notably, ISS’s Governance Quality Score has recently added new diversity factors, including an indicator that looks for Board gender diversity policies with targets. When such a policy exists, it may be found in a Sustainability Report or website. In the past, such a policy was rare; however, with the elevated focus on Board diversity and investor demands for visibility into companies’ strategies and action plans, this may very well become a more common disclosure.
3. Taking care of talent
In a time when labor is in short supply and the fight for good talent has become intense, companies are increasingly looking for ways to attract, engage, and retain talent to gain competitive advantages in the market. In other words, taking care of talent is not just the right thing to do; it’s an important business move as well.
Finding quantitative measures related to talent retention and development is key for companies to strengthen their human capital management (HCM) processes. It’s also something more investors want to see. For some time, investors have been asking for turnover rates as a way to track HCM. And while it is not a particularly common metric, yet, that could change soon if turnover rates are included in the SEC’s next HCM mandate. If a company is not ready to disclose turnover rates, then it should at least be prepared to delve into how it keeps employees engaged and the benefits (monetary or otherwise) it offers to enhance retention.
While there is sure to be advancement in this year’s 10-K HCM disclosures, one company that already stands out is CARS.com. The digital automotive dealer publishes a robust human capital section with information around non-monetary benefits, employee participation in development opportunities, DEI programs and metrics, and employee engagement surveys.
Be ready to talk it up.
Already this year, we’ve seen a higher-than-usual volume of requests for transparency and quantitative data related to climate, diversity, and HCM disclosures. As companies look to engage with investors in 2022, executives must be prepared to address their path to net zero and to speak fluently, and in detail, to their metrics and disclosures related to diversity and HCM. If you need help preparing to engage with investors or pulling together the appropriate disclosures, feel free to reach out.Back To Blog