First, the good news: More companies are paying attention to ESG and starting to get serious about making ESG communications part of their strategic investor relations plans. In fact, we’re regularly taking calls on the subject. Given trends in the U.S. investment landscape, projections for significant inflow into ESG type strategies over the next several decades, and growing evidence from academic studies that ESG works, this is critical for companies that wish to maximize their valuation long term.
Unfortunately, a lot of misconceptions continue to exist around the topic. As a result, many companies are reporting on ESG in a vacuum. In other words, the information they are providing does not necessarily match up with what rating firms and investors want and need to see. And ESG scores are suffering as a result.
So, even if you’ve invested in creating a beautiful, glossy ESG or sustainably report, you’re probably not “done” when it comes to ESG. Here are several of the major fallacies we continue to run into around the topic, and some advice for how to create an ESG communications plan that will satisfy rating firms, investors, and your board.
Myth 1: The questions we’re being asked aren’t relevant to ESG.
Oh yes, they are.
Company leaders are sometimes confused or even annoyed by the questions included on ESG surveys. Or they don’t see how they relate to anything that’s important to their business, board, or investors. But every question has a purpose and an effect on E (environmental), S (social), or G (governance), even if it’s not entirely obvious. For example, inquiries into your workforce stability and training practices go straight to your “S,” and they help uncover whether your company is as risk for high turnover, which can lead to less productivity or higher part-time labor costs. Questions about customer data security also impact “S.” Your answers indicate whether or not your company has the right policies in place to reduce the risk of a breach.
Myth 2: You’ve got two slides about ESG in your investor roadshow. So, you’re covered.
Companies that are taking the initiative to talk about a couple of ESG factors that they consider most relevant often get a false sense of security and think they are ahead of the game when it comes to ESG communications. But the reality is, rating firms consider hundreds of ESG factors. While not every one of these factors will be relevant to your organization, you need to keep in mind that your scaled-down version of ESG might not be broad enough to satisfy the rating firms or the rapidly growing community of ESG-minded investors. Consider embracing a standard such as GRI, SASB, or MSCI—something that shows the Street that you’re on a journey and serious about expanding your ESG horizons and considering all the risk mitigation principles that the standards cover.
Myth 3: Our performance isn’t up to snuff on some factors. So best not to talk about them.
To the contrary, these are the issues about which you need to be most vocal.
Publicly acknowledging any weak spots and explaining your plan and commitment to fix them goes a long way with the rating firms while boosting investors’ confidence. One expert recommends reviewing a company’s performance against the standards (GRI, SASB, MSCI) on a time series basis. In other words, it’s sometimes more impactful to show improvement over time rather than a single point-in-time success.
Myth 4: Our top brass doesn’t need to be involved.
Including a chairman’s, board’s, and/or CEO’s statement in your ESG communications strategy gives it heft and shows a top-down commitment to your ESG policies. You need your leaders on board with your efforts and fully committed in order to make any real progress on improving areas that may be lacking. So, their statements need to be more than lip service. Leaders need to be actively committed. And demonstrating their engagement is essential to gaining investor confidence.
Myth 5: If we don’t talk about it, no one else will.
Sometimes executives believe that if they don’t respond to the rating firms’ surveys, then the firms can’t report on their ESG status. But in fact, MSCI says that about 65% of the data it uses to rate firms comes from sources other than the companies themselves. Participating in the process and providing the data requested in a timely manner is not only the responsible thing to do; it’s smart, too. It lets you share the real facts about what your company is or is not doing rather than allowing the rating firms to surmise that from sources that may be less than accurate.
Myth 6: The final scores are the only thing that matters.
It’s important to remember that, just like a sell side report, ratings are an opinion, not an objective standard. Active ESG investors don’t blindly follow the scores; they look at the inputs as well. It’s your job to make sure those inputs are accurate and wholesome by being responsive to the firms requesting data (see Myth #5 above). In addition, the more data you provide from the beginning, either in response to surveys or in your regular investor communications, the less likely you will find yourself needing to do some fast talking or explaining in investor meetings later on.
Myth 7: ESG is a passing fad – it’s only a marketing ploy.
Believe us, it’s not.
BAML estimates that inflows into ESG type strategies over the next few decades could be roughly equivalent to the size of the S&P 500 today. Trends in the U.S. investment landscape indicate that trillions of dollars could be allocated to ESG-oriented equity investments, and thus to stocks that are attractive on ESG metrics. Assuming an increase in wealth in the U.S. of around $4tn per decade (in line with historical trends), as well as the transfer of $30-$40 trillion of financial and non-financial assets from baby boomers to millennials beginning in the late 2020s, inflows could become parabolic. According to the 2018 U.S. Trust Wealth and Worth Survey, 77% of millennials either own or are interested in adding exposure to “impact investing” vehicles, which — assuming a conservative 30-40% of their wealth is invested in equity ESG funds — would equate to $15 to $20tn of asset inflows over the next two to three decades.
Given these stats, we can’t think of any company that can afford to ignore ESG. Can yours?
Ready to take your ESG communications plan to the next level?
Clermont Partners can help. Our experts have been involved with ESG communications best practices long before they became mainstream. Learn more about our ESG program. Or contact us today to discuss how we can help you improve your ESG rating accuracy and ensure greater investor understanding of your company’s ESG efforts.