Your Social Communications Are Missing the Mark: A Framework for Speaking Investors’ Language

Written By Steve Adams, Senior Director

July 28, 2021

If you spent more time talking about social issues in 2020 than ever before, you’re not alone. 

In the wake of unfortunate societal events like the death of George Floyd, Facebook’s data privacy violations, and Foxconn’s abhorrent working conditions, 2020 became a landmark year for corporate ESG communications, and the “S” factor in particular.

Not surprisingly, there has been a major uptick in the mention of social keywords by corporate issuers at investor events. But, new research seems to show that investors aren’t happy with what they’re hearing. According to an EY study, 98% of investors review companies’ nonfinancial disclosures; and roughly two out five of them say that these disclosures are simply not enough to adequately understand disclosing the social risks of their businesses.

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It’s not the what, it’s the how.

It’s not that corporate leadership and IR aren’t talking about the right issues. Research, including this LexisNexis study and this BNY Mellon survey, show strong alignment between what companies are increasingly discussing with investors and what investors want to hear. In other words, companies are doing a good job of addressing all the hot topics – namely diversity and inclusion, human capital management, and data privacy initiatives.

But, it’s the how companies are speaking on these topics that isn’t quite resonating with stakeholders.

Investors don’t want to hear platitudes or positive statements of intent, instead they want to hear which social issues have the potential to have the biggest risk on their companies, and what specifically the companies are doing about it. Companies need to frame up social discussions in risk mitigation terms. Otherwise, they miss the opportunity to clearly articulate and demonstrate the full value of the social policies they have in place.

Adopting a Risk Communications Framework

The first step in discussing social topics in a way that resonates with shareholders is to spend less time talking about how great your initiatives are, and more time focusing on how those initiatives reduce and mitigate risks.

Using a simple framework that addresses the three main areas of risk – strategy, execution, and outcome – can help you do this effectively. Here’s how it works:

  1. Strategy Risk.
    • A strategy risk is one that manifests in the planning or preparation phase of an initiative, often due to a misconception or misunderstanding. With a diversity and inclusion initiative, for example, one major strategy risk involves improving the racial demographics of a company – but at the wrong level. If diversity is especially lacking among senior leadership, hiring entry-level employees fails to remedy the problem.
    • In this case, it’s important for companies to have a clear strategy that defines the appropriate level for hiring and to share the specifics of that strategy with investors. Doing so helps investors feel confident that the company is setting itself up for success.
  2. Execution Risk.
    • An execution risk shows up in the enactment stage of an initiative and is usually the result of unclear expectations around ownership or process. Building on the D&I example above, the company may hire diverse individuals, but the initiative still fails if those individuals have the wrong skills, come from an unrelated industry, or lack relevant experience.
    • Companies must execute their D&I policies in ways that ensure the right candidates are identified. And they need to clearly communicate with their investors that they are not just checking a box. Be forthcoming about all that you are doing to truly benefit from a talent base that is not only qualified, but that also brings a diverse perspective to the work and to the organization as a whole.
  3. Outcome Risk.
    • An outcome risk may show up in the end result of the initiative. It is most often caused by confusion regarding the objective of the program. Hiring a homogenous subsect within a diverse group is an example of an outcome risk. For instance, if the company brings on a significant number of persons of color, but they are all male, then the initiative has only succeeded against one diversity dimension.
    • By explicitly defining the desired outcome of an initiative upfront, the company can safeguard against this type of failure and, at the same time, reinsure investors about the ultimate effectiveness of its policies.

Avoid missteps and give your investors the confidence they need.

When it comes to the ‘S’ in ESG, merely talking the talk isn’t enough to bring investors on board. A shift in language must be accompanied by a corresponding shift in processes and policies. And the better you can communicate with investors as to how your policies or processes acknowledge and mitigate all three types of risks, the greater confidence your shareholders will have in the viability of your initiatives.

Need help improving your communications with investors? Reach out to learn how Clermont Partners can bolster every element of your ESG communications strategy and help you provide the critical assurances your shareholders need.

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