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ESG is changing investor relations: here’s how

Environmental, social and governance (ESG) issues are changing investor relations says TPB’s Business Development Lead, Fiona Donnelly, as she reveals what the key changes are and reflects on their impact for investor relations teams in Hong Kong.

As we approach the end of the busiest time of roadshow season, those involved in investor relations in listed companies are likely to have had a particularly exciting trip.

Extreme weather events, Greta Thunberg, profound scientific research reports, anti-billionaire rhetoric, expectations of more disclosure on non-financial matters and more have sensitised investors to the very real risk and opportunities that environmental, social and governance (ESG) matters pose to the bottom line and long-term financial viability/investment attractiveness of a business.

While at the same time, conversations with investors are showing their increasing realisation of the role they play in directing capital to support urgent global initiatives such as the Sustainable Development Goals, and the intensifying competition asset managers’ face to win and keep mandates that have a stronger ESG pillar, investors’ needs from their investee companies are changing.

The changing needs are affecting all those involved at the interface of the investor relations function – including Board members, C-suite, as well as investor relations teams themselves.

But what are the changes? At TPB, our latest analysis of leadership conversations, client projects and research reveals three top for investor relations:

Wanting more and different data
As investors consider and evaluate more non-traditional and non-financial aspects in their invest/hold/divest decisions, they are seeking more ESG data to analyse and base their decisions upon.  Where to turn to for reliable non-economic data and how to reconcile any differences in data obtained from different sources is causing consternation.

Needing more and different analytical skills
This inquisitiveness brings challenges to investors as they get involved in topics that they are needing to learn about fast, and then work out how to price and evaluate in their models.  For organisations that want to more firmly align their portfolio to ESG criteria – it is, a step change for example, for Investment Committees to discuss and quantify social factors like the ethics of targeting certain food categories to children, or the impact to the business of not-adopting a waste management strategy.

The rise of the shareholder activist
Depending on the significance of an investee/potential investee to an investor, it is becoming more common for investors to keep in more regular contact with their investments.  And this can range from discreet, private dialogue on a particular issue to a full-on public policy engagement to try to effect a change they wish to see.  Consensus is shareholder activism is on the rise.  But more discreet influence is also not unusual – investor’s ESG goalposts are changing, with the knock on being investees need to comply or risk divestment.

So if this direction of travel is indeed the road forward for investor relations, what is the starting point…

 

What Hong Kong issuers are presenting to investors today

Judgement by presentation deck is always risky as it omits what is said, either in spoken remarks in presentations or in questions raised by/dialogue with an audience. But if you take the view that all material items will be included on at least one slide in such decks, it’s interesting to review investor presentations.

The Hong Kong Investor Relations Association has over 40 Hong Kong issuers nominated for Best Investor presentation material in 2019. Not surprisingly, regardless of the length of these presentations (which range from 15 to 117 pages) typically this material will cover results highlights, financial review, business review and Q&A. Basically a reportage overwhelmingly anchored in financial analyses and possibly tipping its hat to governance issues, that being an investors’ favourite yard stick and proxy for judging various qualities.

Given the shifts mentioned earlier, it’s even more interesting to note what’s not included in these presentations.  We highlight four areas that stood out:

  1. Only about one quarter of nominees mentioned, to any degree, their approach to ESG/sustainability. Even fewer disclosed related goals and results.
  2.  A different one fifth of nominees to the above mentioned environmental or governance awards – it seemed that disclosing these rosettes awarded by third parties are meant to give investors all the reassurance that they require on the awarded topic.
  3. Only one company mentioned the SDGs at all, and how they had selected and were aligning sustainability efforts to this global initiative. This is a missed opportunity considering that recent research found that 80% of their sample of asset owners and managers, had already or were planning to align their investment frameworks to the SDGs.
  4. While only seven of TCFD’s over 500 signatories are in Hong Kong, not all are listed, so the fact that only two of the nominees mentioned TCFD is not a surprise.  TCFD’s appeal is often its move towards disclosures of the forward-looking scenarios relating to climate change that show financial impact.  Parking TCFD specifically, it’s surprising how little information is offered in investor presentations on issues of the future, particularly relating to environment and social matters.

So what does that mean?

We believe that Hong Kong investor relations professionals will be under pressure to change their investor presentations from their current mix of content. We consider there to be an increasing gap between what investor relations is offering investors, and what investors are seeking.

In anticipation of this change, we suggest investor relations functions evaluate and address as necessary the following areas:

Know your audience. 
Not all investors will share the same topics of interest and priority, so learn what your most significant investors are likely to care about and make enquiries about. In a recent global survey of asset owners and managers by BNP Paribas, data was found to be the top challenge to the greater adoption of ESG across their portfolio. A total of 66% respondents indicated concerns over the quality of data, conflicting ESG indices and data not supporting effective scenario analysis. Listening, tracking and having empathy to their view of the world will help stave off surprises and assist investor relations explain their business in a way that is aligned to what is important, useful and helpful to investors.

Understand the issues
On top of what the individual investors want to know about, investor relations people should become more versed and understanding of the environmental and social issues that are material to their company’s bottom line. They should be able to speak to those topics that are analysed to be of significant importance to the business.  This means building bridges with those responsible for developing such materiality analyses so that they can learn and stay abreast of sustainability issues and their developments. This could also require investor relations to understand new topics and terms and being able to translate and bridge investor and sustainability worlds, perspectives and language.

“Investors are looking at the materiality,” commented Erika Leung Rodriguez, Sustainability Advisor, at TPB’s Breakfast with Purpose in Manila, “We see the financial impact when we look at what is material. You can talk about all the good things you’re doing, but if these are not material, then these are not useful.”

Support the leadership
Better equip Board and senior leadership team to understand sustainability particularly from the viewpoint of the investors. This shouldn’t be too much of a stretch for the Board in particular, as they have overall responsibility for ESG matters. Investors often want access to the nerve centre of an enterprise, so be on the front foot and have these individuals well prepared and practiced to speak to the material environmental and social issues. In addition to traditional investor presentations, investees can expect more frequent and different types of engagement and collaboration with investors.

“Boards are ultimately responsible for environmental and social policies, compliance and performance,” commented Alan Armitage, Managing Director of Hong Kong business consultancy tmr.today, “and so they need to ensure that they know enough to manage and delegate these topics. For some NEDs/INEDs/EDs, this could require investing time and effort to upskill.”

 

This is clearly a dynamic area, with big investor relations challenges. As the conduit between investors and the Board, it’s crucial that investor relations professionals understand the impact of ESG issues on their business, and are able to clearly communicate ESG strategies, progress and challenges both internally and externally. Failure in either of these responsibilities will lead to a shorter-lived career, if not business.

 

 

TPB helps define ESG priorities that are right for your business and align investment activities to them. We also help investor relations professionals and Boards to better understand ESG and its importance to their business and investors. Contact us for an informal chat about how TPB can make your business stronger.

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