With the initial shock of the Covid-19 pandemic behind us, companies must look forward to continuing business and their dialogue with investors despite the multitude of uncertainties ahead. What does effective ESG communication look like in the new normal? Here we answer some common questions impacting corporates.
How has Covid-19 affected the drive for standardized reporting?
We think investor demand for greater standardization in sustainability reporting frameworks such as the Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures has only been given a boost during the downturn. Use of these and other reporting guidelines such as the Global Reporting Initiative (GRI) are helping to bring greater standardization to sustainability reporting, focusing companies on reporting against the ESG factors that matter for them and their investors and that will help to drive a sustainable recovery.
BlackRock and State Street Global Advisors are among the growing number of notable investors that have called on companies to use these standards in their sustainability reporting to help better compare companies’ ESG profiles. SASB and GRI have also responded with more collaborative efforts to improve and educate the markets on sustainability reporting and materiality assessment.
Should we consider reassessing our material ESG factors?
While most companies will reassess their material ESG factors every year or two, the events of 2020 have raised the prominence of largely social risk factors including global pandemics and human capital. They have also reinforced the concept of ‘dynamic materiality,’ which suggests that material ESG factors for companies and their stakeholders will evolve over time.
Companies will increasingly need to consider the concept of ‘double materiality’ in their materiality assessments and reporting. This concept, introduced by the EU Commission’s 2017 Non-Financial Reporting Directive, essentially expands the basic definition of materiality beyond financial materiality to consider the company’s impact on society and the environment.
With these developments in mind, companies may want to consider an off-cycle assessment of their material ESG factors to ensure they reflect the new normal.
What types of additional information might investors, proxy advisory firms and ratings agencies be asking for in light of the recent social unrest?
Reporting on workforce gender and ethnic diversity is already best practice in North America and the UK. Recent events in the US have triggered a global response for social justice that has caused investors and companies alike to rethink how they foster workforce diversity.
Investors – They want to see companies pay more attention to diversity and inclusion and report more on related metrics. Some investors may want to know how companies whose CEOs have made statements on diversity plan to back them up with concrete action. In addition, investors want to be reassured that companies have in place recruitment processes that avoid racial biases, as well as see goals, metrics and data to back up these policies.
Proxy advisory firms – ISS, one of the largest proxy advisory firms, has called on companies to disclose information on the ethnicities of their board members and senior executives. Many institutional investors use data compiled by ISS and Glass Lewis to inform their voting decisions. Therefore, a lack of board diversity and diversity disclosure could lead to investors voting against boards that are deemed to be insufficiently diverse.
ESG ratings agencies – You may see Covid-19-specific questionnaires from some of the larger ratings agencies. In addition, agencies such as S&P Global believe social factors could drive more rating actions on areas such as inequality driven by the spotlight being shone on social injustice.
Which ESG ratings agencies and surveys should we prioritize, given our increased resource constraints?
We recommend that companies prioritize data verification and responding to rating agencies that are the most impactful in their shareholder base such as MSCI, Sustainalytics and ISS. If resources allow, we recommend companies consider responding to Covid-19 and diversity & inclusion (D&I)-specific surveys, which help investors better understand how your organization is responding to the crisis.
Should we be addressing ESG issues during our earnings calls, investor day and/or roadshows?
Yes, but the degree to which companies should do this will vary. On earnings calls, companies should seek to focus discussion of ESG factors that are financially material to the company and sector in the short-to-medium term, as well as those that have a legitimate impact on business performance and resilience.
Both the pandemic and recent social unrest have elevated ESG issues such as workforce health & safety, employee pay, supply-chain security and D&I to being considered by investors as more mainstream financial and reputational risk factors. These issues also have the benefit of being relatively well understood by both senior management and financial analysts versus many other ESG issues that may be more esoteric in nature.
We recommend that companies consider using their quarterly calls to provide a brief ESG update and then use at least one of the four quarterly calls to provide more in-depth discussion of ESG and your company’s long-term strategy and to educate your mainstream investors. It is particularly important to show how the company is responding to the crisis, so the calls can allow you to discuss what ESG initiatives are in place to help protect the company’s workforce and community.
Similarly, sharing ESG-related material during investor days and including a page or two on ESG in standard investor roadshow decks provide a great opportunity to update your investors on your ESG priorities and progress. Although this is not necessarily common practice yet, it is an emerging ESG practice that we believe companies aspiring to become ESG leaders should adopt. Even industries where ESG risk profiles are considered moderate, such as financials, can benefit from this practice.
Has the crisis supported the thesis that ESG contributes to a positive return on investment?
Yes, thus far the crisis has only helped to highlight the relevance of ESG and that high ESG performers are being rewarded. While some ESG factors such as cost reductions from implementing energy efficiency initiatives can be quantified, many ESG factors are non-financial and long term in nature and inherently difficult to measure. Nevertheless, evidence is increasingly showing that higher-rated ESG companies are performing better than lower-rated ones. Thematic ESG investing continued to grow during the first half of 2020, despite the extreme market volatility during that period.
In addition, during the onset of the pandemic, the MSCI ESG Rating and Trend Leaders Index, comprising companies with the highest ESG ratings in each sector, outperformed the MSCI broader market index. Between February and May 2020, ESG stocks included in this index had fully recovered their losses by the end of April.
Companies quick to adapt to this new normal in ESG communication will benefit from better engagement with investors and a more sustainable future.
Heather Keough and Chris Plath are senior ESG consultants and Miguel Santisteve is the founder at Leaders Arena. This article originally appeared on the Leaders Arena blog here.
