There are nine reasons why companies should be pro-active rather than re-active in their communications with SRI investors:
- SRI investment has grown and is still growing
- Sustainability is of growing relevance to company strategy and management
- SRI is starting to interest ‘mainstream investors’
- Risk management – SRI investors are a good radar screen
- SRI investors are valuable reference points
- SRI support strengthens a company’s mandate for progressive action
- SRI investors are model investors and supportive stakeholders
- Stronger competition for SRI analysts’ time
- ‘Pro-active’ is always more efficient than ‘reactive’ communication
SRI size and growth
SRI has grown to €5 trillion in Europe (Dec’09) and $3 trillion in the USA (Dec’09) and has shown significantly above market growth in recent years.
In fact, over the past ten years, SRI has shown steady and stable growth on all measures (AuM, funds offered, analysts employed, research capacity etc) – even through the ravages of the deflating tech bubble and more recently the credit crunch. ‘Sustainability’ and ‘responsibility’ appear to be the only areas of secular growth in the investment world at present. (Further details on SRI market size and trends can be found in our SRI Primer report)
Growing relevance to company strategy and management
Sustainability issues are becoming relevant to corporate strategy and to ‘mainstream’ investors - The demands of governments, customers and consumers are steadily tightening around social, environmental and economic factors and making them increasingly important determinants of company strategy.
Companies, of course, have a responsibility to keep their investors appraised of emerging trends that may be of significance to their business. It is also in their interests to be the ones that educate investors about these trends rather than allowing other potentially-less-accurate sources shape investors’ understanding.
Interest of mainstream investors
Allied to the relevance of sustainability issues to corporate strategy is the growth of interest from ‘mainstream’ investors. Although at early stages, more sophisticated ‘mainstream’ investors are starting to recognise the impact of specific environmental and social issues on the long-term value of stocks. They are increasingly working with their SRI colleagues (in a way that simply didn’t happen three years ago) to scan the horizon for other issues and for companies’ responses to them.
It is important to note that their interest is highly unlikely to manifest through broad-based interest in a company’s CSR report or sustainability strategy. It is much more likely to be seen when a single specific environmental or social issue encroaches on an existing valuation driver.
Risk management
Over a sustained period of time, SRI investors have demonstrated an ability to scan the 'issue horizon' and identify social and environmental factors that will become relevant to companies. Although these investors don’t always get the timing or the materiality of issues correct (they sometimes do!), a number of companies have found that active engagement with these investors can be a useful risk management too. In a global economy that is increasingly defined by social and environmental factors.
Strengthens companies’ mandate for action
The support (especially if explicit) of SRI funds and their mainstream counterparts legitimises environmentally- or socially-progressive action by companies. This is particularly important if such action is likely to take a company away from its business-as-usual comfort zone. Smart operators within companies pro-actively use the engagement of investors to reinforce the sustainability messages that they promote internally to managers and colleagues.
Valuable reference points
Regressive companies see the SRI investor base as just another set of (pesky) stakeholders whom they need to be seen to be consulting with. They reluctantly accept a certain duty to report to them but regard them as unrepresentative of and relevant to mainstream investor opinion.
Progressive companies, by contrast, see SRI investors as a unique set of stakeholders with a specific and useful perspective that combines sustainability understanding with a disciplined demand for financial returns. They see them as critical touchstones for the development of sustainability strategy.
These progressive companies regard an annual round of meetings as an excellent opportunity to evaluate their progress against well-considered and relevant standards and to re-engage the support of some highly desirable shareholders.
Model investors and supportive stakeholders
In many respects SRI investors behave in the way that most companies wish that all their investors behaved:
- They show interest in the widest aspects of company activities – not just the narrow financial parameters – and understand that corporate success involves a balance of many wider factors
- They conduct thorough analysis before investing
- They are longer-term (stickier) investors – partly because their own clients are
- They are actively interested in and communicative about companies’ strategies and plans – they give good feedback
SRI investors are arguably the antidote to short-termism in financial markets. So, at a time when other investors have showed too few of the qualities, it is a little surprising that SRI investors are not being publicly feted as models for the future of capital markets. Perhaps they are modest too?
Unlike a number of sustainability-focussed stakeholders (e.g. pressure groups), SRI investors are inherently supportive of companies. As the vast majority of European SRI investors work within conservative investment institutions, they can be used by companies as useful points of reference – even when critical, they will be constructive and discrete.
(As an important caveat, there is a very small minority of SRI ‘investors’ for whom corporate change is the defining objective which may come above the financial best interests of the company concerned. This small group are more likely to use publicised shareholder resolutions than behind the scenes dialogue and should be treated with care.)
Stronger competition for SRI analysts’ time
Ten years ago, SRI investors would chase companies hard for any information they could supply on sustainability performance. Today, however, much more such information is supplied by many more companies. Combined with the higher levels of independent research, this means that SRI analysts are now overburdened with information from and about companies rather than underserved.
Companies that want their sustainability performance to feature in the way that their stock is valued have to work for SRI investors’ attention in the same way as they work for ‘mainstream’ investors’ attention.
‘Pro-active’ is more efficient than ‘reactive’
Although it is widely accepted that pro-active management of stakeholder communications is more efficient than a re-active approach, some companies doubt that this is true for relations with SRI investors. They suspect that supplying information to SRI investors will perpetuate and increase the demand for such information. In most cases, this is simply not true. The longer-term benefits of developing a controlled and constructive relationship with interested shareholders far outweigh any small increase in information that may be demanded in the early stages of this.
