How long should an investor spend preparing for an annual sustainability update meeting with a company that they hold? + WHY?
Last week, SRI-C issued a poll question via LinkedIn here on this topic.
We received 89 answers from our 'connections' across LinkedIn - comprising answers from investors, research providers, listed companies themselves and industry experts.
The results were interesting; the explanatory comments provided were even more interesting. Do join the ongoing discussion via the thread here.
From our respondents:
- 5% thought investors should spend 15 minutes preparing for such a meeting
- 33% thought an hour was the right amount of time
- 46% felt that 4 hours was appropriate and
- 16% thought that more than 8 hours was required.
The average expectation was 3hr 45 (or 2hr 45 if we exclude the outlier top and bottom categories).
My thoughts: An hour is enough ...
... so long as your research activity is effectively set up
I agree with the 'one hour preparers'.
As with everything in investment-research, the key to impact is being efficient in the use of research time. With this in mind, my answer is that an analyst should spend ONE HOUR on meeting preparation for the following reasons:
- In the question, I defined the company as being an existing holding so we have to assume that the investor has already articulated an investment thesis for the holding and has identified the primary respects in which sustainability might affect the key value drivers of the business.
Then, I contextualise my one-hour answer with the following:
- The analyst should have defined sector coverage - so already tracks events and newsflow in the sector (including that which touches the companies on an ongoing basis. (If the investor organises analyst coverage according on an issue-based or geographical basis, it will probably take them 3x as long to get prepared)
- The investor has already established a competent research supply chain that comprises:
- 1 x baseline view of the company's general sustainability competence (call it an 'ESG rating' if you like) and highlights gaps between this and expected practice
- 2+ x sell-side firms that can contextualise sustainability exposures and management practice within financial context and investment implications
- 2 x specialist research providers that provide in-depth or counter-consensus views (who may be 'ESG agencies', 'sell-side brokers', 'credit ratings agencies' or others)
- The investor has established investor-related parameters for their engagement with the company - which is to say that they are likely to focus on the two or three issues that are most financially-material, most impactful on sustainability and of most concern to their clients. (Also, the investor has articulated for themselves, a clear line-of-sight between each issue and materiality / impact or concern.)
- The company will bring to the meeting a presentation that describes its business, its strategy and the key sustainability issues that it faces and how it is managing these. If this isn't in place, preparation will take longer ... but it isn't really the investor that should be doing this, it is the company.
- The analyst is not expected to cover > 100 companies or > 4 (reasonably-aligned) stockmarket sectors. Any investment firm that expects analysts to range more broadly than this isn't putting a realistic level of resources into place.
If these conditions are all in place ... and it is a big 'IF', then we would expect the prep time for the meeting to encompass:
- 15 minutes - for a refresher on the company's core business and strategy
- 15 minutes - to check in with key research suppliers for their latest research on the sector and company including the identification of the company's key exposures and management practices
- 10 minutes - to skim the company's latest sustainability report - picking out the company's notes and plans on the issues of primary interest
- 20 minutes - to follow some leads / dig deeper into the issue (or two) that are complex or challenging
Sense-checking the answers
If an analyst spends:
- 1 hour preparing for a ...
- ... 1 hour meeting and ...
- 2 hours on follow-up action (writing-up, developing investment thesis, internal and external communications)
... in a 250 working day year at 8 hours a day, an analyst can spend 20% of their time on monitoring coverage of this sort of 100 companies leaving 40% for new research and 40% for other activity (marketing, management, client reporting etc). This seems broadly reasonable.
Questions raised
Clearly individual firms structure their sustainability analysts' times differently ... but - to me - these back-of-the-envelope calculations raise a number of interesting questions:
- Do sustainable investors need to (e-)meet with every company that they hold once a year?
- My answer: Probably 'yes' but spending different amounts of time on different companies - depending on their levels of holding / sustainability exposure.
- Can sustainability/ESG analysts meet with any company more than once a year?
- My answer: Not on these numbers - unless they have abnormally concentrated portfolios or particularly large SRI/ESG analyst teams
- Are the assumptions that I make to reach the one hour number realistic?
- My answer: I think they are all reasonable but also an heroically-optimistic view of current practice
An interesting implication: If an investment firm expects their sustainability analyst to cover 100 companies, meet each once a year and divide their time reasonably between 'maintenance coverage', original research and other activities, they had better ensure that these companies are effectively grouped (by sector), prioritised (according to holding level and sustainability exposure) and that their research supply-chains are exceptionally well-atuned to their needs.
Implications for companies
What does this level of preparation imply for the way that companies prepare for these meetings and the assumptions that they can make about levels of understanding?
My answer: It is absolutely critical that companies prepare a tight eighteen slide presentation for investors each year comprising:
- 3 slides on the fundamental shape of the business
- 3 slides on the current strategy and direction
- 3 slides on the company's sustainability management practices
- 3 slides each on the most significant 3 sustainability issues facing the business
Again, it all looks possible but it stretches the imagination somewhat to believe that this is happening globally.
As ever, I would be very interested to hear the thoughts of others ... especially those that challenge or contradict this analysis.
