… to companies.
… because companies (should) only care about the long-term arc over which investor interest in their sustainability exposures and management practices develops.
Companies manage short-term variations in political pressure and investor focus in many other areas and are usually good at determining long-term signal from short-term noise. ESG / DEI / Net Zero and other sustainability factors and trends are no different to other factors and trends in the demands that they make of companies.
In this context, I discuss below:
- what we know about the size, shape and direction of travel for sustainable investment
- what we don't know
- how companies' can manage through uncertainty on a low-cost, no-regrets basis by focusing on high-quality, direct investor relations
- … and I leave the final word to the acknowledged expert in sustainable investor communications: Beyoncé.
What we know (or can reasonably assume)
- Over the next few years sustainability practices / ESG activities will be battered (in equal measure?) by bureaucratic European progressives and the anti-regulatory instincts of the American right.
- This will happen within the glare of the media for as long as the 'wax and wane' story generates clicks on financial news and commentary publications and websites.
- Through it a 'resilient core' of investors will retain their principled interest in allocating capital and exercising their ownership rights in support of sustainability transitions; when trends soften in some areas (for example, renewable energy), they will likely seek them in other areas (for example, healthcare)
- A 'rational body' of investors will allocate capital to sustainability transitions as/when guided to by market context and stock valuation
- An 'evaporating periphery' of investors will 'go quiet' on ESG sustainability - at least in public giving themselves space to tell progressive clients that they are doing one thing and conservative clients that they are doing another … while quietly doing both and neither at the same time ;-)
- This 'going quiet' is likely to result in a reduction in resources deployed to ESG / sustainable investment (across the market) but also (probably) some reallocation (as some firms gain credit for standing firm in a space that others are vacating
What we don't know
- We don't know the size or shape of the 'resilient core', the 'rational body' or the 'evaporating periphery'
- We don't know all of the factors will affect it. We can assume that these will be a bundle of things at the fund and manager level (like reporting requirements which seem likely to soften) and things at the stock level (like the oil price and labour expectations and geopolitical stability which seem likely to [INSERT YOUR OWN GUESS FOR TODAY HERE]
- We don't know how progressives will respond to the current public backlash. In the past, sustainable investment has benefited from being a channel that remains open when political channels for their interests close. At the same time, the industry has also benefited from the development and adoption of regulation within more supportive regulatory environments. (Both cannot be true at the same time.) Political reluctance to address sustainability factors may strengthen or weaken sustainable investment.
Managing through uncertainty
A few things are significant when companies consider how to manage through this uncertainty / lack of visibility:
- The 'evaporating periphery' comprise investors who never deeply engaged with the sustainable economic transitions - that involve strategic decision making and capital allocation. Their approach to 'ESG' was always more centred on data disclosure, downside risk management, passive reporting processes and unchallenging engagement demands.
- (This is not to diminish the 'weight of money' delivered by 'me too' investors … merely to highlight that it was never accompanied by a 'weight of thinking' or 'weight of real expectation' … and that it will be back as quickly as it came and then departed when the political and consumer winds shift again
- Actually, the overall size of these investor categories doesn't matter to individual companies. All that matters is what the particular investors on their own shareholder register think and what those that are thinking of buying their stock think
- In its next iteration, ESG and sustainable investment will necessarily have a much stronger focus on (fewer) financially-material sustainability factors that shape companies' commercial success and investment performance and connect to the company's 'equity story' (… and deprioritise (by comparison) multi-factor hybrid ESG datasets)
A 'no regrets', low-cost focus on high-quality investor and analyst relationships
Rather than worrying about all of the short-term noise, we advise companies to fix their eyes on the prize - of high-quality communications with investors willing and able to allocate capital towards sustainable investment transitions. Specifically, we encourage them to:
- Keep costs tight and conversations private
- Do virtual roadshows rather than actual ones
- Use Zoom calls to communicate to multiple ESG agencies at once rather than getting sucked into endless conversations with 'issuer communications' processes
- Take control of the sustainable investment narrative presented to investors
- Notably there is a chance for many companies to expand investors' horizons from the environmental by highlighting their social & economic contributions
- Ensure that investors receive contextual information (as well as performance data)
- ... so that they can understand how sustainability affects (or doesn't) the business and market landscape within which the company operates
- Improve the efficiency of communications to investors on sustainability with direct communications to named analysts and managers
- Improve the efficiency and quality of relationships and communications with named (sector) analysts at ratings agencies and research providers
- Support an investor focus on those aspects of sustainability that are financially-material and lead to capital allocations those aspects of sustainability that are the company has material over
- (rather than supplying reams of irrelevant granular data and responding to tangential engagement expectations)
- Focus on what their own current investors specifically need (not on what the sustainability commentariat say that all investors should want)
- Prioritise fundamental active, capital-allocating investors (over passive investors who follow the market) and the research providers that support them
Encouragingly all of the guidance, tools and case studies that companies need to achieve this have been developed, tested and are freely available (Our preferred ones are listed below).
"… cause if you like it … (investors & research providers)"
… you gotta put a name on it.
If (as recommended in this post) companies prioritise high-quality, direct communications and the development of relationships with fundamental investment analysts, investors and research providers will need to make themselves available and visible for this.
To paraphrase Beyoncé, if they want it, they gotta put a name on it.
These investors and analysts will need to make sure that the companies that matter to them know that Amy Andrews covers sustainability in the Autos sector for them and Ben Benson covers Biodiversity and Charles Trandell covers Carbon Transition etc. I have written more about this here: Thanks … but no thanks … and please …
You can read the headlines and conclude that we ESG / sustainable investment is waxing or waning … or you can look out over a 3-4 year time horizon and "skate to where the puck is going" … which seems indisputably likely to focus on high-quality analysis of companies' strategic positioning and capital allocation in the face of sustainable economic transitions.
In the meantime, I leave you with the promised resources to support a low-cost, no-regrets approach to sustainable investor communications:
- www.sri-connect.com
- www.sustainable-ir.com
- WBCSD: How to: Target investors & analysts
- WBCSD: How to: Organise ESG roadshows and capital markets days
- WBCSD: How to: Prepare messages and data for investors and analysts
- WBCSD: How to: Integrate sustainability into an equity story
- Free tips (for listed companies) on how to improve the efficiency and effectiveness of your communication on sustainability to investors and analysts.
- Sustainable Investor Relations Services from SRI-Connect.
