Getting to know you: ESG, Investor Relations and Corporate Sustainability
Date: June 12, 2019
This article first appeared on LinkedIn. Brian Tomlinson and Mike Krzus’ report, The Method of Production of Long-Term Plans, can also be viewed for full coverage of the topic.
Four thoughts for better long-term focused disclosures
Communicating new topics to investors often requires new operational processes, personnel, and data; disclosure can work as an organizational forcing function. Corporations are wrestling with this in the context of sustainability and long-termism.
In our research, we’ve spoken to companies about their process for developing long-term investor-facing communications for the first time, layering in key ESG disclosures. This builds on the National Investor Relations Institute’s recently released ESG Policy Statement which guides companies toward more and better ESG and long-term strategy disclosures.
For our report, we spoke to senior corporate representatives of both Investor Relations (IR) and Corporate Sustainability (CS) functions (I use the terms Corporate Responsibility and Corporate Sustainability synonymously in this article). From these conversations, we identified some simple key steps CEOs can oversee within their organization to enable a long-term strategic plan, that builds in ESG, to be communicated to the capital markets:
1 – Shared understanding: A unified view needs to be developed between Investor Relations (which holds the capital markets relationship) and Corporate Sustainability (which holds the sustainability data). Reaching a shared understanding required iterative dialogue to seek a common level and resolve differences of perspective, materiality, audience, and priorities. This process was often emergent and being tested for the first time. Often the long-term plan being disclosed was the first time that IR and CS had co-owned a project or dealt with each other beyond sporadic ad hoc requests – though all participants noted that the increasing volume of requests on ESG themes were driving more interactions.
2 – Cross-team collaboration: Structured cross-team collaboration was key to draw on the specialisms and data held by the different teams. IR provided credibility, control, and CFO engagement in the process and CS gave insights into the sustainability themes and data that the corporation developed and disclosed. CS were also the cutting-edge to identify those issues not commonly discussed in investor presentations like the earnings call – but were of growing interest to their investor base. Both teams were critical to an effective long-term plan that met investors’ broad content expectations.
3 – Un-silo ESG: Sustainability issues had often been seen as sitting in a corporate silo – important for corporate impression management but not meaningfully connected to business operations. This was rapidly changing. There was a two-step process to taking ESG out of the silo: first, to connect the sustainability data, process, and story to strategy through these internal collaborations; and second, to take sustainability out of a disclosure silo, infusing it into investor facing presentations (with the content aimed at the investor audience).
Our participants were clear that the on-going problems of comparability and consistent peer benchmarking, alongside developing internal control mechanisms, added additional layers of complexity onto the disclosure of sustainability issues. Nonetheless, these companies wanted to find a meaningful way of communicating this key value story to its investors and indicated that they had substantively built out from their Investor Day deck to address themes such as mega-trends, material sustainability issues, human capital and purpose among others. Even where there was technical reticence about sustainability disclosure, our leading practitioners wanted to ensure that the sustainability narrative was integrated and understood.
4 – Have a plan to deliver a plan: This work of building an investor-facing presentation stands on a fundamental process which is the strength of strategic planning within the corporation – and the involvement of the board in that process. This relates to a concern in presentations on long-term strategy and sustainability which is the tendency toward sustainability disclosures that sound good but have few practical implications (cheap talk / impression management). The more developed the governance arrangements a corporation had around sustainability, and the extent to which the corporation had built out its view of its key risks and opportunities on the ESG continuum, the more coherent the process of long-term plan preparation seemed to be. For instance, where sustainability was formally accounted for at board level and held by the CFO within the firm.
Long-term outlooks are inherently uncertain (mega-trends, disruption etc). However, corporations must address those uncertainties and enable investors to understand how it thinks through complexity and uncertainty. To do that a corporation needs to internally come to a shared understanding of its long-term value story and the critical sustainability elements that inform it. That requires a whole-firm view of sustainability embedded in long-term strategy and a strong relationship between Investor Relations and Corporate Sustainability.