ESG and activism: How should companies prepare for engagement?

On 24 November IR Magazine facilitated a webinar with advice, questions and answers on international trends when it comes to ESG and activism. Originally most focus were around the ‘E’ addressing environment issues. Then focus was directed towards the ‘G’ with investors engaging in governance issues and how companies handled this area. Finally, the time is now up to focus on the social issues and thus the ‘S’.

How much weight are investors putting on ESG?

Generally speaking, there are many issues in the market and asset managers’ integration of ESG differ a lot in their ESG analyses and investments. According to Rothschild there are many layers in their decision-making. And the legal and official requirements differ a lot in the various countries and sectors – especially in Europe. Various investment processes and internal rating procedures with asset managers and portfolio managers. So far governance has been the top one priority with social considerations gaining weight and importance.

To what extend are ESG questions being raised at investor meetings? Is it a short-term trend?

There has been a significant change from only addressing financial questions and analysis into also to include ESG questions. Now everything is merging together at the investor meetings. Now there are also interest from third parties which IR must be prepared to answer. ESG activism and other challenges is most common in the US, but occasionally European companies experience it as well.

What impact has the current situation with the pandemic had on this development?

Engagement is separating with different approaches. And the difference between activism and engagement is big, i.e. engagement is rather help to the company to change the business strategy of the company in the long term whereas activism is more aggressive and short-term.

It is recommended that you have a team dealing with ESG matters with insight to answer the ESG issues. Be prepared to discuss problems raised by investors and shareholders regardless of the financial results. Avoid green-washing your report. Approach on standards and frameworks on sustainability can be confusing and very difficult for companies to find a good way to address and to select what makes most sense all around.

How to build up an ESG strategy?

IR already know all financial data before investor meetings – but are you also prepared to take ESG questions? Important to include IR in the ESG strategy and thus to connect these related areas before going public with information. Make sure to gather information internally beforehand. How is the information valued? Do you provide the right information to shareholders? What key metrics are investors looking into?

How important is inclusion in indexes?

Probably not that important to professional investors. But with an increasingly global investor base, it will add in importance going forward. May also be emphasized further due to the present pandemic with less access to one-on-one meetings and roadshows, i.e. investors may turn to indexes to form a view on the ESG reporting.

What issues are likely to come in focus in the coming years?

The ESG/SRI trend is of increasing interest not only from institutional investors but also retail. ‘S’ will gain in importance so all three letters will balance in importance. Governance is still the most important though. Rising perception that ESG/SRI investments work better and gives better yields than traditional companies without this focus.