Risk Management

How to Quench Investors’ Thirst for ESG Information

A large proportion of investors have recently assigned greater importance to companies' environmental, social, and governance factors.
David McCannJune 11, 2018

While companies are ramping up initiatives to win interest from an investor population that’s growing ever-more focused on sustainability, it may be a race to keep pace.

Among the 47% of 189 investment professionals surveyed by strategic communications firm Clermont Partners who said they take environmental, social, and governance (ESG) factors into account when making investment decisions, 75% said such factors have become more important to them over just the past two years.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Only 2% of such respondents said ESG criteria have become less meaningful for them during that period.

Investopedia defines ESG as “a set of standards for a company’s operations that socially conscious investors use to screen potential investments.”

Environmental criteria, says Investopedia, “look at how a company performs as a steward of the natural environment.” Social criteria “examine how a company manages relationships with its employees, suppliers, customers, and the communities where it operates.” And governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

ESG is frequently considered synonymous or closely related to socially responsible investing, or SRI, but the two are quite different, Clermont notes.

The former focuses on the value that the above-defined criteria bring to investors. SRI, on the other hand, favors the stocks of companies that “do good” or that don’t “do bad.” For example, “a pure SRI investor may not hold liquor or firearms stocks, but an ESG investor might, depending on how well a company addresses ESG-related issues,” says Clermont.

Among the surveyed investment professionals, 60% identified “changing client preferences” as a key driver for the increasing importance of ESG factors in their investment strategies

But an even greater proportion of respondents — 66% — said a key driver is that ESG provides an additional way to evaluate risk. For example, engaging in business activities that have a negative impact on the physical environment can deal a heavy blow to a company’s reputation.

The same can apply to companies that maintain poor relationships with stakeholders or excessively reward executives.

A majority (56%) of survey respondents said they obtain ESG information from companies’ annual reports. Other sources included direct questions in meetings (46%), sustainability reports (44%), quarterly earnings reports (36%), and conference presentation materials (29%).

Clermont offers the following advice for proactively communicating ESG metrics:

  • Build a cross-functional team represented by investor relations, communications, legal, operations, and sustainability officials. Educate the team on which metrics are most important to the company’s investor audience, especially those that are crucial in the company’s industry.
  • Determine the company’s ESG agenda and goals, and determine four to seven of its most material assets — such as low carbon emissions, low workforce turnover, strong data security, or board diversity.
  • Consider merging the company’s annual report and sustainability report into a single document, and put it on the company’s website.
  • Develop an ESG “talk track” — what company officials will say out loud during a PowerPoint presentation — for investor meetings and calls.
  • Know how the company is portrayed by ESG and corporate governance rating agencies. Expect disparity among them, based on their customized analyses. Ultimately, provide information that makes sense for the company, but don’t leave such third parties to erroneously tell the company’s story.

What categories of information do investors want more of in order to better evaluate companies’ environmental, social, and governance profiles? See the chart below.