The role of investor relations is expanding to include communication with new audiences and the development of new disclosures, messaging, and communications to meet investors’ mounting information needs.
Roiling the landscape is the significant rise of passive investors — whom, as it turns out, aren’t all that passive anymore. There also are new de facto ESG reporting needs and a groundswell of support for a return to investor communications that focus on long-term plans for value creation for all stakeholders, not just investors.
With the proliferation of exchange-traded funds and index funds in recent years, Morningstar estimates that passive investors will top 50% of ownership in U.S. companies this year.
Today, passive investment firms like BlackRock, Vanguard, and SSGA collectively manage trillions of dollars of assets and are by definition long-term investors.
In addition, in 2018 ESG investments reached the $20 trillion mark, or roughly one-fourth of all investment in global equities.
These investors are collectively becoming more vocal about the information they want from the public companies they own. This increased thirst comes amid significant technological disruption, globalization, climate change, a generational shift in the workforce, and environmental, social, and governance (ESG) issues.
The investors want to know that companies are not only responding to change but proactively working to manage risk and capitalize on opportunities, and how that will drive long-term value creation.
Since passive investors don’t generally engage in traditional IR communication, companies are increasingly leveraging the proxy to communicate with this important audience, which has a greater impact on proxy voting results than ever before.
As a result, today’s proxy disclosure goes well beyond SEC requirements to incorporate investor relations messaging, address a growing list of investor concerns, and provide needed context for evaluating the information presented. So far in the 2019 proxy season, executive compensation and board diversity remain key areas of focus.
Proxy best practices continue to evolve, and many companies are leveraging cover letters to highlight the most important information in the proxy and incorporating graphics that simplify complicated information about board composition, peer group analysis or executive compensation, for example.
This can be helpful to passive investors who are reviewing thousands of proxy statements over a short period of time and can positively influence voting outcomes.
Companies are not required to make ESG disclosures. However, leaders of large-cap corporations recognized the need to implement ESG communications programs, and many of those flourished in 2018. Now, large institutional investors as well as the many databases that track ESG are asking small and mid-cap companies about it.
What’s changed the most about ESG in recent years is that purpose and sustainability have gone beyond what’s good for the world to what’s good for a company and all of its stakeholders.
What’s become clear is that companies of all sizes and across all industry sectors must formulate strategies and a narrative around ESG that (1) addresses material risks, from climate change and pollution to supply chain labor and data security; (2) explains how such risks are linked to the company’s strategy, risk management, and plan for creating sustainable long-term value for all stakeholders; and (3) includes relevant metrics enabling the impact of ESG initiatives to be measured.
While disclosure frameworks for developing ESG reporting are available, there is no standard practice. Generally, it’s best to look for at the corporate leaders in any given sector for best-in-class examples.
What’s changed the most about ESG in recent years is that purpose and sustainability have gone beyond what’s good for the world to what’s good for a company and all of its stakeholders — investors, employees, customers, partners, etc. — and how that connects with the company’s profit engine.
As BlackRock CEO Larry Fink wrote in his 2019 letter to CEOs, ESG is not about feel-good projects. It’s about an enduring focus on the impacts of social and environmental factors that maximize performance — as well as those that hamper it — and earning the recognition of increasingly attentive customers and employees.
Passive investors are advocating for this shift to a focus to long-term value creation, and the buy-and-hold investors that every public company targets as key shareholders are following suit.
One example of this is the Strategic Investor Initiative’s CEO investor forums, which connect corporate leaders with institutional investors to discuss how best to communicate sustainable long-term value creation stories.
The SII recently published a letter in collaboration with Harvard Law School and leading intuitional investors that nicely sums up this effort.
For many companies, meeting investors’ new expectations requires a significant shift away from the quarter-to-quarter focus that drives many investor communications today and toward long-term storytelling.
Ideally, companies should thoroughly and broadly address ESG and strategies for long-term value creation in venues such as earnings calls, annual reports, meetings with institutional investors, IR websites, proxy statements, SEC filings, investor presentations, CSR reports, news, and social media.
Important topics to address include market opportunity, trends, competitive position, risk and opportunities, financial performance, corporate governance, corporate purpose, capital allocation, and human capital.
In addition to winning the support of long-term investors, avoiding an activist attack is another important benefit of effectively communicating about ESG and plans for long-term value creation. It’s an increasingly worthwhile endeavor, given the continued proliferation of activism aimed at companies of all sizes across all sectors.
All told, successfully competing for capital today requires effective communication with an expanded group of investors — both active and passive— that have their own unique requirements.
CFOs who both recognize the increasing importance of long-term messaging and move with urgency now to get on the forefront of this fundamental change will position their IR efforts – and their companies – for success.
Moira Conlon is founder and president of Financial Profiles, a strategic communications firm specializing in investor relations and financial communications for public companies, pre-IPO companies, and asset management firms.