May 28, 2020
Led by large asset managers and mission-driven asset owners, investors are asking more questions about how environmental, social, and governance (ESG) factors are integrated into corporate strategy and risk oversight. Such inquiries related to ESG mean that investor relations (IR) officers must be well versed in issues beyond traditional financial metrics.
Moreover, the rising prominence of ESG factors for investors also puts those issues higher up on the board agenda, and makes coordination among IR, sustainability legal, and compliance functions critical to help ensure that management and the board receive timely, actionable information.
The past two decades have seen tremendous change in expectations for board oversight, from the focus on overboarding and audit committee duties in the early 2000s, to the rise of environmental disclosures in the 2010s. Now, COVID-19 may catapult social issues to even greater prominence for investors and boards.
Valerie Haertel, senior vice president, IR, CVS Health, said she believes that “COVID-19 highlights the importance of balancing ESG matters with profitability” and expects the pandemic to accelerate the trend.
For insight on the role of IR in the communication and interpretation of ESG data and disclosure to the investor community, the KPMG Board Leadership Center recently interviewed three members of the National Investor Relations Institute (NIRI), a trade association based in Washington, DC, for IR professionals. These conversations with IR officers from CVS Health Corp., Oshkosh Corp., and Etsy, Inc. were conducted between February and April 2020.
For insight on the role of IR in the communication and interpretation of ESG data and disclosure to the investor community, the KPMG Board Leadership Center recently interviewed three members of the National Investor Relations Institute (NIRI), a trade association based in Washington, DC, for IR professionals. These conversations with IR officers from CVS Health Corp., Oshkosh Corp., and Etsy, Inc. were conducted between February and April 2020.
“Many investors have reached out to learn what we are doing for our employees, clients, members, and the communities we serve,” said Haertel. She expects the company’s COVID-19 response to be part of its annual meeting discussions, investor engagements, and corporate social responsibility (CSR) report in the coming year.
“Investors have been extremely interested in talking about the status of our ‘supply chain’—millions of individual creative entrepreneurs around the world—asking questions that tie to our economic impact strategy,” said Deb Wasser, vice president, IR, Etsy.
“The concept of ESG factors and how they fit into the overall business risk is definitely an area that we are spending more time on, making sure that we can tie the strategies of the business back to the different risks,” said Patrick Davidson, senior vice president, IR, Oshkosh. “When you report [on data], there’s a tendency with our culture at Oshkosh to improve.”
While the three largest asset managers—BlackRock, Vanguard, and State Street Global Advisors—have led the institutional investor push for ESG-related disclosures, Haertel, Wasser, and Davidson all noted that interest from active managers is rising, including those that have developed their own methodologies and strategies for ESG-linked analysis. They said that investors are spending more time scrutinizing board member experience and other governance factors, including board diversity and board composition, as well as how the board constructs executive compensation for the long term.
“Fixed income investors and banks are also asking these questions, with a particular focus on product sourcing,” said Davidson, noting that Oshkosh, in turn, audits its suppliers for adherence to safe work practices and related rules and regulations, including ISO 9000 and ISO 14000.
While CVS Health and Oshkosh both produce CSR/ESG reports primarily mapped to the Global Reporting Initiative (GRI), Etsy recently moved from a separate impact report to an integrated financial report that includes certain metrics from the Sustainability Accounting Standards Board (SASB).
“At Etsy, our impact goals are fully integrated into our business goals—they are not separate,” said Wasser. “Last year, recognizing that our key nonfinancial metrics around economic, social, and ecological impact are an integral part of how we run Etsy, we moved to an integrated approach for impact reporting.”
As corporations continue their ESG journeys, the following insights from IR professionals can help boards and management better align the company’s disclosures around ESG initiatives with investor expectations.
- Ensure that IR is aligned with management and the board perspectives on ESG, including where oversight of ESG-related risks, opportunities, and disclosures sit within the board structure. Can IR speak to board composition and board diversity? Where are environmental and social issues on the board/committee agendas? Does the board review diversity and inclusion efforts and the company’s approach to talent management?
- Prepare for questions regarding executive compensation, board composition, and board size, and know how your company compares with its industry (and revenue) peers on leading corporate governance practices.
- Consider investors’ ESG-related concerns (including any shareholder proposals) and, as appropriate, address them through ongoing engagement and feedback, well ahead of proxy season.
- Make ESG reporting clear, consistent, and readily available. “We have all the data [for investors] at the tips of our fingers in our sustainability report, and our statistics and progress have become part of our narrative.”
- Avoid greenwashing. Coordinate closely with sustainability/impact executives, as well as legal, compliance, and the C-suite to ensure that the company’s ESG/CSR goals are aligned with corporate strategy and clearly communicated to investors and other stakeholders.
- Reevaluate reporting frequency. Which ESG metrics (e.g., talent, community support, product safety) are most critical to the company today? Have investor expectations changed regarding the timeliness and/or location of reported data?
- Ensure that IR professionals have a broad view of the company’s operations, including ESG-related factors and risks. It’s no longer enough to just know the numbers and mediate analyst questions. “You have to know the activity that drives the numbers.”
- Back up the company’s ESG story with numbers and actions. For investors focused on workplace equity and shared responsibility, the board, management, and IR should be able to back up that perceived equity with numbers and actions. “Culture builds credibility.”
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Insight from investor relations professionals on how boards and management can better align the company’s disclosures around ESG initiatives with investor expectations.
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