The case for integration

We asked Laura Hayter, CEO
of The Investor Relations Society,
for her perspective on the evolution of ESG disclosure.

Why do IROs need to create a compelling narrative on ESG performance that is aligned with the business strategy, and what should that narrative include?

Here at the Society, we believe that a thorough understanding of the ESG issues impacting a business is necessary for long-term value creation. Management of these issues should be an integrated part of business strategy. 

Businesses are expected to adopt a more thoughtful approach to wider value and evidence mounts for the importance of governance and overall stewardship to investors. We believe that a real opportunity exists for companies to be proactive in setting out their long-term strategies against a defined reporting framework and including ESG issues when engaging with the investment community, and we encourage companies to move in this direction.

Why should IROs prioritise and focus on the most material ESG issues to the business, and how do you determine what those are?

When IROs are considering integration of ESG factors into their reporting and engagement, it will of course depend on the business, sector and company size but some of the relevant ESG elements could cover the following: Environmental – climate change, water, waste and potential reporting against the Task Force on Climate-related Financial Disclosures (TCFD); Social – UN SDGs; safety; social impact; diversity and gender pay gap; supply chain; access to work; Governance – socially responsible investing policies; initiatives such as the UK Stewardship Code, and UK Corporate Governance Code; succession planning and executive remuneration linked to non-financial KPIs.

When reporting on such ESG issues, it provides investors with information on the business’s wider impact beyond financials, aligns with stakeholders reporting expectations of high-performing and mature businesses, and should help the business improve its ESG performance. It also provides specialist and socially responsible analysts and investors with the information they need to assess businesses. ESG reporting may be fully integrated within wider corporate and annual reporting or in specific reports (or both). 

What are some best-practice examples of strategies and tactics that leading companies and countries are using to build capacity within IR and corporate governance departments to communicate with investors on ESG issues?

We have seen a growing focus on ESG issues within IR teams over the last few years, and some of the larger listed companies are hiring ESG specialists in-house to address investors and analysts directly in this area. This includes increasing corporate access contact with specialist ESG investors and analysts, and building out communications on company websites to address ESG questions and information. In addition there is a plethora of incoming queries from the ratings agencies (e.g. MSCI, Sustainalytics), which requires a lot of resource and coordination to gather the information internally within a business. We expect IR teams to continue to add specialist ESG resource here. 

What support does the IR Society offer IROs in relation to ESG?

Over the last 12-18 months, there has been growing interest from institutional investors in the sustainability performance and corporate governance practices of quoted companies. As a Society we are working hard to understand the needs of the buy- and sell-sides in this area and keeping our members informed. Our best-practice committee continually reviews our IR Society best-practice guidelines, available to members, which includes practical advice on how to address ESG communications. We also address sustainability and governance issues in much of our policy work at the Society. One of our other initiatives for 2020 is our global survey of the buy-side and what ESG information investors would like to see provided by companies, so look out for the results to be published shortly. 

As part of the IR Society professional development programme, we run a popular half-day course – ESG/SRI: Sustainability issues for IR. This course ensures that participants gain a better understanding of the key sustainability issues, current and future trends and how to successfully identify and engage with key stakeholders. Attendees also learn how to respond to the growing interest of institutional investors in the sustainability performance and corporate governance practices of quoted companies.

What practical action can IROs take to integrate ESG into shareholder engagement?

As part of best practice in integrating ESG practices, we would encourage companies and IRO/governance departments to consider a materiality assessment. Materiality is key in establishing what issues matter to stakeholders and to the long-term success of the business. This guides the reporting and management of risks and issues. Reporting should also reflect performance over the last reporting period alongside future goals and targets. Reporting should be balanced, accurate and clear, reflecting challenges in addition to successes.

As well as reporting agencies advising on the latest developments in corporate reporting, assurers, such as the large financial audit firms and other specialist consultancies, can help provide advice over non-financial reporting and help reporters improve their ESG reporting. 

We are also seeing a lot of information around reporting frameworks, which are wide ranging and it can be hard for companies to know where to start. Reporting frameworks such as the Global Reporting Initiative’s (GRI) G4 Guidelines, the International Integrated Reporting Council’s (IIRC) Integrated Reporting Framework and the Sustainability Accounting Standards Board’s (SASB) Standards help businesses provide comparable, material and complete disclosure. 

Finally, to complement disclosure and bring the narrative to life, we encourage companies and IR to use mixed media, such as infographics, film, web and social content.  

As part of the IRS awards you have a ‘Most Effective Integration of ESG’ category. What do the winners of this do well?

Now in their 20th year, the IR Society Best Practice Awards provide a meaningful opportunity to showcase best practice, and for the Most Effective Integration of ESG category, winners will be demonstrating evidence a of year-round communication approach to investors and wider stakeholders. They also provide insight into how ESG risks and opportunities are identified, understood, and proactively managed and measured to contribute to a business’s competitive advantage, as well as having a positive impact on the employees, associated communities and operational partners.

We recognise that this is a developing area for many companies and each will be at different stage of their journey. What we like to see is businesses demonstrating that their internal approaches are changing and that the ownership of the ESG communication does not rest with one department or team, but that a cross-section of departments works together to deliver a consistent and holistic communication approach to ESG. 

Overall, judges applaud companies that have shown evidence of a clearly defined approach, with a consistent and proactive point of view on material ESG issues and long-term value creation across all communications with investors.

ESG will also have even greater importance post COVID-19. In a recent poll conducted by the Society, 86% of respondents noted they expect ESG to become more important as we emerge from the current crisis. Momentum around climate change has rapidly shifted to a focus on human and social capital and the supply chain as a result of the crisis and companies are going to be measured not just on the treatment of shareholders but all stakeholders.  

The Luminous view

We agree wholeheartedly with The IR Society. Investors want to understand a company’s ESG strategy and how it supports long-term value creation. IROs should give regard to both comparability and materiality when communicating to the markets.