Its underlying themes have had many catch phrases and acronyms over the years – SRI, ethical investing, impact investing, CSR. Will ESG (environmental, social, and governance) lose its hype or become an integral part of the investment world?
“This ESG thing is real.”
“ESG is huge.”
These are two samples of many similar comments overheard in various sessions at the Canadian Investor Relations Institute’s 2019 Annual Conference in Halifax Nova Scotia. With no fewer than three sessions over two days of programming dedicated to ESG (environmental, social, and governance) and with the topic cropping up in the Q&As of sessions not even remotely focused on it, CIRI definitely made the case for ESG not just being a temporary trend.
“ESG is definitely here to stay,” said Yvette Lokker, President & CEO of CIRI. “You just need to look at the value of assets under management and it’s growth over the last few years as evidence – over $30 trillion in 2018, up 30.4% from 2016. Add to that, the increased demand from the buy-side and now the sell-side for enhanced ESG disclosure from issuers. To meet this demand, IROs should be incorporating ESG into their IR program, from communicating their company’s ESG information in their investor presentations to targeting ESG-focused investors.”
Defined by the Financial Times Lexicon as “a generic term used in capital markets and used by investors to evaluate corporate behaviour and to determine the future financial performance of companies” – ESG has certainly become top of mind for many IROs and corporate governance teams.
As if its broad scope- encompassing everything from climate change, shareholder voting rights, Board diversity, human capital management and more- didn’t make ESG complex enough, it also comes with the added complication of a plethora of differing methodologies for reporting on it and ratings systems from over a hundred different data providers that each use their own scoring methodologies.
Differing opinions on ESG’s overall importance, the teams responsible for ESG communications, and how ESG should be reported are highlighted in a recent ESG & Investor Engagement report published by IR Magazine and Corporate Secretary. But while details like whether the order of the letters in the acronym should be rearranged (since ‘governance’ seems to take precedence in most cases) or how best to report on it (investors seem to prefer integrated reports versus separate ESG reports, according to the study above), with $2.13 trillion AUM (Assets Under Management) in Canada, what can’t be debated is that IROs need to prepare themselves to deal with it.
Taylor Thoen, the CEO and Executive Producer of BTV-Business Television, moderated a panel discussion at CIRI, where ESG became a theme of its own in her panel’s follow-up Q&A. I asked her for her take on ESG’s staying power: “I think when you see entire shifts in corporate governance to include the grading of a company’s compliancy on ESG, when you see ETFs being launched in this segment and if you don’t check off at least one of the three boxes your company won’t be considered for investment by some major funds, the genie is out of the bottle so to speak. It’s here to stay, and as such we’re booking an entire BTV ESG Episode on BNN Bloomberg for this fall.”
According to Yvette Lokker, “IROs should be well-informed of their company’s ESG practices and disclosure so that they are prepared to address questions from the buy- and sell-side. Depending on the structure of the company, they may even have responsibility for ESG reporting, which gives them a clear view of internal processes and information. IROs should also be educated on the various ESG frameworks used by investors, most often SASB, so that they can anticipate investor information needs.”
The continued growth of ESG’s importance to investors will likely lead to an uptick in governance roadshows and we’ll be seeing more Boards meeting with investors to discuss ESG/CSR questions. These Board members will need to be prepped by IR and ESG teams on the types of questions they are likely to face.
Whether prepping Boards for these situations, answering questionnaires from ESG ratings agencies, or fielding investor questions on ESG matters on conference calls, IROs need to be ESG-ready. It appears to be here to stay.