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Investor relations officers (IROs) are increasingly recognizing the importance of environmental, social and governance (ESG) factors for their investors. The Canadian Investor Relations Institute (CIRI) has also noticed the increased focus on ESG and is proactively engaging IROs in the ESG conversation by offering sessions at conferences and events that explore these topics. Recently, ESG Global Advisors team members have spoken about ESG at the CIRI Annual Conference in Halifax (June 2019), CIRI’s Essentials of IR program in Toronto (September 2019), and the CIRI Let’s Talk ESG event in Vancouver (September 2019).
So why is ESG becoming a hot topic in the IRO community?
Amid recognition that ESG factors can impact the financial performance and long-term value of companies, there is growing acceptance that integrating ESG is a core part of a prudent investment process. In response, the integration of material ESG factors in investment decisions is becoming mainstream within the global capital markets. Edelman’s 2018 Trust Barometer of Canadian Institutional Investors found that 91% of Canadian institutional investors changed their voting and/or engagement policies to be more attentive to ESG risks. Further, 65% of investors said this change occurred within the past year. As a result of this increased investor focus on ESG, IROs are receiving more requests from their investors on ESG topics.
As investors are integrating ESG into their investment process and becoming more sophisticated on ESG, they are using their influence to engage with companies on ESG. Investors are dissatisfied with the current level of ESG disclosure and, as a result, many investors are pushing for enhanced disclosure from portfolio companies on ESG factors that will allow them to better assess how companies are managing ESG risks and opportunities. IROs are often on the frontlines of investor engagement and they are responding to more information requests from investors to disclose material ESG risks and explain how they are actively managing these risks in the context of long-term business strategy and performance.
It’s no secret that IROs have a lot on their plates and responding to the growing list of requests for ESG-related information in surveys, reports and meetings with investors requires a strategic approach. For IROs, it’s important to note that investors are seeking progress on ESG from companies; they don’t expect perfection. It is important to be prepared to talk ESG, particularly in advance of the upcoming proxy voting season.
Here are a few tips for IROs to get started on strategically addressing ESG factors:
Be proactive – Companies that are proactive in identifying and reporting on material ESG factors have an opportunity to take control of their narrative with investors.
Apply a financial materiality lens – Investor-focused ESG reporting links material ESG factors with associated key performance indicators related to financial and operational performance.
Engage your Board – Management teams should engage Boards of Directors in a discussion on the link between material ESG factors and business strategy and risk management.
ESG integration isn’t going away anytime soon and IROs will continue to receive inquiries and requests from investors on ESG topics. A proactive approach enables companies to demonstrate understanding of these issues and showcase its ESG efforts to investors.