June 17, 2016
The investor relations and sustainability fields recently missed a rare opportunity to collaborate and build relationships that could have long-term benefits. Earlier this month, both the 2016 National Investor Relations Institute (NIRI) Annual Conference and Sustainable Brands 2016 were held in San Diego, occurring simultaneously about a 15-minute drive away from each other. We wish the organizers of the two events had agreed to do something together, but they did not. It was a lost opportunity, in our view, although the shared goals and need for collaboration may be a foregone conclusion.
The fact is investor relations and sustainability are increasingly being pushed together by growing interest in socially responsible investing, integrated reporting, materiality, intangible assets and the evolving Sustainability Accounting Standards Board (SASB) standards. An additional deciding factor could be where the Securities and Exchange Commission (SEC) lands on possible updates related to Regulation S-K to address “disclosure effectiveness,” which, if enacted, could require a significant amount of sustainability disclosure in SEC filings, among other possible changes. (See The Huffington Post’s “5 Market Problems the SEC Can Help Solve Through Regulation S-K.”)
While we often hear that investors are not particularly important stakeholders for sustainability, recent trends, data and anecdotes suggest that the dynamics are changing quite rapidly. The investment community’s growing interest in environmental, social and governance (ESG) factors – in other words, nonfinancial reporting that encompasses sustainability and corporate social responsibility – is unmistakable, according to several studies.
In sharing the results of Ernst & Young’s “Tomorrow’s Investment Rules 2.0” study of more than 200 institutional investors, Brendan LeBlanc told an audience at Sustainable Brands that 62 percent of institutional investors now say they care about ESG factors, compared with about a third in 2014. LeBlanc, a partner in E&Y’s Climate Change and Sustainability Services group, acknowledged that analysts rarely ask companies about sustainability on earnings calls and in investor meetings, but he asserted that portfolio managers in the investment houses do pay close attention to “sustainability, risk management and safeguarding the assets,” including intangibles such as reputation and company culture.
He reported that E&Y’s study found that 71 percent of institutional investors review companies’ nonfinancial reporting when making investment decisions and 80 percent consider mandatory board oversight of nonfinancial reporting to be essential or important. Up until the last 18 months or so, the interest has been particularly strong in Australia, Western Europe and South Africa. However, the latest studies are showing that the ESG focus for U.S. investors, public companies and markets is gaining serious momentum. Evan Harvey, director of corporate responsibility for Nasdaq, said at Sustainable Brands that U.S. stock markets are inclined to publish best practices and guidelines about ESG reporting rather than issue rules – unless the SEC requires such reporting, of course.
Greg Unruh, Arison Professor of Values Leadership at George Mason University, told the Sustainable Brands audience that investors will find “money to be made and risks to be mitigated by paying attention to ESG factors.” He said, “The challenge is sustainability people think in PowerPoint and investors think in Excel,” and the difference in semantics between ESG and sustainability is not always well understood. Thus, the session at Sustainable Brands was titled “Lost in Translation: The Disconnect Between Corporate and Investor Perceptions and Demands.”
Unruh also discussed results from his MIT Sloan Management Review and The Boston Consulting Group study, “Investing for a Sustainable Future,” which found that 75 percent of nearly 600 investors surveyed said a company’s good sustainability performance is materially important to their firms when making investment decisions and 60 percent said their organizations exclude or divest from businesses that have poor sustainability performance. However, furthering the point of “lost in translation” was their finding that only 24 percent of investor relations officers surveyed believe they should be talking to investors about sustainability.
Meanwhile, 15 minutes away at the NIRI conference, a small roundtable discussion focused on the importance of getting investors and corporate leaders to understand the connection between ESG and financial performance. The group discussed the critical finding from a recent “study of studies” by Deutsche Asset Management and the University of Hamburg in Germany. The large majority of studies have found a strong positive correlation between ESG criteria and corporate financial performance, which appeared to hold true across North America, Europe, other developed markets and emerging markets.
Unfortunately, the growing connection between investor relations and sustainability was not among the hottest topics at either event, and the two groups did not coordinate. Given the current situation and the outlook, I’d say it would benefit both functions to work more closely together before key opportunities to impact business strategy and eliminate silos are lost, and before the terms of such collaboration are dictated by others.
Contact me to talk about how we can make these connections happen.