ESG Issues Increasingly Influence Investor Decisions
Monday, June 8, 2020
Posted by: Tanya Guy
In recent years, environmental, social and governance (ESG) issues have increasingly influenced investor expectations and decisions. Understanding what the investor community expects regarding ESG disclosure and how to meet those expectations may weigh heavily on the minds of company executives, board members and employees responsible for shareholder relations.
“It’s really important to know what’s important to investors for a company’s specific sector or industry and what specific issues investors are seeking in terms of disclosure,” said Brigid Rosati, director of business development at Georgeson. “In addition, from an internal view, employees in the shareholder services and corporate secretary roles are now being asked to report to management and the board about these issues.”
One of the most prominent ESG topics regardless of industry is climate change. Many investors now expect companies to address the risks and opportunities presented by climate change in their industry. For example, investors may expect a construction company to disclose whether it is building near protected wetlands, using environmentally friendly materials and implementing “green” processes. Oil and gas producers have a host of different climate-related issues, including water use and recycling, and the carbon footprint of their extraction process.
Another significant ESG issue is human capital management. A grocery store chain, for example, may be expected to disclose to investors how it is protecting employees during the COVID-19 pandemic. Does the company offer paid sick leave? What is the hazard pay policy? Do employees have access to personal protective equipment on the job?
“Diversity and inclusion are also important human capital management issues, not only from an employee perspective, but also from a board perspective,” Rosati said. “Investors want to know whether a company has a highly diverse board. Those that do not have a lot of diversity may make themselves targets for investor votes against certain directors or the entire director slate.”
Knowing that ESG issues are so important, how should companies approach disclosure expectations?
1. Get educated. Learn about the ESG frameworks and standards that are applicable to your company’s industry. The Sustainability Accounting Standards Board and Task Force on Climate-Related Financial Disclosures are two of the more prominent organizations outlining frameworks for ESG disclosures.
2. Engage with investors. Learn what ESG information is important to them and anticipate what questions they may ask so you can prepare.
3. Start small. “You don’t need to develop a glossy 30-page sustainability report the first year you tackle this,” said Hannah Orowitz, managing director on Georgeson’s corporate governance advisory team. “Figure out what you need to address, what you can address now and your game plan for moving forward, and communicate that to the market.”
Companies that have worked on sustainability reporting for years may have developed substantial investor resources related to ESG. For example, PepsiCo has an ESG webpage containing an A-to-Z index of more than three dozen topics along with information and resources about the company’s approach to each of them. That may be intimidating for a company just beginning to address ESG disclosures, but it doesn’t need to be.
“A company like PepsiCo has been doing this for a long time,” Orowitz said. “They have voluminous sustainability reporting, but you don’t need to do that. Yours could be as simple as a five-page index that points investors to where the information is located in your other filings or provides the information in a concise format.”
The growing importance of ESG issues has been more evident than ever this year.
“ESG is impacting proxy voting to a greater extent than we have seen in prior proxy seasons,” Orowitz said. “There are a lot of shareholder proposals that address these topics, which we’ve seen for several years, but directors’ elections are increasingly being impacted by how companies are managing their ESG risks and opportunities. That’s going to continue to accelerate in future proxy seasons based on what large investors have communicated.”
To help shareholder services professionals and their colleagues who are seeking to implement or improve their ESG disclosure practices, SSA is offering an ESG webinar at 2 p.m. EDT on June 25, 2020. Join Brigid Rosati, Hannah Orowitz and Chad Spitler, founder and CEO of Third Economy, for a discussion about ESG, including a look at early proxy season voting results related to specific issues and other trends, moderated by Mark Gereb, shareowner services manager with Verizon.