Commentary

Investor Relations: the Good, the Bad, and the Uninformed on ESG

Direct engagement with companies where we are shareowners is one of the most impactful ways to promote progress on environmental, social and governance (ESG) issues. But often lost in the big picture ESG goals we discuss with companies is the critical role played by their investor relations (IR) teams. At ClearBridge, we have always recognized the importance of IR and it has provided us access to senior management, such as the CEO, CFO and Board of Directors, that other investors may not have. As part of our ongoing effort to raise awareness of corporate ESG practices, we have helped educate IR teams through presentations to local National Investor Relations Institute chapters as well as a recent presentation at the NYSE to 200 corporate IR officers about ESG and shareholder value from an investor’s perspective.

Exhibit 1: Who Handles ESG Communications?

Source: SRI Connect.

Education is conspicuously needed as ESG issues remain a low priority for the majority of IR teams at U.S. public companies. Just 24% of IR professionals surveyed in 2015 were directed by their companies to communicate the value of sustainability in contributing to profitability; nearly 40% were given no direction on sustainability reporting while nearly 80% did not regularly include ESG talking points in investor presentations.¹ Some of the confusion may be a result of different companies assigning different groups to lead their ESG communications efforts (Exhibit 1).

Exhibit 2: Sustainability Reporting is Steadily Increasing

Source: Governance & Accountability Institute.

This lack of IR involvement is inconsistent with the meaningful progress made by companies in their sustainability reporting. Exhibit 2 tracks the increase in reporting among U.S. large cap companies. Meanwhile, the Global Reporting Initiative, an international organization that advocates for corporate reporting on ESG issues, says that 95% of the world’s 250 largest companies now issue sustainability reports.

We have witnessed shortcomings as well as notable breakthroughs in our three decades of experience working with IR that provide useful perspectives on the value of these partnerships. To encapsulate the three main categories of IR awareness and responsiveness to investor outreach on ESG issues, we have laid out the landscape as follows:

The Good

At its very best, IR can serve as a company communicator, facilitator and internal advocate on ESG. Good IR officers have the ear of the CEO and CFO and are well informed on the sustainability strategy of the company. Most of our successful engagements with companies have been facilitated through IR. These productive communications have included a consumer products company that, due to their CEO’s commitment to sustainable business practices, involves ClearBridge’s consumer staples analyst in their sustainability advisory outreach. The CEO of a biotech company has IR reach out specifically to our health care analyst for investor feedback and sustainability recommendations. Meanwhile, the CFO of a large media company, who oversees IR outreach and sustainability initiatives, provides our media analyst with regular updates on their progress.

The Bad

Unfortunately, IR teams can also work to the detriment of ESG efforts. In these instances, IR plays the role of gatekeeper, blocking or limiting access to company management due to indifference, defensiveness or being overly skeptical of the value of ESG. For example, IR for a major retailer would for years put the general counsel on calls with our analysts whenever the words "environment" or "labor" were mentioned. Prior to the 2010 explosion of the Macondo well, IR for an oil services company told our energy analyst that everything was fine and no questions needed to be addressed about the environment or safety. Meanwhile, IR for a media company questioned why we were interested in sustainability and we had no business asking his company about such topics.

The Uninformed

Some IR teams are simply unaware of what is taking place internally in ESG, have no idea there are corporate sustainability initiatives and believe investor engagement is only about governance and executive compensation. IR may be unaware of the E, S, or G issues their company faces - from both a competitive and a sustainable shareholder standpoint. However this situation can be turned around and is well worth the time our sector analysts spend on engagement, as we have found many companies we invest in will rise to the challenge.

For example, ten years ago an IR officer for a major retailer said he had no idea about sustainability, but he would "find some people in the company" and he would listen in as well "to be educated on ESG." The company has evolved into an industry leader in promoting ESG best practices. IR for a financial services company, meanwhile, couldn't understand why we were interested in carbon emissions as they were not an oil company. This company was overlooking the tremendous amount of power used for their offices around the country and for business travel. We informed the IR manager that if he reviewed the Carbon Disclosure Project (CDP) for the Financials Sector, he would see that not only had his company’s peers been reporting for some time, but these competitors were already in the top 10% of sector reporters to the CDP. A technology company IR rep told us he would be the only one who would understand sustainability at the company and that he would figure it out when he had the time. The company gave this same response for two years. Our IT software analyst has since placed the company under review for lack of engagement.

Communicating with IR

As a top 20 share owner of many of the companies in our portfolios, we have been told by IR representatives over the years that our interest and support for sustainable business practices and disclosure has made a difference. Specifically, it has helped move the needle internally to promote innovation, transparency, and integrated reporting (which combines elements of the company’s sustainability reporting with the annual report). Exhibit 3 shows the growth of the number of large global companies that are integrating their corporate responsibility (CR) reporting into the Annual Report. Interestingly, the eight companies (none U.S.) with the highest rates of sustainability disclosure in financial investor reports all have legislation that requires it.

IR teams in the U.S. will often ask for our direction on sustainability reporting and we have shared feedback on what is helpful to our sector analysts, who formally assign an internal ESG rating for every company under their coverage. Our guidance has included reporting on why sustainability may provide competitive advantage (e.g., better energy efficiency, lower costs, top line growth, stronger reputation) as well as goals and targets on key metrics that are relevant to that company’s industry or business model (e.g., emissions reductions, water volumes recycled, diversity goals, lost work days, living wage).

Exhibit 3: Percentage of 100 Largest Global Companies That Include Corporate Responsibility Data in Annual Reports

Source: KPMG Survey of Corporate Responsibility Reporting 2015.

The goal of our engagements with IR is to turn these crucial corporate contacts into our ESG advocates within the companies where we are share owners. When properly educated about the growing importance of sustainability to investors, IR teams become valuable communications conduits to the ESG decision makers within our covered companies. As illustrated by the progress of previously "uninformed" IR teams, these groups can be change makers that increase awareness, improve disclosures and assimilate ESG considerations into the business models of the companies they represent.