Elizabeth Judd, Writer
When IROs seek novel investor groups to target, responsible investors don’t always appear on their radar screens.
Slowly and steadily, though, awareness of socially responsible investing (SRI) is growing. Each year, a number of Canadian companies are voluntarily participating in the Global Reporting Initiative, a framework indicating what environmental and social information should be disclosed in the interests of promoting a sustainable economy.
Still other companies are striving to be included in SRI indexes, such as the Jantzi Social Index. And some are training a close eye on precisely what criteria Sustainalytics, MSCI, and other research companies use to determine an investment’s attractiveness through an ESG (environmental, social, and governance) lens.
Marie-Josée Privyk, Director of Investor Relations at Innergex Renewable Energy Inc., says that companies in the natural resource sector have been “keenly aware” of their environmental impact and how this impact must be responsibly addressed. Innergex, she says, recognizes that its renewable energy story might appeal to socially responsible investors, and has recently begun mulling what approach to take. The company has intuitively developed a sustainable business model over the years. “The next step,” she says, “will be to formalize our approach and target more specifically investors that have a responsible bias.”
Privyk is ahead of a wave that has been growing in Europe, where IROs have been keen to attract SRI investors for many years now. In its 2013 study of the state of IR in Europe, Citigate Dewe Rogerson found that 22% of European roadshows scheduled this year will target SRI investors. In Germany, a whopping 53% of companies said they’d actively target SRI investors, while the report chided UK companies for appearing “to be potentially missing a trick” because only 14% planned to visit this investor group within the next 12 months.
“In Canada, a lot of oil and gas and materials and mining companies are acutely aware of these issues given the nature of the resources and extractive industries,” says Ryan Pollice, Senior Associate at Mercer in Toronto. “Europe has been ahead, but you can’t count out Canada. There are a lot of people doing good work here.”
Understanding the Market
Although estimates of the size of the SRI market vary widely, the Social Investment Organization suggests that as of the beginning of this year, nearly 20% of Canadian assets under management in the financial industry – or $600 billion – were managed using SRI guidelines. The growth of these assets is also outstripping the broader market. According to the group’s Canadian SRI Review 2012, assets managed under sustainable and socially responsible guidelines in Canada grew 16% between June 30, 2010, and December 31, 2011, compared to 9% for total Canadian assets under management.
Some contend that SRI asset figures are inflated. This debate is difficult to settle because there’s so little agreement on which assets qualify for inclusion – or even what terminology applies. (This investment group falls under a number of different rubrics from SRI to ESG to responsible or ethical investing.)
Although measuring the size and strength of this investment class is challenging, a compelling case can be made that many large institutions with household names and billions in assets are increasingly concerned with environmental, social, and governance issues.
Robert Walker, Vice President, ESG Services at NEI Ethical Funds, which has roughly $3 billion in SRI-screened investments, notes that the Canada Pension Plan Investment Board, with $188.9 billion in assets, and the British Columbia Investment Management Corporation, with over $100 billion in assets, are actively looking at ESG issues when making investment decisions.
At the same time, more institutions are expressly using SRI criteria. NEI Ethical Funds is one investment manager with an SRI focus. Others include Desjardins Funds, OceanRock Investments Inc., Vancity, and IA Clarington Investments Inc.
Meeting Information Needs
One way to reach responsible investors is sustainability reports, which have improved dramatically over the past 15 years, maintains Walker. “We’ve come a long way from the days of sustainability reports focused on every $5,000 donation a company ever gave to an NGO,” he says.
That said, sustainability reports still show room for improvement. “We’d like to see a sharpening of pencils when it comes to diving down deeper into key, material ESG issues,” says Walker.
Deb Abbey, Executive Director of the Social Investment Organization, agrees, and therefore anticipates that companies will soon integrate ESG topics into a more general conversation around performance. “We’re seeing more focus on quantifying risks, and the leaders in every sector are moving in this direction,” she says.
Pollice describes this shift towards integrated reporting as a welcome one. “Integrated reporting is the attempt to move from a separate sustainability report to reporting on ESG issues alongside – and integrated with – the normal financial reporting that a company does,” he says.
“The most important things for investors is that the company adequately spells out what the ESG risks – or opportunities – are, and how those particular issues relate to the business’s strategy,” says Pollice. To illustrate, he notes that both The Coca-Cola Company and Levi Strauss & Company, which rely heavily upon clean water in their supply chains, are proactive when it comes to explaining water scarcity issues.
One way companies can move towards more integrated reporting is by taking part in the International Integrated Reporting Council’s (IIRC) pilot programme. In Canada, both Teck Resources Limited and Vancity have signed on.
Written reports are not, of course, the only possible mode of communication. Walker also urges companies targeting the SRI community to “highlight the significance of material ESG issues” in their regular analyst calls. For analysts with ESG expertise, opening up the conversation to ESG issues would give them a “chance to probe a little deeper,” he says.
Another way to achieve these ends might be the fifth analyst call – an additional conference call taking place between the release of the proxy and the AGM. Peter Chapman, Executive Director of SHARE (Shareholder Association for Research and Education), a Vancouver-based advisor to institutional investors on responsible investment issues, notes that IROs hoping to cultivate relationships with responsible investors might view fifth analyst calls as an avenue for meeting the “specific information interests” of this group.
No matter what communications vehicles a company chooses, whether it’s sustainability reports or supplementary analyst calls or roadshows, what matters most is providing the SRI community with information that goes beyond the merely anecdotal. “In order for information to be useful, it has to be given context and it has to be comparable year-over-year,” says Pollice. “Investors want to know if companies are achieving their goals and whether their achievements are getting better over time.”
Kevin Ranney, Director, Advisory Services, at Sustainalytics, points out that the past decade has seen “a tremendous growth of interest” in ESG information, especially in details that are material to financial performance. “To get a full picture of a company within a traditional perspective of financial analysis really requires understanding of the risk exposure – and the opportunities – that a company might face that relates to ESG issues,” he says.
Ranney notes that several Canadian companies are gaining recognition for their strength in ESG disclosure. As examples, he cites Bombardier Inc., Kinross Gold Corporation, Westport Innovations Inc., and Gildan Activewear Inc., all of which are included on the Jantzi Social Index.
Arguably, the darlings of the SRI world have hit upon far more than a way to attract some additional attention. There’s mounting evidence that soundly run companies with an eye to environmental sustainability and their own long-term viability are attractive because they also demonstrate strategic and managerial astuteness. Professor Benjamin Richardson, Canada Research Chair in Environmental Law and Sustainability at the University of British Columbia, notes that some academics are demonstrating that “being attentive to ESG issues can make you financially prosperous over the long term.”
Allies Against Short-Termism
As the financial community continues to clamor for more generous disclosure, ESG issues are getting more attention, too, says Abbey. “We will,” she predicts, “see more regulatory requirements of transparency around these issues.”
To illustrate, she cites the Sustainable Stock Exchanges (SSE) initiative, a peer-to-peer learning platform exploring how exchanges – in collaboration with investors, regulators, and companies themselves – can encourage sustainable investment and enhance corporate transparency (and ultimately, performance) on ESG issues.
Finally, Chapman sees a link between a disillusionment with short-termism on the part of investor relations officers and a growing interest in SRI. He notes that the typical ESG investor has a more forgiving time horizon, and that “a lot of sustainable or responsible investors are long only.” Thus, Chapman points to an alignment between the savviest IROs and those investors who view ESG issues as critical.