Many IROs do a phenomenal job of disclosing earnings and letting investors and other stakeholders know what’s driving a company’s financial performance. On the other hand, it’s only a small but admittedly growing group of IROs who do the same outstanding job when it comes to letting investors and other stakeholders know where their companies stand on non-financial issues, such as ESG, or environmental, safety, and governance.
In a 2016 Canadian investor survey New Insights into What Investors Want from Disclosure, Donnelley Financial Solutions and SimpleLogic found that when making investment decisions, 65% of institutional investors often or always consider environmental and social issues, and 95% often or always consider governance issues – for all investments.
According to John Truzzolino, Director, Business Development, at Donnelley Financial Solutions, major investors like BlackRock are looking more closely at “the link between the materiality of corporate sustainability to the company and how companies are explaining that materiality in their disclosures.”
“The number of socially responsible ETFs is increasing as we speak,” says Truzzolino. “More people are looking to put money into these socially responsible funds. And while the dollar amount is fairly small, it will continue to grow.”
Truzzolino also points to regulatory changes driving companies to take their ESG disclosures more seriously. He says that in 2013, 180 ESG-related regulatory initiatives were identified, while today there are over 2,000. In Canada, for instance, many public companies are now subject to new disclosure requirements with respect to the representation of women on boards and in senior management positions.
What’s more, the number of required ESG disclosures is likely to increase. As part of its Disclosure Effectiveness Initiative, the SEC issued a concept release in April that included questions around non-financial issues. The SEC was soliciting feedback on whether disclosure reform should look at ESG issues, specifically climate change, resource scarcity, corporate social responsibility and corporate citizenship.
Randy Mah, Senior Manager of Investor Relations at Capital Power Corp. in Edmonton has worked in IR for 16 years and notes that this topic “is more prevalent now compared with five years ago.”
That said, ESG is hardly a subject IROs find themselves addressing on a daily basis. Nicholas Estrela, Director of Investor Relations at Domtar in Montreal, notes, “sustainability is part of our core values.” When he travels to Europe to visit investors, he fields frequent questions about environmental impact and sustainability, “and yet,” he says, “sustainability questions come very, very rarely in North America.”
New Initiatives and Reporting Standards
The markets, says Truzzolino, are looking to ESG because of five separate drivers: regulatory requirements, investor demand, stock exchange requirements, disclosure frameworks, and ratings and rankings.
Although he, too, notes that interest levels are higher in Europe, Truzzolino finds this discussion to be more prevalent in Canada than in the U.S. “On a per share basis, everyone has been paying more attention to ESG in Canada, which is why we decided to do the survey there and not in the U.S.,” he says.
This fall, several disclosure frameworks have made headlines. On October 19, GRI launched the world’s first global standards for sustainability with the goal of “giving companies a common language for non-financial information.” Meanwhile, the Sustainability Accounting Standards Board (SASB) is also getting plenty of press, with lengthy articles in The New York Times and The Wall Street Journal.
Truzzolino applauds the rise of more and better reporting standards, noting that these standards encourage “comparabilities within your disclosures.” He continues: “Companies tell their stories within 10-Ks and CSR reports, on corporate web sites, in annual reports, and in questionnaires. You want to make sure that it’s the same story you’re telling in all those places. Companies have to focus on the consistency within their own brands – and to do that, you need standards.”
Dominique Ramirez, Director of Corporate Social Responsibility at Goldcorp Inc. in Vancouver, praises The Global Reporting Initiative (GRI) for providing “a common base so people can compare apples to apples.” She points out that GRI varies its metrics by industry, and that Goldcorp conforms to the guiding principles of her industry association – the International Council on Mining and Minerals. She also makes sure that ESG information provided is aligned with the United Nations Global Compact.
In addition, though, Ramirez has an “open door policy” for answering stakeholder questions on a one-on-one basis.
Greg Waller, Vice President, Investor Relations, at Teck Resources in Vancouver, credits disclosure frameworks for evolving to focus on materiality. “Ten years ago,” he says, “we used to get these questionnaires from rating agencies, and they would ask innumerable questions and you’d say: ‘What the heck is the relevance of this?’ In order to be evaluated and get the best marks, you had to respond. Today, though, there really is a trend of focusing on materiality.”
Finally, when it comes to third-party evaluators, such as Sustainalytics or Vigeo, IROs quibble about aspects of the process but not about the practice itself. Waller sees “increasing sophistication in the evaluation processes,” adding “most of them are quite fair and reasonable.”
Domtar’s Estrela agrees, noting that his company is implementing changes proactively so when new requirements appear, “we will already have the infrastructure set up.”
Estrela also emphasizes the importance of monitoring all that’s said by third parties in order to correct misimpressions as swiftly as possible. “One of our jobs is to stay on top of things, maintaining our relationship with a lot of these third parties and making sure whatever they publish is accurate,” he says. “It’s a two-way conversation.”
Getting the Message Across
Only 30% of Canadian institutional investors surveyed by Donnelley and SimpleLogic found that the ESG information provided by companies is good enough to help them assess materiality to a company’s business. Seventy-five percent of respondents prefer getting ESG information from third parties, but here, too, they say they’re still not getting the information they need to understand materiality.
Truzzolino notes that companies “are exposed” because they are now letting third parties tell their stories. He says that if IROs don’t tell their own ESG stories effectively, they’re at the mercy of outsiders doing it for them.
For companies everywhere, the lack of comprehensive ESG information represents a rich opportunity to step up to the plate and begin delivering the quality non-financial information that investors are requesting.
Teck is one company that is communicating proactively. Every other year, Teck embarks on a roadshow with a socially responsible investing (SRI) focus. In addition, Waller hosts what he calls “the fifth conference call,” or a conversation after the sustainability report is published that highlights findings, allowing investors, analysts and rating agencies time to participate in a live Q&A.
Waller says that while the response to the extra conference call and the SRI roadshow has been “reasonably good,” he wonders whether these efforts would garner more attention if the company didn’t already enjoy such a strong record in this area. For the past seven years, Teck has been named to the Dow Jones Sustainability World Index, a sign that its sustainability practices are in the top 10% of the 2,500 largest companies in the S&P Global Broad Market Index. “A company not ranked so well in this area might have to spend more time answering questions,” Waller maintains.
Meanwhile, sustainability reports continue to be very important vehicles for telling a company’s non-financial story. As an example of a Canadian mining company that has been producing a sustainability report for 10 years, Goldcorp covers a broad array of topics, says Ramirez. CSR topics include the environment, safety and health, people performance, social performance, engagement with indigenous people, and human rights issues.
What the Future Holds
For companies serious about telling their own ESG story effectively, the first step is "owning" the project by assignig an individual or team responsibility for making sure the story is told thoroughly and well, says Truzzolino. He also advises companies to look to their peers and to perform third-party assessments to gauge the trajectory of the industry.
ESG disclosures themselves are in need of improvement. A handful of leading companies has stopped using boilerplate; instead sharing concrete numbers around water use reduction and then explaining whether these numbers meet or exceed stated goals and by how much.
“Some companies are making a change from boilerplate information to specific information as it relates to materiality,” says Truzzolino. “That’s what investors want and that’s what they’re saying they haven’t gotten enough of.”
Finally, Teck’s Waller emphasizes that IROs need to hone the business case for communicating about non-financial topics. “In our business,” he concludes, “it’s going to be those companies with a good track record – and that can demonstrate they’re dealing with sustainability issues in the very broadest sense – that are going to get the approval to build projects and therefore reinvest in their businesses and grow. There’s a fundamental business case for communicating [about non-financials], in addition to it being the right thing to do.”