LEAD ARTICLE

IROs are old hands at being evaluated by everyone from buy- and sell-side analysts to portfolio managers allocating finite assets among thousands of possible public company contenders.

Now, however, IR professionals find themselves vying to win top marks from a new group of evaluators: the growing cadre of environmental, social and governance (ESG) ratings and research firms out there.

The challenge begins with determining which ratings agencies to watch. Among the most important for Canadian companies, say the IR experts, are ISS, MSCI, Sustainalytics, and Bloomberg. Depending on where a company operates and what industry it is in, smaller, less well-known firms may be influential as well.

Lorne Gorber, Executive Vice President, Investor and Public Relations for CGI Group in Montreal, notes that ESG information is sometimes even solicited by third parties at the request of institutional investors. In such cases, IROs could find themselves fielding unexpected phone calls from individuals outside Canada in search of extremely specific information.

Gorber finds that staying abreast of ESG ratings is occupying more time than ever. Not only is he looking at his company’s various ESG ratings at least monthly, but also his conversations with investors are increasingly touching on ESG. “In a one-hour investment meeting, instead of five minutes being devoted to the topic, it might be 10 minutes now,” he says.

Susan Sheehan, Vice President, Sustainability Consulting for G&S Business Communications in Toronto, has also observed that the importance of ESG for IROs is growing. “Over the last few years, it went from ‘I’m not really sure ESG is important to us’ to ‘We’re getting these questions regularly in investor meetings,’” she says. “We were seeing a lag effect, but now it’s as if a tsunami has hit.”

How ESG Scores Are Determined

Third-party ESG ratings firms fulfill a critical need for investors interested in the admittedly vast undertaking of comparing ESG practices among public companies. These firms, wrote Martin Small, head of U.S. iShares for BlackRock, “provide crucial information that would be difficult for any but the deepest pockets to obtain on their own, and, importantly, create a framework for comparison, be it letters, numbers, stars or some combination. Try to imagine assessing the credit risk of a corporate bond without information gathering by the major rating agencies.”

For IROs, understanding the various ESG ratings agencies and how they determine scores is no easy feat. Take, for instance, ISS, which for several years now has published its own QualityScore, a rating that focuses on transparency and disclosure. In 2018, ISS acquired Munich-based oekom research, which provides “more of a full ESG risk rating,” and so ISS now has “two different ratings systems with two separate purposes,” explains Mark Brockway, Managing Director at ISS Corporate Solutions.

The fact that ISS backs two separate ratings systems underscores a larger challenge for IROs: the various ESG ratings systems do not always yield consistent results. In fact, State Street research has shown that there is only a 0.53 correlation between ESG scores from MSCI and Sustainalytics. 

Since ESG ratings can differ dramatically and because IROs are experiencing what Brockway terms “survey fatigue,” he advises investor relations professionals to ask their leading shareholders to name the ratings agencies they rely upon. Once an IRO knows the two or three most influential ratings firms for his or her unique shareholder base, the IRO can focus on providing detailed information to them on a regular basis.

What’s more, Catherine McCall, Executive Director for the Canadian Coalition for Good Governance (CCGG), observes that institutional investors prefer to get their ESG information directly from companies whenever possible. “There’s a push,” she says, “for companies – not the ratings agencies – to provide this type of information. The belief is the information will be more accurate and reflect the company’s view of what risks and opportunities it is facing better than an outside service provider’s ranking can.”

Gorber also says that he favours direct engagement over simply supplying numbers. He points out that CGI recently received a cold call from an individual asking what percentage of his company’s revenue derived from military activity. A question like this is difficult to answer, he says, because of gray areas, such as CGI’s support for the help desk of a Navy training base in Maryland. He maintains that discussing these nuances with investors can be far more meaningful than furnishing a statistic that is open to misinterpretation.

Setting the Record Straight

Sheehan urges IROs to develop a roster of internal colleagues to call when answering ESG questions. “The IRO may be the captain with the ball,” she says, “but you need to have a go-to person for environmental and for workplace diversity questions, as well.”

To illustrate how this might work, consider CGI, where Gorber relies on the legal department to spearhead all comments on ISS reports. However, he says, it takes a “collective effort” involving global services from procurement to IT, legal, and finance to respond to the extensive questionnaires from the Dow Jones Sustainability Indices.

Brockway encourages IROs concerned with accuracy to regularly check ISS’s online data verification system. He notes that challenges from public companies prompt an ISS analyst to reexamine the company’s ratings, but only when challenges are accompanied by supporting disclosures. IROs seem to be learning this lesson. Brockway notes that in any given year, more than half of all companies in ISS’s global system are now verifying their data.

Although responding to the ESG ratings agencies is important, no single rating will determine a company’s fate. In fact, G&S’s Sheehan describes ESG ratings as a starting point for investors, most of whom will then perform their own analysis before reaching a final investment decision.

Martin Grosskopf, Toronto-based Vice President and Portfolio Manager for AGF Investments, which has approximately $35 billion in assets under management, relies primarily on MSCI for ESG research. That said, he cautions that MSCI’s ratings are only “an input” and that it is the investment manager who determines what is material ESG information for any prospective investment.

Grosskopf continues: “If we see a company with a poor MSCI rating, we’re going to ask: ‘What’s your dialogue like with MSCI? And why is your rating so bad? You guys should be doing better on this.’” He maintains that “there’s a bit too much reliance in the industry now on ESG ratings” and that investors need to be ready to dig deeper.

Telling Your ESG Story

Although some IROs rail at ESG ratings, CCGG’s McCall points out that the ESG ratings agencies rarely serve as the final arbiters. “The ratings agencies have power, but it’s your shareholders you really need to know. It comes back to investor relations people knowing who their shareholders are and what they think,” she says.

Sheehan raises a similar point. She observes that an IRO who wants to correct a distortion by one of the ratings firms will need to have documentation to back up assertions. “If you don’t tell the story, you can’t own the story,” she says. “You have to tell your own story and not rely on ratings agencies or investors going on an Easter egg hunt for all the information.”

For IROs, whose stock in trade is effective communications, ESG questionnaires may someday be viewed less as a burden and more as another opportunity for painting a nuanced portrait of your company. “If you want to own the narrative and own the story with your investors, you have to make an investment in telling your own story and not waiting for the ratings agencies to tell your story,” concludes Sheehan.