Change the Conversation—Redefining How Companies Engage Investors on Sustainability

Kristen Lang is a senior director at Ceres. This post is based on her Ceres memorandum. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

When Ceres released The Ceres Roadmap for Sustainability—our vision for corporate sustainability leadership in the 21st century—in 2010, sustainable business leaders were easily identified and few in number. Now it is commonplace to find a “sustainability” or “corporate responsibility” section included on company websites. Increased public awareness, regulation and investor interest has made acknowledging environmental and social impacts, and claiming a commitment to be “sustainable,” a mainstream practice for doing business today.

Nearly half of the 600 largest public U.S. companies are formally communicating with investors in some way on sustainability, via annual meetings, quarterly earnings calls, investors days and more. But how those companies are engaging, and the depth and value of those engagements, varies widely. For example, most companies still share information in ways that reinforce the misconception that these issues are extra-financial and not material. They also fail to provide investors with the information they need to understand and value the positive impacts of sustainable business strategies on corporate health and financial performance.

For 30 years, Ceres has partnered with leading global corporations and investors to better integrate environmental and social considerations into business strategies—effectively working together to redefine business as usual. As active advocates leading these corporate and investor dialogues, we understand that for many companies, engagement with investors on environmental, social and governance (ESG) issues is fraught with trepidation and resistance. This leads to reactive, less-effective interactions with interested investors. Without deeper insight on what ESG information investors value, how investors want to see this information and who they want to hear from, companies will continue to fall short in providing the decision-useful information investors need to fully understand and value the financial implications of critical sustainability risks and opportunities.

In collaboration with more than 25 Ceres investor partners—including some of the world’s largest asset managers and asset owners, ESG-oriented asset managers, ESG and governance analysts, and proxy advisors—we conducted a series of interviews to further explore the themes and observations gleaned from our decades of experience in corporate and investor dialogues.

In these conversations, we sought to get answers to the most common questions we hear from companies every day:

  • What does meaningful ESG disclosure look like to the investor community, and where and how do they want to see it?
  • What timeframes are investors interested in: short- or long-term?
  • How do investors define sustainable business leadership?
  • How, in an increasingly crowded space of companies claiming to be sustainable, can companies stand out and be rewarded by investors for their leadership?

What emerged is a set of nine recommendations, outlined under three strategies, to guide companies toward more meaningful and effective investor engagement on ESG issues.

Strategy #1: Formalize sustainable business integration

  1. Demonstrate accountability for
  2. Develop the sustainability business
  3. Cultivate collaboration between sustainability, investor relations and governance

Strategy #2: Identify what to disclose and where to disclose it

  1. Focus investor-directed disclosures on what is material, but don’t ignore emerging
  2. Disclose decision-useful information, both quantitatively and
  3. Disclose sustainability information consistently where investors are already

Strategy #3: Implement a proactive investor engagement strategy

  1. Use language that investors understand and
  2. Leverage the C-suite and board of directors as key
  3. Diversify investor engagement

This post describes how these recommendations relate to and build upon one another. Most importantly, it explains how companies that take these steps can be better positioned to meet investor expectations and capture competitive advantages.

The Sustainable Investment Landscape

Integrating environmental, social and governance (ESG) factors in investment decision-making is fast becoming a mainstream practice among investors of all types and sizes. today, ESG investing represents about one quarter of all professionally managed assets around the world. In 2017, investments guided by ESG criteria rose to $12 trillion in the U.S. alone, nearly double from 2014 levels, and these investments have risen to nearly $23 trillion globally. And wealth transfers to a new generation of millennial investors will likely drive this trend to accelerate even further and faster.

These trends are accompanied by increased investor activity focused on improving and accelerating company ESG performance and commitments. To enable effective engagement and accurate assessment, investors are coupling increased activity with demands for improved access to more and better information. More than ever, what companies publicly disclose and proactively share with investors on ESG issues is critical in distinguishing leadership among sector peers.

While investor engagement strategies vary—including direct dialogues, proxy voting, collective requests and shareholder proposals—those related to environmental and social issues are increasing in frequency, influence and impact. Shareholder proxy proposals that at one time received only single percentage points in voting support are now reaching majority levels. The 2017 and 2018 proxy seasons, for example, saw majority votes for climate change-related shareholder resolutions at some of the largest energy companies in the world, including ExxonMobil, Occidental Petroleum, PPL and Kinder Morgan. The 2018 proxy season also saw many shareholder resolutions withdrawn in response to proactive corporate commitments and actions driven by investor dialogue and engagement.

Beyond asking companies to recognize, assess and mitigate sustainability risks they face, investors also want to see sustainability as a path toward future success. In 2018, the then CEO and Chairman of Vanguard called on companies in its portfolio to proactively integrate sustainability into business strategies.

For too long, companies have sacrificed long-term value creation to generate short-term results, which erodes the sustainability strategic investors seek.”

—Bill McNabb, former vanguard Chairman and CEO

And in his 2019 letter to CEOs, Larry Fink, the CEO of BlackRock explains that as fiduciaries for its clients, BlackRock advocates for practices that it believes will drive sustainable, long-term growth and profitability. The letter again argues that companies without purpose will deliver subpar financial returns.

Profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked. Purpose unifies management, employees, and communities. It drives ethical behavior and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company.”

—Larry Fink, CEO of BlackRock

Asset manager giant State Street is also weighing in affirmatively for stronger ESG actions.

In 2018, the firm used its voting power to influence companies in its portfolio on board gender diversity, voting against 511 companies for failing to address gender diversity. State Street’s interest and engagement resulted in 152 companies adding a woman director to their boards and another 34 agreeing to do so in the future.

Investors are pushing for these measures because they recognize that sustainability is core to business value creation. Studies from wide-ranging sources, including Oxford University, Harvard Business School, Morgan Stanley and Bank of America Merrill Lynch, all affirm that a focus on a sustainable business strategy can provide a competitive advantage in stock price, cost of capital and operational performance.

As an analyst from a major U.S. asset management firm explained to us, “I think it is inevitable and positive that these issues will get more weight in the future. Consumers are going to care more and more about this. It’s already happening. And clients too. One reason we have an ESG staff that is three times bigger than it was a few years ago is because clients are asking more questions.” Socially responsible investment (SRI) firms are also seeing these shifts.

As one SRI analyst observed, “There are big changes we are noticing—like the majority vote at Exxon with BlackRock and Vanguard. These large firms are building up their teams in this area. What was once on the fringes is now the mainstream.

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The complete publication, including footnotes, is available here.

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