Building bridges: how disclosing risk helps companies connect with investors

Eric Vermeiren

 

Posted in: Policy & Research, Speaking Out, Strategy, Sustainable Investment

Building bridges: how disclosing risk helps companies connect with investors

November 08, 2016

Corporate Citizenship’s new Long-Term Value Project is exploring the disconnect between corporate responsibility (CR) and investor relations (IR). Eric Vermeiren explores how CR and IR teams can work to bridge the gap.

 

The investment community doesn’t care about environmental, social and governance (ESG) issues.

What’s more?

Sustainability practitioners within companies don’t provide the investment community with adequate information on ESG issues.

… Or at least these are assertions commonly held by sustainability and investment professionals.

 

But Corporate Citizenship’s research shows that this disconnect between investment and sustainability communities needn’t be the case.

While not yet the norm, the number of investment professionals incorporating ESG information into their financial analysis and decision making is growing substantially.

And despite what some may believe, the attention paid to ESG issues is not limited to activist or specialist sustainability investors. Larry Fink, the CEO of the world’s largest asset manager, BlackRock, sent a letter to CEOs of leading companies earlier this year urging them to take into consideration longer-term macroeconomic trends and ESG factors, beyond short-term quarterly targets.

So what should companies (particularly sustainability professionals within companies) do?

Well, it comes down to establishing a link between your company’s ESG issues and its broader business strategy.

  • If a company is upfront and discloses the ESG risks and opportunities it may face, it helps to establish trust and sends a signal to investors and shareholders that company management understands potential vulnerabilities.
  • Secondly, if a company is clear about how how it’s going about managing ESG-related risks and opportunities (e.g. by setting goals & targets), it sends a further signal that it is paying attention and working to address material issues.

Of course, being transparent and disclosing ESG-related risks only goes so far without a concerted communication effort. So, companies should also be proactive in articulating their risks, opportunities, and performance on ESG issues in their outreach and communications with investors.

This will require better collaboration between a company’s CR practitioners and its IR team, to ensure that the ESG information that’s being disclosed is what investors want, and that it’s being communicated to the right audiences.

The disclosure/transparency/communication approach

Identifying and communicating material ESG issues to investors can yield big wins for companies.

An example of a company taking a proactive approach to disclosing and communicating its ESG risks is BHP Billiton. The mining and energy giant was facing mounting pressure from activist investors and environmental groups and decided to get ahead of its critics.

The company reached out to shareholder advocacy group As You Sow for guidance on how to best disclose the risks it faced from hydraulic-fracturing for oil and gas, including its use of toxic chemicals, water consumption, waste management, air emissions, methane leakage, and impacts on surrounding communities.

Disclosing its risks from fracking in no way let BHP Billiton off the hook (the environmental and social risks posed by fracking are well documented). But by informing its investors of its key ESG risks and how it’s managing them, BHP sent a clear signal that it is working to be more accountable to its stakeholders concerned about risks from fracking. Steven Heim, managing director of Boston Common Asset Management, an investor in BHP Billiton, was quoted as saying that without greater disclosure, “investors have no way of crediting those companies making meaningful efforts to adopt best practices and mitigate their impacts on communities and the environment.”

Another example is agricultural colossus Archer Daniels Midland (ADM). The company was facing calls from some of its investors to take greater environmental and social responsibility for the way its products were produced.

Rather than ignore these requests, ADM engaged with Green Century Capital Management, a mutual fund manager that focuses on sustainability, and the New York State Common Retirement Fund to come up with a no-deforestation policy covering its soybean and palm oil operations.

Its policy sets a clear commitment to no deforestation, and to progressive action focused on opportunities for future improvements to ADM’s supply chains.

These are just two example of companies that flipped the script.

By transparently disclosing and communicating their ESG risks with investors and stakeholders, these companies were able to shift what were initially adversarial situations into productive collaborations focused on creating long-term shareholder value.

At Corporate Citizenship, we’ve identified a framework for improvement on how companies can bridge disconnects through a series of practical actions. It’s the first part of our Long Term Value Project, a new initiative by Corporate Citizenship looking to bridge the gap between IR and CR. We want to hear from companies, investors and other interested parties. Get in touch!

 

Eric Vermeiren is a Consultant at Corporate Citizenship.

To learn more about how companies are finding common ground with their investors and embarking upon building long-term commercial success, download the first instalment of Corporate Citizenship’s Long-Term Value Project.

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