The annual Investor Relations Society conference took place last week in London. I find this a useful barometer of opinion on the issues facing companies in getting their story out to the wider financial community.
This year there were several sessions focusing on best practice, including thoughts from investors, sellside analysts and Investor Relations Officers. What was perhaps surprising was that the most impactful panel, on “Driving value through ESG”, was at the end of the day, not the beginning.
I wrote a blog last summer on ESG. I concluded that the publication of the revised guidance from the UK Financial Reporting Council on the Strategic Statement in the annual report would be a catalyst which would move ESG reporting from a box-ticking exercise to a fundamental part of the investment decision by large institutional investors. On this front, it is early days, as the guidance only applies to accounting periods starting in January this year.
However, what struck me from the debate at the IRS conference was that the dynamic within investment houses is really starting to change. Every fund manager of any size has been talking the talk on ESG issues for a while, but it has been questionable how many have been walking the walk. I am now getting the sense that the ESG department, historically very separate from the real money managers, often tucked away at the back of the office, is gradually being integrated into the mainstream.
And this is starting to have an impact on corporate behaviour. No longer is it just good enough to “meet the analysts’ numbers” but a company needs to show that it is achieving this in the right way. I can see this being increasingly reflected in results presentations, as companies need to justify their behaviour on these softer issues. And corporate capital market events, which address longer-term strategy, are starting to focus here too. Look at Tesco, which has scheduled an investor day this week just to address its ESG credentials.
One of the fund managers at the IRS conference admitted that they were “in the middle of a journey”, and I would see corporates having to commit much more time and effort to their own ESG journey. And it is unlikely to be easy.
Firstly, meeting analysts’ EPS estimates can look quite straight-forward when there is reasonable consistency on accounting standards. When it comes to reported results, the financial community and companies are speaking the same language. Performing well in ESG is much more subjective, with, I am told, over 200 agencies setting different standards for corporates. “Which of these 200+ questionnaires do I need to fill in?” is the common complaint I hear from Investor Relations Officers.
Secondly, sellside analysts, who have traditionally advised investors, tend to be industry experts, and tailor their commentary accordingly. They would not value a high-growth international tech business in the same way as a value-based UK industrial manufacturer. There is a risk that ESG assessment, similar to the proxy rating agencies in corporate governance, adopt a “one size fits all” approach across industries, leading to justified criticism from corporates that “they do not understand my business”.
As an ex-sellside analyst myself, I confess to having spent very little time on these so-called softer issues in the past. I am seeing some evolution here, with, e.g., Barclays setting up a “Sustainable and Thematic Investing” team within its equity research department. However, there are few signs of this being integrated into the mainstream of sector analysts issuing Buy and Sell ratings. This certainly needs to change if these analysts are to remain relevant for their investor clients. Perhaps they need to accept that a company with good ESG credentials deserves a higher valuation than a company with a lower score? Investors certainly seem to be moving in that direction.
What I am sure about is that the subject of ESG will move higher up the agenda for the next Investor Relations Society conference, and any company, which does not pay much more attention to this area, risks losing relevance with institutional investors.