Earlier this month, I had the pleasure to participate in a Q&A session relating to the Environmental, Social and Governance (ESG) issues on the minds of more than 100 Canadian Investor Relations Officers (IRO) at the IR Magazine Forum - Canada, in Toronto.
Both Valerie Cecchini, Vice-President and Portfolio Manager at Mackenzie Investments (VC), and I (MC) fielded questions from the Canadian market attendees. It was a great opportunity to demonstrate how much the Canadian market has advanced since last-year’s event. Below, we’re sharing the top 5 questions and our responses:
1. How much do investors rely on independent consultants and rating agencies vs. internally collected data?
(VC) Makenzie uses 3rd party data from rating agencies. There are biases that need to be adjusted for in their use; for example, market-size. Smaller companies tend to get lower ratings. Rating agencies like MSCI focus more on policies and readiness instead of internal research. I am more interested in the number of controversies – which are the yellow flags - and not just the single big controversy. The number of controversies signals the organization may be under stress and may be “pushing the envelope” at various levels.
(MC) Every investor is different and is looking for different things. Investors are developing their own proprietary models and processes. The rating agencies generally use publicly available information without much discussion with management, so the level of insight that the Canadian sell-side is starting to provide is being welcomed by the investor community. Some investors, such as hedge and quant funds, are using new tools in the market to scan sources outside a corporate’s disclosure. With more than 600 different ESG rating agencies, an ESG story is being told about your company whether you like it or not. Therefore, issuers need to move into a proactive mode to tell their own story.
2. How important is culture, and can you measure it?
(VC) Culture dictates controversies. How do investors know what is in the DNA of a company? They look for KPIs around culture, and they do interviews with management and boards. It’s noted as a red flag if a board member is leaving after a short stay – it says something about the culture. One’s competitors can replicate a product, but they cannot replicate culture. It is difficult to steal, and it becomes an integral part of the investment thesis as it shows the ability to attract and retain people.
(MC) Employee retention rates or turnover versus industry averages is often an indication of employee engagement and the culture of an organization. For example, the market has been concerned about Starbucks’ ability to retain staff. The company has begun addressing these metrics directly with analysts by disclosing their turnover rates on their analyst calls the turnover rates. They have come to understand that this “cultural issue” is financially material to the market. This is an important step for issuers. They need to be able to identify their financially-material ESG issues and, as they would with any other business issue, understand how to manage it and then disclose metrics on the issue to the markets.
3. What is important to disclose?
(MC) What investors want to know is that companies have gone through a process to identify what is financially material for their organization. Issuers need to own the process of identification, and then use that as a mechanism to educate their own organization and subsequently, the investment community.
Ideally investors would like to find the disclosure on your ESG issues in your regulatory documents. In the absence of your company’s comfort level to do so, then you need to find your own strategy approach to how and where you will disclose.
(VC) There are approximately 150 indicators in the sustainability reports and investors don’t deem all of them relevant. Investors are interested in a subset of them with normalized data. The Sustainable Accounting Standards Board (SASB) is a standard that was jointly prepared with the participation of investors and industry and focuses on key metrics – 80% quantitative and 20% qualitative. It’s a great place to start.
4. What are the best practices for disclosure?
(MC) Companies need to proactively engage investors with what they deem material. Earlier today, Teck Resources took leadership by doing a 1-hour sustainability session as part of its investor day. The session was led by its CEO and provided a great update of how sustainability (or ESG) issues are strategic to their business, with lots of time for Q&A.
(VC) In Europe, we are seeing companies moving to integrated reporting with financial and sustainability results being published in this way, including how climate change is impacting an issuer’s business and financials. Unilever has one of the best disclosures that we see in the marketplace.
5. What are some of the common material issues?
(MC) Some of the most frequent issues we see are climate change, attraction and retention of talent, diversity, cyber security, governance. In governance, investors increasingly want to know if your Board is engaged and taking ownership of your ESG issues.
(VC) Every company is different and each needs to look through to its supply chains and customers to answer that question. As well, conversations are moving from what your impact is on the environment to, how the climate is impacting your business and what you, the issuers, are doing to transition to a low-carbon economy.
Overall there was great receptivity and engagement by the attendees around these ESG issues. It’s obvious that Canadian investors are advancing on their integration of ESG issues and as such, that issuers are starting to feel the impact through increased engagement. We anticipate more and more engagement with issuers as a result of competitive pressures being felt by investors.
For issuers, it’s time to take your ESG issues into your own hands. And as IROs in those organizations, you now have the great opportunity to tell the market your ESG story.
Milla Craig is the Founder and President of Millani Inc.