… because that’s the way it works in ‘mainstream’ investment.
What?! You want more reasons?!
Isn’t everything we have been trying to do for the past 20 years to integrate sustainability into mainstream practice so that capital can flow smoothly from unsustainable to sustainable economic activities?
… and the mainstream investor communications process works fine. Of course, there are a few conflicts of interest around investment research and corporate access and some inefficiency baked into the fact that sell-side firms dominate the process … but it basically does the job … and Zoom has made it much more efficient than it was previously and there are much bigger problems to be solved in investment.
… but you still want more reasons?!
OK. Here are four more reasons why, I believe, it is essential that – for the next phase of sustainable investment:
- Companies take control of and manage the sustainable investment communications process
- Investors and analysts desist from trying to manage communications and focus on the content that is communicated
For impact
Counterintuitively – but beneficially - companies who control the sustainable investor communications process actually subject themselves to the most REAL investor influence.
- A company that adopts a reactive approach to sustainable investor communications tends to engage with [a] the (primarily) research providers that get in their face most and then [b] the investors (typically not their largest investors) who do the same
- By contrast, a company that adopts a proactive approach naturally prioritises a combination of [a] their largest investors and [b] the most advanced / specialist investors on sustainability … big investors with specialist understanding => impact.
(Hopefully, it goes without saying, that comprehensive access should always be encouraged – so, actually, a company that adopts a proactive approach will actually end up engaging with the biggest, the most specialist and the no
For efficiency: Targeting, timetable and prioritisation
Hexagons don’t roll smoothly
The SRI-ESG value chain has tried to reinvent the wheel of investor communications. In so doing, however, we have reinvented some sort of hexagonal structure that kind of rolls but has all sorts of curious kinks in it (disclosure requests, collaborative engagement, expectations statements etc). While individually these processes appear to work; collectively they confuse and overwhelm companies, cause inappropriate priorities and discourage them from taking on the responsibility themselves or from aligning investor communications on sustainability with investor communications on other material issues.
By contrast – in ‘mainstream IR’ – companies understand the value in [a] setting a timetable [b] identifying investors [c] understanding their information needs [d] undertaking comprehensive (and prioritised) communications outreach. It’s easy. This wheel rolls.
For quality: Context is king | Quality is critical
If I am trying to generate alpha from sustainability information through an investment in Volkswagen, I don’t care about the company's ‘sustainability performance’. I actually care about:
- The sustainability context within which VW operates
- The scale and nature of VW’s exposure to the specifics of this
- VW’s management strategy in the face of this
- VW’s executed response (which is basically the aspect that relates most closely relates to ‘sustainability performance’ - but rather than being the sole aspect for analysis is one of four)
This more complex information requirement presents me with a choice:
- Do I set out independently to understand for myself the intricacies and details of EV demand, the battery supply chain, labour relations laws in the company’s various countries of operation, the background and capabilities of the company’s directors etc.
- Or do I milk VW for everything that it can tell me on these contextual and exposure issues while treating this information sceptically, checking with research providers and undertaking deep-dive proprietary research into the few areas that I believe most likely to deliver value
Because I have chosen to be an investment analyst rather than an academic, I choose the latter option … but for this to work, I need the company to be willing to provide me with this in-depth, contextual information and I need to be prepared to listen to it.
I can only - reasonably - expect the company to do all of this work for me if I [a] allow the company to present it under conditions that they choose (typically with other investors involved and [b] engage with the outcome and [c] do so with a bone fides intent to invest, divest or actively hold the company’s shares as a result.
… because it is not just VW, I need to this for. I need to do the same for Novartis and CLP and EDF and etc.
(Note: As I have picked them as an example, it seems only fair that I should highlight that VW’s sustainable investor day took place last year in October 2022)
For focus: On the issues that matter
The process is being driven – that is beyond dispute.
But when companies don’t set the agenda and drive the process, the agenda is set – to a large degree – by campaign groups acting on wider society and on asset allocators … who then put pressure on asset managers.
So, when a company asks why they are being asked about a sustainability issue that appears to have no relevance to their business, the quick answer should be: “Because you didn’t get your communications in first – so someone else filled the space.”
Obligations
Of course, for this to work:
- Companies must see the advantage (and feel obliged to) reach out directly to all of their investors and research providers on an annual basis (1 x sustainability results webinar + 1 day of virtual roadshow is usually enough) to execute this high-quality, high-impact, high-efficiency process.
- Investors must be prepared to use it and to avoid trying to reinvent their own communications hexagons
… which all sounds much like ‘mainstream’ investor relations. No?!
As ever, I'm keen to hear other (esp. opposing) views: Via SRI-Connect here or via LinkedIn here
