5 steps to clearer CSR communications with investors
Assuming that corporate CSR and investment communities share the same objective -- excellence in corporate performance over the long-term -- why do they seem to have such a hard time communicating? The answer may lie in loaded language, overcommunication and misdirected messaging, according to industry insiders from CDP, UBS, Columbia University, Deloitte and others who spoke at Capital Link's recent CSR and IR Forum. More than 350 institutional investors, asset managers, and CSR professionals gathered at the Metropolitan Club in New York for a lively exchange of ideas among players who don't often share the same sandbox.
Capital Link President Nicolas Bornozis opened the well-attended event by posing the question, "Does CSR enable companies to have easier access to the capital and financial markets and to lower cost of capital?" Panelists answered with a qualified "yes" and then described factors which short-circuit the clear communication between companies and the investment world.
Semantic Short Circuits
There's disconnect between CSR reporters and investors because they often use different vocabularies, even while they're speaking about the same issues. Sometimes the words just get in the way.
Investors don't typically ask questions about "sustainability," said Erika Karp, managing director and head of global sector research for UBS Investment Bank. Rather, investment analysts and portfolio managers speak about issues such as "succession planning, regulatory compliance and energy efficiency," and yet every one of those issues is about sustainability, Karp said.
"Is it all a grand misunderstanding?" asked moderator Eric J. Hespenheide, global leader of Deloitte's Sustainability Audit and Enterprise Risk Services. "It sounds like analysts are actually interested in this but not getting through because of the language."
Companies with strong sustainability performance unintentionally may alienate investors by the terminology they use.
"Values investing, social investing, impact investing – these terms are problematic because they can be divisive," Karp said.
Speaking later in the day, Gary Buesser, a director at Lazard Asset Management, LLC, echoed Karp's point: "CSR professionals speak a very different language than analysts. Analysts are focused on issues such as income statements and cash flows. But in reality, any issue that affects a company's valuation is important."
Too Much Noise
Corporations are disclosing more nonfinancial performance data that ever before, but that actually can be part of the problem.
"Lots of CSR data is available today -- lots of bad data and irrelevant data," Karp said. Too much CSR data lacks materiality and relevance. Most CSR information provided by corporations is "irrelevant and essentially noise," she said.
Fortunately, other speakers at the Capital Link event offered several suggestions for repairing these semantic short circuits.
Steps to Static-Free CSR Communication
1. Investors need industry-specific data. Karp commended recent efforts by the Sustainability Accounting Standards Board (SASB) to establish industry sector specific disclosures. Hespenheide concurred, noting that SASB's work on standard setting relevant and material issues can lessen noise in the communication process and bridge the language gap between investors and companies.
SASB working groups are developing standards covering 10 sectors and 88 industries which should be available beginning in 2015.
2. Avoid loaded language. It's best to stick with neutral terms that don't carry value judgments (no pun intended). In a quip about the meaning of the term "SRI," Joseph M. Kinard, investment committee member of the Presbyterian Church USA Pension Fund, joked, "'Socially responsible investment' equals 'solid return on investment.'"
Karp prefers to use the term "systematic analysis of environmental, social and governance (ESG) factors." When organizations speak about their corporate social responsibility or sustainability performance, they're really speaking about corporate excellence, she maintained.
"Language should bring people together," said Karp.
3. Talk to the right players. Sustainability issues should be raised in investor conversations as an integral component of portfolio managers' assessment of companies. These discussions shouldn't be limited just to conversations with an organization sustainability officer. "Get the right people around the table and ask right questions," said Marc Fox, director of investor initiatives for The Carbon Disclosure Project.
4. Provide useable data. Companies need to provide easily digestible data on carbon emissions, human capital, natural resources and other sustainability performance metrics. This would enable investors to feed the data into their models, said Bruce Kahn of Columbia University's Sustainability Management Program.
Kahn acknowledged that some CSR information may not be financially material to a company's current stock price but helps tell a story that will take a longer time to emerge. Both types of information are valuable to analysts.
5. Explain the meaning behind the data. CSR data is most useful when companies link their sustainability activities to return on capital. It's important to explain how programs such as energy efficiency improve profits today and better position the company for long-term success. Making those connections can influence analysts' expectation of future performance, noted Fox.
Following these practices can produce static-fee dialogue that results in more accurate corporate valuation and enhanced access to capital.
Phone photo CC-licensed by Dan Morgridge.