Communicating across the chasm: How companies can navigate the new investor ESG landscape

GreenFin Summit, GreenBiz 20
Flash Gordon Murray, Pixel PhotoVideo
Erika Karp (with microphone) from Cornerstone Capital speaks to panel (from left), Joel Makower, GreenBiz Group (moderator); Richard Mattison, Trucost/S&P Global; Mindy Lubber, Ceres; and Ken Bertsch, Council of Institutional Investors at the 2020 GreenFin Summit in Scottsdale, Arizona.

Two weeks ago, I joined 200 sustainability, finance and investment leaders at the second annual GreenFin Summit during GreenBiz 20, where attendees forged critical connections between the investment and sustainability communities. 

While many companies have been tackling environmental, social and governance (ESG) issues for decades, investors are newly incentivized to incorporate sustainability into their own business models, products and services — demonstrated by a flood of recent announcements from institutional investors such as BlackRock and State Street and underscored by unlikely pundits such as Jim Cramer.

Edelman’s 2020 Trust Barometer finds that 56 percent of people think capitalism does more harm than good in the world today, and Nasdaq President and CEO Adena Friedman has declared 2020 as the tipping point for ESG.

We’ve reached peak hype on investors and ESG. But now it’s time to convert hype into reality, and companies and investors are fumbling for solutions as they navigate toward a vision for better capitalism.

What will it take to align and leverage capital markets to drive the global economy toward sustainability? How are investors using ESG data and ratings in decision-making? And how should they communicate sustainability leadership to important audiences?

Here are three of my takeaways from the conversation for companies seeking to align and engage successfully in the new world of stakeholder capitalism.

Finance and sustainability leaders are still learning each other’s languages

Like tweens at a middle school dance, finance and sustainability are in the same gymnasium but still unsure of the best way to interact.

Awkward differences between the two worlds are exacerbated by the fact that there is currently no standard framework for ESG data reporting despite the existence of protocols from the Global Reporting Initiative (GRI), The Sustainability Accounting Standards Board (SASB), and the Task Force for Climate-related Financial Disclosures (TCFD). For now, companies should focus on creating connections and fluency between finance and sustainability functions within the corporate organization.

One head of sustainability for a global food company tracks the number and nature of investor inquiries on ESG to influence and communicate with the C-suite. This has helped her move the needle on sustainability funding and measurement and disclosure.

Another theme discussed at the summit was internal alignment. While we know that many sustainability executives already join investor calls when needed, many companies attending the GreenFin Summit noted they have formed robust internal ESG working groups composed of corporate social responsibility, risk and compliance, finance and investor relations to develop the muscle to engage on ESG proactively.

For those looking to gain buy-in from CFOs, the Accounting for Sustainability CFO Leadership Network provides resources, TCFD workshops and ESG case studies written "for finance by finance."

Perhaps the holy grail of internal ESG alignment is Equinix: Katrina Rymill’s role as vice president of IR and sustainability at the data center company is the ultimate expression of ESG virtues. These examples from the GreenFin Summit are a few pragmatic steps companies can take to better integrate their finance and sustainability functions.

Own your own narrative

Disclosure and transparency no longer will be optional. As markets continue to debate the best ways to set up policies, standards and regulations for ESG disclosures, investors aren’t waiting for a perfect system. They’re already forging ahead with assessments that are affecting investment prospects and cost of capital for companies.

Investors — from the biggest institutional investors to small investment management firms — have developed custom models to assess ESG performance.

For example, State Street’s "R-factor" combines Sustainalytics, ISS-ESG, Vigeo-EIRIS and ISS-Governance ratings with a proprietary house blend of analysis and algorithms.

Why does this matter? Many companies (and in particular, CFOs) may not be aware of the importance of environmental and societal stewardship and how it affects investor decision-making — and ultimately reputation and stock price. Equinix was turned down by an investor in Europe due to a low Sustainalytics rating.

Another summit attendee from a medical device firm noted it had received a low ESG rating, not because of poor performance, but simply because it had not reported one key metric. General Motors — a leader in ESG disclosures — found outdated information on MSCI, an index investors use to assess ESG management.

Companies should understand their ratings and correct them or supply more disclosures if needed. In addition to disclosing data, investors are also looking for context to help them understand how the numbers fit into corporate strategy.

Here lies the opportunity for companies to communicate with investors. This engagement and disclosure can drive positive action on sustainability across the organization that will be rewarded by the capital markets and employees, and will better meet the new expectations under stakeholder capitalism.

Evolve external and internal communications

Investors, employees and society are all hungry for better communications on how companies are addressing ESG. The term ESG was used during 100 percent more S&P 500 corporate earnings calls in the second quarter of 2019 compared with the first quarter, according to FactSet.

GreenFin Summit attendees noted that incorporating sustainability into analyst days is becoming the norm. In order to be fully prepared, be sure that executives beyond the head of sustainability are prepared to speak to your corporate ESG strategies with attending analysts, media and industry stakeholders.

Greenwashing is another major concern. Because ESG investing is still relatively new, the ability of shareholders, investment managers and individual investors to judge the meaningfulness of various ESG factors is still evolving.

Vanguard and others in the retail investment space have been criticized for rushing to market with ESG funds and dedicating fanfare to portfolios that included many non-ESG friendly stocks. Corporate communications executives should work closely with sustainability and finance functions, credible ESG thought leaders and third-party experts to position any claims or to bring new ESG products, services and initiatives to market to ensure trust with key stakeholders is not broken.

Lastly, companies must communicate more authentically with employees. As seen with Amazon’s employee climate protests and highly publicized shareholder resolution, employees are critical actors when it comes to engaging on ESG.

Leading companies engage employees proactively and enlist them in the stewardship of environmental and social outcomes. At a minimum, this includes sharing information with all employees on how the company is performing, explaining the ESG strategy and how employees can help drive it and acknowledging any tradeoffs and considerations.

Just like any other major corporate transformation, employees will need to be more fluent in ESG in order for the company to deliver against ambitions sustainability and social targets.

Hope for the future of stakeholder capitalism

Just as environmental, social and governance stewardship is not a new concept to the corporate sustainability community, the investor community has its own tried-and-true precedent to rely on: the basic principle of sound financial management.

Someday the markets may think about ESG the way Mark McDivitt, managing director and global head of ESG at State Street, summed it up best: "Forget the term ESG. It’s just 21st century alpha." 

Maybe the chasm between corporate sustainability and investors isn’t as wide as we think.