In a recent survey carried out by Diligent and non-profit think tank OCEG, nearly half (46 percent) of respondents report having a formal ESG program. Another 34 percent of organizations plan to implement one. These figures would be great news – if it was 2019.
During 2021, however, the pressures around ESG have intensified, with two big developments anticipated by the end of the year: requirements by the SEC that corporations publicly disclose their climate change risks and what they’re doing to manage them, and an international agreement by the Group of Seven (G7) nations for mandatory climate reporting.
As regulatory requirements tighten, investors are also demanding more disclosures and scrutinizing the quality of the data they receive. The key question, then, is an obvious one: just how prepared are organizations for upcoming ESG challenges? And what role do IROs play in spearheading a business-wide approach to ESG?
IR leading the way on ESG With increased investor scrutiny around the ESG practices of organizations, the onus now sits firmly on IR professionals to reassure those investors that a proper and mature ESG program is in place and that the organization they represent is dedicated to fostering a culture of continuous improvement – in terms of disclosures and reporting as well as demonstrable proof of a strategy for achieving future ESG success.
Today, investor relations teams must arm themselves with the tools they need to answer any ESG questions that may come their way. They are the tip of the spear. Accordingly, integrating ESG into existing governance, risk and compliance (GRC) strategies will put that team in the best possible position to give proof of dedication to the continued development and improvement of any ESG program.
At its core, a strong ESG program is the value-creating by-product of an integrated GRC program. Reporting against various frameworks should not be seen as the final objective, but rather as a by-product of a strong program. In a future defined by the issues of the world around us, it’s the only sensible way forward.
Increasing budgets, lagging confidence The Diligent and OCEG survey clearly indicates that organizations already recognize that money must be spent on ESG. Among survey respondents, 55 percent have money budgeted for ESG and 73 percent are increasing their budgets for it. Additional survey findings shed insight into why.
To start with, ESG is making its presence known in critical business areas: sales, recruitment, the supply chain and beyond. Survey respondents report inquiries about ESG activities from customers (52.4 percent), potential hires (19.2 percent) and suppliers (16.2 percent). Critically for IR teams, nearly half (44 percent) of survey respondents report inquiries from investors.
In short, investors want to know whether an organization is capable of addressing uncertainty, is acting with integrity and has a reliable ESG platform in place to achieve these objectives. In many circumstances, it will be up to IR teams to showcase these abilities and ensure the tools are in place to make accurate reporting and data collection possible.
Organizations are drawing stronger links between ESG and the bottom line beyond the usual areas of brand and reputation. Survey respondents describe ESG performance and reporting having an impact on:
A symbiotic relationship exists between these different areas. Customer satisfaction has an impact on investment decisions. Both customer satisfaction and employee satisfaction affect brand and reputation. Financial outcomes tie to both customers and investors. All of those factors have an impact on not just the immediate bottom line, but also long-term growth and sustainability.
ESG effectiveness starts with data So how does an organization align its activities with the values and commitments in its ESG statements while effectively monitoring uncertainty and risk? Moreover, how can investor relations teams effectively communicate their progress with investors and other stakeholders? Data and monitoring are key.
Information is the fuel that drives a mature ESG program forward. With systems in place to collect, aggregate and review data, organizations can both map progress against their own goals and tackle crucial next steps on disclosures and reporting.
In tandem with that, being able to ascertain the public mood around your own ESG program and take the temperature of the market before meeting with investors is imperative for IR teams. Connecting the dots between internal practices and the broader market perception – ideally within the same system used to collect and collate the data – can make a significant difference to preparations.
Yet ESG data collection comes with a variety of challenges, like changing regulations and requirements, the lack of a single reporting standard and numerous reporting methodologies.
Technology can help, bringing together diverse datasets from multiple systems of record with different levels of security and access requirements. Multiple evolving frameworks govern ESG issues today. The effort required to collect, standardize, consolidate and analyze ESG data, therefore, means a flexible technology platform will soon be a requirement for timely and accurate reporting.
These disclosures are just the beginning. Once an organization uses its ESG data to understand its current state, it can establish or improve a formal ESG program with a set budget and KPIs – something investors of all stripes will be keen to see.
Ultimately, the relationship between investor relations teams and ESG comes down to one question: are you prepared to answer the questions you know are coming? Being ready to answer the wide variety of inquiries that will come in from the market is crucial – and having the right controls and processes in place will help.
Organizations worldwide will have told investors about what they’re doing – and what they’re planning – when it comes to ESG. IR professionals need to make sure they’re in a place where they can prove it.
