Closing the short-term/long-term gap Advertisement feature
The following are highlights taken from a recent BNY Mellon-hosted webinar with Anthony Di Meo, senior director of investor relations at Becton Dickinson and Company, and Brian Tomlinson, director of research at the Chief Executives for Corporate Purpose’s (CECP) CEO Investor Forum, entitled ‘ESG and the earnings call: Integrating long-term thinking into short-term discussions’.
In recent years, companies have increasingly made public statements about how ESG issues intersect with their business strategy, and the impacts of their ESG efforts to contribute to a better world. With parallel trends such as stakeholder capitalism and the impact of Covid-19 taking hold, the topic has come to influence investor expectations as well.
Investors want companies to offer more than just public statements and free-standing ESG reports, however. Beyond high-level, long-term, unquantifiable goals, they want to see how ESG ties into the company’s bottom line and share value.
Communicating ESG outcomes and connecting them to company financials is one way in which ESG matters play an increasing role in quarterly earnings calls. The trick for senior leadership and investor relations teams is balancing the disclosure requirements of a short-term quarterly report with the company’s longer-term ESG disclosure goals.
The norms for communicating quarterly results have solidified over time, with clear accounting and regulatory standards for what to communicate. With ESG, it’s a different matter: standards are still emerging. A recent report by the NYU Stern Center for Sustainable Business and CECP’s CEO Investor Forum highlights a potential emerging consensus. But it is still the case that analysts do not all fully understand what to ask or how to approach the topic. IR teams must understand investor expectations for clear, meaningful and quantifiable ties between ESG and more traditional quarterly metrics.
It may take close internal collaboration within the C-suite and across the business in order to craft a complete and authentic story and explain the material impact of the company’s ESG efforts as effectively as explaining more traditional cost-cutting or growth initiatives.
Investor relations teams can help make ESG a meaningful, valued theme in quarterly earnings calls by following these six simple guidelines.
1. Be structured, not reactive We expect analyst and investor interest in ESG to continue to increase. Meeting this demand takes diligent planning. Companies should create clear and detailed plans for how and when to introduce ESG into their quarterly disclosures and earnings calls.
It requires significant cross-functional work and executive buy-in to develop and align the right metrics and messaging to tie the company’s overall value story together.
2. Craft the right messages Given the lack of standards and evolving understanding of the role and impact of ESG issues, developing simple and straightforward consistent messages is helpful. Convoluted stories and elaborate cause-and-effect explanations can be confusing and may raise more questions than they answer. Rely on the communications expertise of your IR team and IR advisers.
For example, human capital-intensive companies can talk about community workforce training initiatives. Resource-intensive companies can talk about efforts to limit or replace their natural resource use. These approaches make it clear that addressing ESG concerns generates value and is not just corporate philanthropy in disguise.
3. Offer meaningful, relevant data Issuers must develop a clear understanding of financially material ESG issues.
Disclosure data must indicate short and long-term value on both ESG and financial impacts to the business. Keep in mind that a sober ESG mindset means balancing the risks and opportunities embedded in material ESG issues.
4. Align ESG closely to the company’s long-term strategy Investors and analysts should already understand your company’s long-term strategy and value creation story. For example, investors would welcome the news that a company has reduced its carbon footprint by 5 percent, quarter over quarter. A better quarterly story would show how the company’s cost savings from, for example, fuel innovation strengthens its position among its peers.
5. Take a phased, intentional approach Introducing substantive ESG content to quarterly calls out of context could create surprise and confusion, and may suggest a strategic pivot by management. The better approach introduces ESG content sequentially. Companies may introduce a free-standing sustainability report first, including specific ESG risks and impacts that specify the ROI of efforts to address issues that materially affect the business, in human capital and operations achievements, for example. Adopting a sequential strategy to address ESG topics in quarterly calls makes sense organically, without creating distractions.
6. Pro tip: Prime the analysts IR teams can use the careful management and co-ordination of quarterly calls to their advantage when introducing ESG developments. Sharing ESG-related questions with analysts in advance helps shape the Q&A discussion and encourages them to include ESG topics in the discussion.
Ultimately, beyond merely meeting external demand and tactically improving your IR efforts, addressing ESG considerations can help break down the risks of short-termism in a quarter-to-quarter investor mindset. Closing the gap now makes good sense for your business, both today and over the long haul.
BNY Mellon is the leading depositary bank for issuer clients looking to access the global capital markets through DRs. BNY Mellon Depositary Receipts is independent from the influence of investment banking, trading and research, and can support its DR issuers’ access to a wider range of investors. With our global footprint and deep expertise in DRs, our clients enjoy access to our global investor relations advisory team, a highly specialized team dedicated to helping companies fully realize their global market access opportunities through IR trainings, Market Connect services and analytical solutions.
