Meeting the ESG engagement challenge with investors

Governance guidelines recommend co-ordination of ESG and investor relations in listed companies.

The release of Environmental, Social and Governance Engagement Guidelines is an important governance development for listed companies as market focus on ESG intensifies.

Chairs of ASX 200 companies report an increase in investor meetings and the time devoted to ESG issues. Institutional investors want to know more about the board’s view on issues such as organisational culture, diversity, health and safety and climate-change exposures.

“Up to 50 per cent of the time in these (investor) meetings is about responding to ESG issues,” David Crawford, AO, FAICD, Chair of Lend Lease Corporation and South32, told Company Director Journal. “… That is part of governance these days.”

Institutional investors such are increasingly factoring ESG metrics into financial decisions. Almost half of all professionally managed assets in Australia at December 2016 used responsible investment methodology, which incorporates ESG filters, up 9 per cent for the year earlier, according to Responsible Investment Association Australasia (RIAA).

Boards responding to trend

This ESG focus is challenging boards on three main fronts. First, ESG issues such as climate-change exposures are morphing into material issues for some listed companies, meaning they must be disclosed to the market to comply with continuous disclosure rules. Failure to do so could in some cases expose directors to liability and risk shareholder class actions.

Second, chairs of ASX 200 companies are meeting with more stakeholders in the lead-up to the organisation’s Annual General Meeting and discussing a wider range of ESG-related topics. Boards must ensure they understand investor concerns on ESG, are appropriately briefed and that they give a consistent message (aligned with that of management) to the market.

Third, directors must be satisfied there are appropriate processes at board level and within the organisation’s investor relations function to satisfy market demands for ESG information. This can be challenging if ESG issues cut across several board sub-committees or if they are handled within different parts of the organisation at management level.

As ESG issues blur with investor relations, boards must know the organisation has the right people and process to provide a co-ordinated ESG response to the market. And that there is a strategy on ESG communication as part of broader stakeholder-engagement programs.

It’s likely that many ASX-listed companies are lagging trends on investor relations and ESG. About a third of ASX 200 companies do not have an investor relations officer, according to AIRA, and ESG typically has not been considered a core responsibility of investor relations teams.

AIRA’s recommended approach

AIRA’s new ESG Guidelines are the first of their kind on recommended practices for listed entities to improve their engagement practices on ESG issues.

“The investment community has become more complex in terms of the number of parties involved in ESG issues, including asset owners, asset managers, proxy advisers, activist groups and ESG research providers,” AIRA CEO Ian Matheson said in a statement.

“It is vital, therefore, that companies have an understanding of who’s who in this chain and their various requirements, the timeframes and who should be representing a company to these various parties.”

AIRA believes there is a critical role to play for the investor relations officer (IRO) in companies to coordinate these interactions with the investment community on ESG issues.

Matheson adds: “At different times, there will be different people from the company involved in these interactions, including the board chair, board committee chairs, CEO, chief financial officer, company secretary and sustainability officer. IROs already act as a prime link between companies and the investment community. As ESG issues become more material, from a continuous disclosure perspective, so they should be managed appropriately from a disclosure process point of view.”

ARIA’s guide gives a range of practical consideration and checklists for listed entities to consider. They include:

• Avoid wasting valuable time by knowing whether an asset manager is also the beneficiary and whether he or she has the right to vote the shares.
• Give priority to engagement with asset owners on ESG issues.
• Thoroughly prepare chairmen and directors before attending meetings.
• Ask whether ESG analysts and investment analysts will attend the meetings on the asset owner’s behalf.
• Consider the appropriate timing for the meetings.