Effective Two-Way Engagement: A New Gold Standard for SRI Investing
At its most effective, communication is a two-way process. Developments in engagement practices between companies and social, responsible and impact (SRI) investors are showing us that this idea is now more applicable than ever.
New expectations and standards are growing up around investor/investee engagement in the SRI investing sector. These are driven by a number of factors including calls for more transparency and accountability, the rising power of investors in the boardroom and emerging evidence that attending to extra-financials, like sustainability, has positive effects on financial performance.
In practice, the pressure to engage—and the need to find effective ways to do this through communication—comes from several directions.
Investors want more extra-financial information
The need for engagement is impelled by a increase in socially concious investors, notably wealthy millennials and women, who are demanding detailed ESG performance information about the companies they invest in. Recent research reveals that investors (and their advisors) are relying more heavily on extra-financial disclosure when deciding where to place their capital. Poor performance in ESG areas, or a lack of disclosure about them, will make them say no to an investment.
Companies are responding to this increased scrutiny by improving communications around ESG extra-financials. This may include making performance information more freely available on websites and other media, or training company spokespeople to incorporate extra-financials into their communications. It may also mean embracing integrated reporting, which delivers performance information in extra-financial areas and provides the content for communication in these areas.
In another trend, the corporate world is seeing increased demand for more up-to-the minute and on-demand performance information. Facilitated by web-based services, real-time financial performance information is already a reality for some companies and it could shortly become a necessity for all. If that happens, companies will need to create systems for delivering extra-financial information this way—and for receiving investor feedback.
Investors expect more influence over companies
Investors are becoming more active in their efforts to influence the companies they invest in. In a trend for more investor engagement, industry leaders like Blackrock are declaring their intentions to engage with investees on governance matters, strategy and operations, with ESG issues a major focus. Evidence of increased engagement on extra-financials can be seen in the record number of proxy resolutions filed by investors seeking corporate disclosure and action on a range of environmental and social issues, seen here in the Sustainable Investment Institute’s Proxy Preview 2015.
To deal with increased pressure from investors, businesses are establishing direct engagement strategies, and communication is an important part of these. Direct engagement strategies identify investor concerns and priorities, then pro-actively seek to address them before they become an issue. Communications may involve a range of measures including targeted investor roadshows, making more information accessible online and one-to-one communication between investors and senior managers.
Companies need to know more about SRI investors
The burden of communication isn’t solely on the side of companies. Investors, too, need to communicate clearly for effective engagement, especially when they are SRI-focused.
With the increasing influence of investors in the boardroom, it’s more important than ever for companies to seek out investors who will support all parts of their strategy. This is particularly true when it comes to businesses aiming to produce both profit and benefit—blended value, impact and profit-with-purpose businesses—and those for whom ESG goals are a core part of their business model.
For these kinds of organizations, investors who might work against the overall strategy, for example pushing through an unfavorable exit or IPO, should be avoided. To make a good match, companies need adequate information about potential investors before they partner with them, including insight into their goals, priorities, values, governance stance and voting policies.
According to findings by the Conference Board, a US governance think tank, investors should communicate clearly and transparently with potential investees about themselves, providing information on their own engagement policies and track record when voting as members of the board. Information about their stance on extra-financial issues, such as governance and sustainability, should be easily accessible to investees and should form a point of discussion during negotiations. Triodos Bank is one SRI investor that makes such information freely avaliable to investees and the public.
Engagement services for the future
With engagement between investors and investees becoming more important, the question of how best to engage is now taking center stage in SRI investing.
In mainstream financial markets, Broadridge has risen to become “the most important firm on Wall Street that you’ve never heard of” by providing investor engagement services, including proxy and shareholder communications, to companies. However, it’s questionable whether Broadridge’s engagement methods will prove as effective for the SRI sector, where communicating ESG extra-financials and impact metrics will be as important communicating about the traditional bottom line.
This suggests an opportunity for service providers to step up to meet the needs of a growing marketplace of SRI investors and companies. By providing high quality, innovative engagement services that help investors and investees communicate about a broader range of performance criteria, an ESG- and impact-oriented engagement service company could fill the gap and become the next Broadridge in a vibrant new marketplace. Any takers out there?