Investor Relations and investment analysts have been slow to bring sustainability into their work. My view: their short-term incentives stop them trying to grow the competences needed. Relying on diffusion from leaders hasn’t worked. But two new initiatives, the Taskforce for Climate-related Financial Disclosures and the High Level Expert Group on Sustainable Finance, are likely to change the pace. We need to get ready.
Photo courtesy of Corporate Citizenship
Earlier this week I was at an event which brought together Investor Relations (IR) and Corporate Responsibility (CR) professionals, as part of Corporate Citizenship’s Long Term Value Project. It’s aim: identify barriers and solutions to closer cooperation, enabling a mindset shift within corporations toward creating sustained, long-term value for a company’s shareholders and stakeholders. (Thanks to Corporate Citizenship for the event, which I’ve assumed was under Chatham House Rule.) I was there as a Trustee of the EIRIS Foundation, asking ‘what could help responsible investors make a difference?’
Five years ago I had run a similar-is project. So, I was interested in the event what had changed in the last 5 years, and what needs to happen next.
Back in 2013…
Back in 2013 I ran a project at Forum called ‘Engaging Investors Roundtable’ (no link because we never got the chance to go public). Leading companies told us that investors were a barrier to going further on sustainability. Essentially, they weren’t interested and never asked questions. The project idea was to share insights on how to engage them, so investors treated sustainability leaders differently from the rest.
What we found back then was two things:
1.Limited capacity in each link of the investment chain.
Within the company, the IR team and many C-suite executives didn’t understand how sustainability created long-term value for the company.
It was even worse in the mainstream financial players of brokers, analysts, fund managers, and pension fund trustees. Not only did they not understand, they also didn’t care. Their incentives were pretty much all about the 1 year investment performance. There was no reason for them to even bother to understand the issues.
Source: Forum for the Future
2.The need to communicate a specific business case.
Therefore, IR professionals needed to start where their audience is at. You could try short-term benefits and risks avoided. But better was to leave the ’s’ word out of it entirely. Integrate the specific activities on, say, sustainable agriculture into a message which says “our supply chains are ready for the future”.
Good and bad news in 2018
The good news: the scale and the partners.
The ICAEW grand hall was full: over 250 people drawn from IR and CR. Back in 2013 we could get about 10. Partly that was because of CC’s partners: my old accounting institute, ICAEW (who Richard Spencer has been steering forward on sustainability for over a decade), and the Investor Relations Society. The IR Society would not have been interested 5 years ago.
The bad news: the same fundamental issues were there.
Mainstream investors just don’t ask questions during the analyst calls. The C-suite aren’t under external pressure to bring sustainability into their strategic story. The IR teams haven’t brought the relevant sustainability elements into their ‘3 reasons to buy our stock’.
Well, that’s not quite fair to the three companies who spoke during the second panel. They had brought CR into IR in various ways. But still, their efforts had more to go, and certainly the companies on my table had made much progress. Also, it’s clear people are putting time into activities that don’t add a lot of value. I hope the ears of people at the Dow Jones Sustainability Index (DJSI) were burning. Many delegates said they spent months filling it in, and investment analysts said they didn’t use it. Originally, doing the DJSI was a sign of intent; now it is an old piece of furniture no one can quite bring themselves to throw out.
For the mainstream finance institutions on the first panel it was a similar story. Each persons there was doing a good job, and ESG factors had been integrated into the aspects they touched. But that was very much a minority of their organisation. And their organisation was seen as a leader.
As one person on my table said, the pace of change is glacial. That, I think, is fair.
Voluntary leadership was not enough
Elsewhere I have written that the much corporate sustainability effort has implicitly relied on a diffusion theory of change. Push the leaders, and as they succeed then others will copy. There’s simply not a lot of evidence this has succeeded. Indeed, as Jem Bendell has written this reform approach has turned out to be weak.
We’ve had 20 plus years where the dominant mode of corporate sustainability was voluntary action. Frankly, if the diffusion model was going to work it needed to happen by now.
Required: urgency. Now.
The latest science on how to reach 1.5C warming compared to pre-industrial levels requires peak emissions in the next 5 years and then something like 6% reduction each year after that, so that we halve each decade.
That requires an astonishing deployment of financial capital. Into new infrastructure, into new innovations, and into completely reshaping industries. Some, like coal and oil, will need to go into managed decline. Others like industrial chemicals will need to completely rebase themselves to be circular and regenerative. Some of the investment will come from capital markets, some from companies’ own retained earnings (which is where most capital for big companies comes from).
This is the first industrial revolution with a deadline. As Zengehlis, and Mazzucato and Perez and others argue, we have to use policy to make an imperative which investors and businesses cannot ignore. We have to shape the direction of growth, and require a period of creative-destruction, not diffusion.
But IR and CR professions kept acting as if the current pace was good enough. As Bill McKibben has said, winning slowly on climate is the same as losing.
It would be easy to be frustrated – if not despairing – at the pace of change. I’m constantly astonished that financial institutions pay no heed to their own future success, and cannot siphon off even a tiny proportion of their vast resources into getting better at sustainability.
But financial institutions do have form. Back in 2007, Citigroup CEO Chuck Prince said that “as long as the music is playing, you’ve got to get up and dance” even when you know it is putting your organisation and the whole financial system at risk. Soon after the crash former Fed Chair Alan Greenspan admitted that he had got it wrong: “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity – myself especially – are in a state of shocked disbelief”.
Well, that dynamic is playing out again. Back in 2015, Bank of England Governor Carney said that climate change is a tragedy of the horizon: “the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix.”
Change is coming
Fortunately we are not going to have rely on financial institutions to understand their self-interest. Two changes are coming which will force IR and CR to meet a lot quicker.
Taskforce for Climate-related Financial Disclosures
The one that came up on the day was the Taskforce for Climate-related Financial Disclosures (TCFD) (which had been co-chaired by Carney). A company can choose to disclose on governance, strategy, risk management, and metrics and targets. In particular, an organisation should disclose “how its strategies might change to address potential climate-related risks and opportunities is a key step to better understand the potential implications of climate change on the organization.”
So, no hiding place. If you say climate isn’t going to affect your business, you have to show your working. And you can be taken to task.
And, though these are voluntary requirements, they have momentum to become a norm. If you want your investors to be informed on how you are dealing with what many people say is a key risk, why would you not disclose? Particularly as your peers have.
High Level Expert Group on Sustainable Finance
Much more important is something which didn’t come up on the day: High Level Expert Group on Sustainable Finance final report to the EU Commission (‘HLEG’). I was at the UK launch of HLEG a few weeks ago and the ambition is startling. The recommendations are an attempt to put the finance system at the service of the people of Europe – rather than the other way round. Ten years after the financial crash, EU commissioners have decided that the way to have a stable finance system is to force it to focus on sustainability, not speculation.
There’s far too many recommendations to describe here. But, for instance, one is to ‘clarify investor duties to better embrace long-term horizon and sustainability preferences’. Basically, if you are investing for a pension you have to worry about the world that person will retire into in 30 odd years time. In the past the key barrier has been that investors and their agents do not have the competence to act on sustainability, and short-term time horizons mean they had no incentive to try. The HLEG changes that. Investors and their agents will have to pay attention to the long-term, and will have to learn how to do that.
What’s needed now: making those interventions a success
It’s desperately important that we make TCFD and HLEG successes. Part of that is making sure finance institutions implement them well. Not by seeing them as tick-box compliance that is a costly constraint. But as ways to enhance value in the short- and long-term.
Here’s where Corporate Citizenship’s partnership with the IR Society could be very useful (as well as commercially successful). There’s going to be a need for lots of capacity building, best practice sharing and otherwise supporting IR teams and the C-suite as the various reforms cascade through.
There will be more needed, of course. I’m still making my way through the final HLEG report, thinking particularly about what EIRIS Foundation can do to speed things up.
The TCFD and HLEG mean that the current glacial pace is probably going to change. We should get ready.