ROI from ESG

David Willans details thoughts from a recent Toronto Stock Exchange series on making ESG work harder for investors

After months of speculation, on March 21^st 2022, the Securities & Exchange Commission (SEC) issued a proposal that would require public companies in the US to provide climate-related information in registration statements, annual reports, and audited financial statements.

This proposal was long anticipated, and so the cliff-hanger became: What climate-related information will companies need to disclose? The SEC’s recent proposal is consistent with the regulator’s often-stated desire to steer clear of rules-based on overly-proscriptive pronouncements in this arena. According to the proposal, companies need to disclose any climate-related information likely to have a material impact on a business. Beyond that, the SEC specified that greenhouse gas emissions would need to be disclosed.

Contribution time

This SEC proposal is yet another reason why Investor Relations Officers (IROs) need to look long and hard at their approach to ESG. And while climate and other ESG-related disclosures may seem to be just one more time-consuming and expensive obligation, they aren’t. Increasingly, experts are looking at the Return on Investment (ROI) of ESG. With so many saying they are doing it, investors want to know who’s doing it well enough to deliver good returns.

Efforts are underway to help businesses understand the financial implications of their ESG work. For instance, HSBC and NYU Stern School of Business recently launched its Return on Sustainability Investment (ROSI) toolkit for measuring the impact of ESG investments.

It’s such a fast-moving topic, that rather than write reems on the current picture, which will have changed by the time you read, let me instead give you the key takeaways from a solid source. Earlier this year, the TMX – the Toronto-based company that operates the Toronto Stock Exchange – broadcast a four-part series on ‘ROI from ESG,’ tackling topics ranging from free ESG tools to ESG media insights, IR and ESG, and ESG from the top (interviews on this final topic have yet to be released).

Key takeaways

• Get smarter about targeting ESG-focused funds. When it comes to global equity assets, $2.4 trillion is invested with an ESG focus, according to Christopher Stroh, Director at IHS Markit. It’s important for any company to understand the vast size and potential of this market when beginning to consider the ROI of ESG.
• Take advantage of passive ESG investments. IROs don’t necessarily need to launch ambitious outreach campaigns to target ESG investors. Stroh points out that passive ESG investments can be won by producing a sustainability report, filling out surveys from ESG data providers, and by pursuing inclusion in ESG indexes.
• Talk to active portfolios. A higher percentage of ESG funds are actively managed than global assets more broadly. In fact, says Stroh, 82 percent of ESG assets are managed actively, versus 60 percent for global assets across the board. ‘If you aren’t proactively engaging with active firms and funds and proactively telling your ESG story to the relevant parties and active fund managers,’ says Stroh, ‘you likely aren’t getting full credit for your sustainability reporting initiatives and goals.’
• Begin with your existing shareholders. Your current institutional shareholders may have ESG-focused portfolio managers who are not clued into your story. If current shareholders have portfolios dedicated to ESG, make sure to talk to the individuals managing these portfolios.
• Make full use of public data. When looking for ESG investors to approach, there is plenty of survey data out there that can be accessed for free. Stroh suggests starting with the UN’s PRI, Climate Action 100, EUROSIF, and US SIF, all of which publish information on which institutional investors are signatories.
• Take advantage of CRM to track questions from meetings. IROs should take note of any and all trends from ESG marketing meetings, says Craig Armitage, Cofounder at LodeRock Advisors, a capital markets communications firm in Toronto. Observations from ESG-oriented IR meetings will help you craft a savvy message for future sustainability reports and outgoing IR materials.
• Establish a sound baseline for measuring ESG efforts. Do you know how many of your investors are integrating ESG information into their decisions? And what is the value of these investors’ holdings? Starting from a solid baseline lets companies calculate the ROI of their sustainability reports and other outreach efforts.

Measuring the ROI of ESG is new for most companies, but will only become more pressing with time. As companies prepare to meet the SEC’s new proposed disclosure requirements on climate, understanding the potential ROI from ESG efforts is one way to turn a regulatory obligation into an opportunity to bring in new shareholders and even bolster financial returns.

To listen to the TMX podcast series on ‘ROI from ESG,’ go to https://www.tsx.com/resource/en/2822/ and get in touch if you’d like support around your ESG comms.