Taking the ESG case direct to investors

Events of the past three months have overtaken my personal learning objective of increasing awareness of ESG in our local equity market. I planned to do this by encouraging the sell-side to incorporate ESG into their research by starting annual awards for the leading reports. However, pressure on sell-side revenue has intensified, which saw another international house exit cash equities here and a bulge bracket house retrench some of its top rated local analysts. Meanwhile, rumours abound that another may exit equity research globally. Research heads note that incorporating ESG is very costly because it requires hiring scarce skills and often paying for specialized data, in an industry already struggling with declining commission/revenue and profitability. So encouraging the sell-side to publish thematic ESG research is an increasingly hard sell.  

However, the rising interest in climate change among fund managers that I flagged in my last post has accelerated. An NGO and shareholder activist forced a second large bank to include resolutions on climate change and transition risk in the coal-fired power sector at their AGM later this month. And, in first for my country, six large investors co-filed a climate risk resolution to compel our largest petro-chemical group to report on whether their (unambitious) emissions targets align with the Paris Climate Agreement. Unfortunately, the company refused to, but it was a rare instance of big local investors working together and challenging a corporate publicly, rather than behind closed doors.

Our investors still focus far more on ‘governance’, after yet another corporate accounting scandal this year, followed by ‘social’ (largely inequality), with ‘environment’ far behind. Interestingly, last week Moody’s reduced the baseline credit assessment for our state-owned agricultural lender due, at least in part, to ‘a high level of environmental risk’, which is the first time I’ve seen this. The rating agency cited physical risks (drought and hail) and increased frequency of disease reducing clients’ ability to repay their agri loans. I think rising temperatures and fires are more of a threat than the last two risks that Moody’s mentioned.  

Reassessing how best to raise awareness of ESG in our local equity market, increasing my group’s ESG disclosure (in our integrated report and results announcements) may be the most efficient way. Flagging the importance of ESG directly to investors via our investor relations narrative, rather than by getting the sell-side to write about it, appears more likely to produce dividends. Improving our ESG disclosure also addresses investors’ complaints about the lack of ‘usable’ ESG information in our market more generally (rather than us specifically).

7 thoughts on “Taking the ESG case direct to investors

  1. This is a thoughtful piece on why paradoxically – as the opportunity gets larger to invest sustainably – the willingness to provide advice and products is in part declining. There are two areas in my view that need addressing. Firstly, the availability of standardised and harmonized ESG company data (which is a regulatory responsibility), and secondly products that make use of the data to optimise risk / return for buyers, addressing poor sustainability compliance and rewarding sustainable innovation by companies. My co-authors and I recently published a book chapter*, which (also) looked at the use of Smart Beta techniques to address opportunities using ESG data. But to be wide-spread and practical ESG Investment will have to rely on easily available, comparable and robust company reporting (IR and beyond) and the creativity of the sell-side to create the products that the market needs – and that will drive corporate change.

    *Rethinking Strategic Management (ed. Thomas Wunder), Springer, 2019 – Chapter: Integrated Management for Capital Markets and Strategy, Andrew Mountfield, Matthew Gardner, Bernd Kasemir & Stephan Lienin

    Like

    1. Thanks for your comments Andrew. I’ll certainly look up your chapter! I agree with you: data remains a big challenge, particularly standardized ESG data for corporates. While it’s growing fast, the data still isn’t great. Also, banks are hard to compare with many corporates, given our large indirect impact and comparatively small direct footprint. There’s some really good sell side ESG research, particularly in Europe. Often they compile the data directly from corporate integrated/reports.

      Like

  2. Hello eco-thriller

    Thank you for your blog – really interesting and some differences with my experience in a European based bank.

    Firstly I am noticing a pick up in sell-side activity, particularly by some of the larger European and American houses. The cynic in me wonders if this is to help navigate through/around regulatory changes (E.g. Mifid). There is also clearly a business opportunity angle here. I had a slightly surreal conversation with an analyst about ESG trade ideas – it did not sound like a long-term capital transaction to me! In any case, good to see this pick up from a slow start… It will be interesting to see what happens to the sell-side industry as a whole from here. As you say, so much change and restructuring!

    Secondly, I agree about the investor momentum – it is quite overwhelming in some ways. ESG is featuring in more and more meetings. This can also be challenging resource-wise, especially trying to discuss complex topics in a short time-frame.

    Lastly, improving ESG disclosure certainly plays a key role in increasing positive outcomes for society. In my view education and awareness is very important too. Educating Boards is a part of this to enable the right questions to be asked.

    All the best.

    Liked by 1 person

    1. Thanks a lot for your comments 4littlelucas. There’s excellent ESG research in the EU and some Asian markets by particular houses, so you’re lucky with the sell-side. One aspect you reminded me of with your comment on resources is all the surveys! It so irritating that they use ‘negative marketing’ techniques e.g. “this is the data that we’ve collected for your company, if we don’t hear otherwise, we’ll assume it’s correct.” And often the data is horribly inaccurate and time-consuming to pull together. As you’ve advised before, we need to prioritize the key ones. Smiled, as the global that’s rumored to exit equity research is y’all.

      Like

    2. Alan it sounds like you are eating the elephant one mouthful at a time – onwards and upwards!

      I am curious to know what sort of impact the recently convened Just Share advocacy group is having on your group’s thinking? I know that ours’ has become more concerned about the risk of ‘disruptions’ and being called out at shareholder meetings. They have also challenged some Pension Fund boards to demonstrate how they are adopting a long-term, sustainable investment approach and specifically integrating ESG factors as required by the regulation and more recently the Guidance Note on Sustainability. So keep punching above your weight!!

      Like

      1. Just Share are the NGO I mentioned above! They and their partners have really elevated climate change among our investors, by forcing two of our peers to include climate change resolutions in their AGMs. We’ll see the outcome at your AGM voting tomorrow!

        I’m interested they’re challenging pension funds, which makes sense. We’ve yet to see a discernable difference among most of the local investors, besides the managers that were quite active in ESG to start with. I spose it takes time for boards to implement change.

        Did you see the CER research just released on climate change among the top 10 local emitters and 5 large banks?

        Like

  3. Thanks for your post. It’s interesting how the market sometimes develops in non-linear ways. After all, we do live in a VUCA world! There is no doubt that the tone of investors has changed dramatically over the last 2 years, which is a very positive development as it has influenced all others.The key thing, as you have done is to adapt to these changing conditions and adjust your levers for change!

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s