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A bird's eye view of the forest canopy
We recently had the pleasure of attending IR Magazine’s ESG integration Forum in NYC. It was a jam-packed day filled with lively discussion around all things Sustainability.

We went into the event with strong conviction that a company’s sustainability strategy is synonymous with risk mitigation, and when material E, S & G matters are managed strategically and proactively they can serve as a strategic business driver, competitive differentiator, value-creator, and talent attractor. The event validated this point of view and shed light on many other hotly debated topics.

Here are four of our key takeaways on what IROs, the C-Suite and the Board need to know about sustainability:

1. The anti-ESG movement is noise… the focus on sustainability disclosures is here to stay.

In the face of ESG being politicized, many corporations and financial institutions are ‘green-hushing’ by taking a step back from spotlighting their position on hotly contested social and climate issues.  One example that has been widely noted is Larry Fink removing the term ‘ESG’ from his annual CEO letter and BlackRock’s using the term “material sustainability-related risks and opportunities” in lieu of ESG in their 2023 Engagement Priorities.

Despite this trend, there was clear consensus at the forum that it remains important for companies to disclose how they “manage ESG” as sustainability practices remain a highly influential consideration for stakeholders. In addition, EU regulations are here, and the International Sustainability Standards Board (ISSB) issued its first two IFRS Sustainability Disclosure Standards in June 2023. SEC regulations will inevitably be here as well. And, until then disclosing your sustainability strategy as a voluntary matter will continue to be expected by investors in the US.

So, where is the ESG backlash coming from? The panelists widely agreed that the push-back is in part rooted in a misunderstanding of what sustainability or ‘ESG’ is, or more importantly what it isn’t.

It isn’t: a check the box reporting exercise or effort to ‘do good for good’s sake.’

It is: about managing material risks and maximizing opportunities across a range of environmental, social and governance factors that may impact your business. It is operational excellence, lean manufacturing, talent management, supply chain management, and customer attractiveness. Put another way, as one panelist characterized it, ESG is a set of pre-financial factors – how they are managed directly affects how a business ultimately performs.

SMA’s Take:

When framed this way we believe it is easy to understand why every management team and Board needs to prioritize getting clear on their sustainability strategy. While it may be tempting to push pause until the anti-ESG noise dies down and the SEC’s ESG regulations are inked, don’t stop. Instead, take the time to reassess your approach to managing and disclosing sustainability. Rather than checking the box, how can you reframe ESG as a competitive differentiator, value-creator, and business imperative?

2. Materiality is the critical starting point.

As one panelist put it: if an environmental, social or governance factor is material to your company you should be managing it as you would any other material business risk, and you should be talking about it.

The ISSB, many shareholders and others make it very clear that a company (not third parties like ratings agencies) should define its own material risks. This is why a critical starting point for any ESG program is identifying what E+S+G factors are material to your business. Referring to peer practices, reporting frameworks and standards like IFRS S1, IFRS S2, SASB, TCFD and GRI provide good guidelines, but to truly uncover what uniquely affects your business, a materiality assessment is a must.

Climate remains a hotly contested topic. In considering materiality of climate factors, we leave you with a powerful thought shared by Mindy Lubber, CEO and President of the sustainability nonprofit organization Ceres who declared: “The climate crisis is the biggest economic crisis we have ever seen, affecting every sector, every geography, and every company.” In the insurance industry, for example, companies are meaningfully shrinking their TAM as they stop doing business in states like California due to climate risks. If management and the Board are not assessing and planning for managing the risks presented by climate factors, according to Lubber, they are not doing their jobs.

SMA’s Take:

A materiality assessment is a critical starting point to ensure you focus your time and resources on the topics that matter most for creating value for your business and your stakeholders. By doing so you can identify critical business risks and opportunities early and develop effective mitigation strategies.

3. Own the narrative.

A crisp, clear, and compelling sustainability narrative is a must. It defines your strategy and the story behind the information you are sharing.  Without a narrative, it becomes clear that sustainability is not in fact embedded in how you operate your business or how you manage risks.

Some tips to consider as you craft a narrative:

  • Progress not perfection. Investors want to see that you are moving the needle but do not expect you to set ambitious targets right out of the gate.
  • Your narrative should reflect leadership’s voice. Investors want to see that the leadership team and the board are driving your sustainability strategy – after all, this should be about your strategic management of business risks.
  • If you have determined certain factors are not material to your company, include an explanation of why and how you went about determining that. Being able to point to a materiality assessment as reason for not focusing on a specific ESG factor can be highly effective.
SMA’s Take:

Control the narrative, or investors, ratings agencies and the media will control it for you. A sustainability report that lacks a narrative and only includes a laundry list of disclosures, runs the risk of not only having little impact, but worse yet presenting your company as a poster child for ‘check the box’ green washing.

4. Engagement is more than a sustainability report.

Publishing a sustainability report is a huge accomplishment, but it is only the beginning. It is crucial that you integrate your sustainability narrative throughout your stakeholder communications. For investors, this includes integrating ESG updates into your IR website, earnings calls, investor meetings and investor presentations.  You also will want to integrate messaging and updates across employee, supplier, and customer communications.

Additionally, it is important to engage with shareholders around your ESG efforts year round. A few pointers with engagement – have an agenda, go into these meetings with an understanding of where your shareholders’ ESG policies may differ from your practices, and be prepared to involve members of the Board. That is now par for the course.

On a related topic of engagement, points of view on ratings agencies remain divided.  Ratings agencies are seen as a necessary evil. On the one hand, you can’t build your program around ratings scores, but on the other you need to pay attention to where you are getting ‘red flags’ as poor ratings can result in you being screened out as a potential investment (particularly for passively managed funds). So, it is recommended that you consider your strategy around ratings agency engagement.

SMA’s Take:

Just like effective IR, effective sustainability engagement involves integrating your story across all stakeholder communications, knowing your stakeholders’ position on key topics, and engaging proactively throughout the year.

To summarize: Sustainability is here to stay. The ‘pause’ created by the anti-ESG wave presents an opportunity for companies to spend time getting clear on what environmental, social and governance factors present material risks to the business and how those are being managed. From there an effective disclosure and engagement strategy can be implemented to spotlight how you are building durable and sustainable value for all your stakeholders. Ultimately helping to attract more investors, engage better talent and grow your business.

Ryan Flaim

Ryan is an investor relations professional, strategic communicator, and innovative thinker with two decades of experience advising c-suite executives, IROs and boards of directors on leveraging investor relations strategies to accelerate value creation. She is regarded as an expert in presentation development, messaging architectures, sustainability communications, and investor engagement. She has a track record of preparing management teams for investor days, earnings calls, and special situations, such as proxy contests, M&A, executive transitions, and bankruptcies.