Commentary

A Sustainable Dialogue

Sylvie Harton, Chief Business Strategy Officer at Lumi, explains why transparency and trust will be key to ESG in 2024.

2023 marked a turning point where ESG became an integral component for investors. More than half of institutional investors plan to increase their ESG-oriented investments in 2024, and UK retail investors plan to allocate over a third of their portfolios to ESG ETFs.

As a result, ESG will only rise in importance this year and organisations will need to think carefully about how reporting and effective communication in this area can be used to build trust with their audience, instead of just being seen as a box-ticking exercise.

The rise of the ‘G’ in ESG 

Due to the urgency and scale of the climate crisis, ESG conversations have typically favoured environmental factors and last year the spotlight on the ‘E’ was ever-present – particularly as COP28 neared. In 2023, carbon emissions and climate change dominated headlines, leading to increased scrutiny of companies’ environmental efforts.

While in the past some businesses used environmental considerations as the proof point to tick off all parts of ESG, the social aspect of ESG have become more prominent. With a renewed focus on initiatives addressing diversity, equity, and inclusion in the workforce, as well as prioritising employee and customer well-being, many companies have made sure to tackle the ‘S’ head on.

While these two areas have dominated the conversation in recent years, the big shift we saw last year was the ‘G’ being firmly placed at the forefront of companies’ minds. Company management and boards faced scrutiny like never before, whether it was executive pay or greenwashing claims, meaning that as 2023 came to a close, organisations were under pressure to look at their governance practices.

2024 is now a pivotal year for governance in ESG, as we see the spotlight extend beyond superficial evaluations and focus in inner-circle board dynamics, ensuring a proper understanding of corporate decision-making processes.

Ongoing conversation

2023 could be seen as the year of the shareholder voice, as shareholders and investors made their views heard on issues important to them. ESG was no exception and businesses are recognising the need for a more consistent dialogue with investors.

This ongoing conversation is key to understanding investors’ priorities within ESG and tailoring communications to meet them. Whilst some care about environmental issues, such as climate change and carbon emissions, others prioritise social aspects like labour practices and diversity.

To facilitate this, businesses need to expand their communication to multiple touchpoints across the year. Gone are the days when investors would be content with a single annual meeting to voice concerns. Whilst the AGM remains a cornerstone event in the shareholder calendar, offering investors multiple opportunities to voice their opinions is going to become essential.

Regular investor relations (IR) meetings offer more frequent opportunities for shareholders to raise any concerns, preventing a range of issues from spilling over into one important meeting. This trend gained momentum in 2023, with major players like Shell organising a series of IR meetings to maintain engagement. With ESG taking centre stage in 2024, ongoing dialogue is more important than ever for boards to stay on top of investor needs.

Not only do businesses need to hold regular meetings, but it is vital they make these meetings accessible to a wide range of investors and communicate talking points beforehand. Research from Lumi shows that 85% of investors want to see more information from the companies they invest in on the issues being discussed at the meeting before they attend, as they look to become more informed about the companies they invest in.

Businesses must tackle this head on by equipping investors with the information they need to engage meaningfully. Regular touchpoints can foster this more informed participation and empower shareholder voices.

More than a checklist 

ESG reporting will become critical in 2024, driven in part by new regulations such as the Corporate Sustainability Reporting Directive (CSRD). This will impact how companies report on their ESG efforts and means a broader set of large companies, as well as listed SMEs, will now be required to report on sustainability. In addition to increased compliance, businesses will also need to step up their ESG reporting game to meet the demands of an increasingly discerning investor community.

Ahead of any reporting, organisations need to have their information in order. Businesses must start by securing commitment to ESG at all levels within their company. Then, assess the current state in terms of ESG practices and performance, and set clear and actionable ESG goals that align with your overall business objectives.

Remember, ESG reporting is more than a marketing checklist, and investors are wising up to businesses simply showcasing positive outcomes to their shareholders. It requires boards to acknowledge where improvements need to be made, measuring not just what an organisation is doing well at, but also where it falls short.

It is important to be transparent with investors. As investors value ESG, they also value honesty. When setting ESG targets and KPIs, organisations should take care not to over-promise or over-commit. Third parties such as investors or regulators may become cautious when they are faced with ambitious targets that they know aren’t realistic. Instead, businesses must set an ESG roadmap clearly, signposting aspirations and being truthful about where they are right at that moment.

A key component for successful ESG reporting lies in establishing a feedback loop. Understanding how investors integrate ESG performance into their financial models is crucial for aligning communication strategies. Recognising the diverse stakeholder landscape and extending communication efforts beyond institutional investors to encompass customers, employees, retail investors, and analysts is essential.

The power of hybrid meetings

In the era of diverse stakeholders with different communication needs, hybrid meetings have emerged as an essential way to effectively engage with investors and expand reach to new and varied audiences. Companies are already seeing the benefits – 35% of all AGMs and IR meetings during the first six months of 2023 were held in a hybrid format, and this is a welcome step in ensuring investors can engage meaningfully.

This approach ensures that ESG strategy and performance resonate with all stakeholders. A hybrid meeting format enhances communication by enabling more investors to attend and creates a comprehensive understanding of the company’s commitment to sustainable and responsible business practices. Investors are more passionate about ESG than ever, and with a hybrid format, they can use the latest technology to not only join a meeting but ask questions verbally using a virtual microphone, as well as written queries, to enhance the virtual experience further.

As we look to the 2024 AGM season, the integration of governance, investor relations, and robust reporting that prioritises transparency will help define the success of companies in this new era. This year, it is not merely about riding the ESG wave. Success means engaging with investors, fostering ongoing dialogue, and integrating ESG into the core of your business. It’s about steering the course towards a sustainable and equitable future.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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