Following our recent blog post concerning investor ESG engagement, we at Maanch wanted to look at the “other side”. This blog therefore digs deep into the corporate perspective, outlining our insights into how corporations best manage their engagements with investors. Amidst the pandemic, the need for corporates to fully integrate ESG into their everyday operations has only been further emphasised. Whilst FTSE 100 corporations such as Unilever or Severn Trent often have specialised sustainability teams, small to medium sized companies may struggle to have the same expertise due to a lack of resources or not understanding that ESG can facilitate a competitive advantage within respective industries. This blog has been inspired by various semi-structured interviews with industry experts ranging from the QCA (Quoted Company Alliance), FTSE 100 company to a small European start-up. The purpose of this research was to best understand whether there was a gap in the market for Maanch to create a corporate engagement tracker which can in many respects facilitate the following problems discussed.
Requests for ESG information in the investment process
ESG requests from investors have dramatically increased recently, with ESG integration and strategy within a company no longer being just a specialised area but rather a mainstream adopted approach. To further add to this, ESG type requests from rating agencies have skyrocketed and become its own niche minefield. The use of ESG information in the investment process has facilitated the work of agencies. ESG factors not only affect a company’s fundamental operations but also their general reputation in an ever increasingly sustainability focused world. Yet, the requirements for reporting ESG information is lacking universality. The term “survey fatigue” has recently been coined as businesses are having to juggle multiple rating firms who require different reporting standards. An ESG analyst from the FTSE 100 company interviewed mentioned how a large bulk of their time was dedicated to dealing with such agencies and often diverging ESG ratings are changing share prices and discouraging investment. A recent study by MIT has found that scores of different ratings agencies only align with one another 60% of the time. The difficulty that these rating agencies place on companies could further restrict small-medium sized corporations from gaining a competitive advantage with regards to their efforts to sustainability. Furthermore, they may lack the capabilities and information to successfully answer required surveys meaning that successful ESG and sustainability efforts may be reserved for only larger companies. Even if small-mid sized corporations are focusing on ESG rating agencies they are often having to do this at the expense of integrating it into their business model.
Increased pressure on internal processes
With rising ESG requests and the existence of multiple rating agencies, the demands on the internal process needed to handle this is also increasing. Yet, there is so far no universal internal structure for this. Small-mid cap sized companies would hugely benefit from a streamlined process to the way in which they deal with investor requests. That is not to say that some of the picture isn’t promising in larger companies, such as at Severn Trent, where there are specialised ESG analysts who can adopt such roles at early stages within their career. Severn Trent, which scores very highly on the Tortoise Responsibility Index, also affirms that all board members have extensive ESG knowledge. For them, ESG is an integration of the everyday practice rather than an afterthought. Small-mid sized cap companies often do not have the ability to create sustainability specific teams nor successfully manage investor requests through their more generalist roles. This can be due to a lack of ESG education, access to resources and data or, put most simply, time constraints. This pressure will only get worse as demands grow and as mentioned in our previous blog it is critical that investors communicate to portfolio companies what is and isn’t important to them. This not only improves communication between investors and corporates but also communication within these companies. Maanch can help streamline such processes through providing a platform in which unstructured data is turned into structured data.
The role of tech
Another key issue that lies within corporate engagement with investors is the lack of appropriate tech solutions and ESG/impact education. The fragmentation and diversity of requests necessitates the need for sophisticated processes to deal with such demands. The CFA Institute speaks of the need for a technology system that processes and channels information adaptably, cheaply and efficiently. This provides a great opportunity for the Maanch dashboard prototype which aims to streamline and structure data into a usable platform. This can be further emphasised through the lack of consistency that lies in the ecosystem regarding ESG data with companies often having to decipher themselves what information to disclose to investee firms highlighting both the absence of technology and communication.
Overall, and as reinforced by a discussion with the QCA, there have been some improvements in all areas regarding governance. Yet huge gaps exist in the often forgotten S (social) aspect of ESG, despite COVID to an extent illuminating this problem slightly.
Ultimately, there is a clear need for more efficient processes from both the side of the asset managers and all corporations involved regardless of size or type of organisation. There is a huge role and gap in the market for improved processes and tech support which can improve both efficiency and visualisation stages. It is without doubt that this need will only increase as active engagement continues to grow on both ESG issues and targets. Feel free to contact us with any thoughts or engage in our next steps – we’d love to speak to more companies.
Blog post by Maanch team member Verity Walker.