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If climate change, water shortages, diversity and inclusion and labour relations are all financially material, even though they are non-financial, shouldn’t they be part of any financial presentation?
If they affect a corporation’s value and success, as, by now, even the SEC recognises, then they should be being discussed at every investor facing presentation. If that is the case, should they be siloed off into ESG-only investor calls?
In the same way, if these issues are financially material, why are they siloed off into sustainability reports rather than being presented in annual financial statements? Oh, wait, in every other country except the US they are. And that IS the SEC’s fault.
Let’s look at the rise of ESG mentions in earnings calls. As a matter of fact, in an anomalous finding, Factset found a 56% decrease in ESG mentions in earnings calls in the first quarter this year among companies in the S&P 500, though the overall trend is upwards. It attributes this decline to the pandemic, saying 474 companies in the index mentioned COVID-19 on their calls. On the other hand, questioning a company about its policies regarding the pandemic would surely come squarely under the S of ESG, so the statistics could be interpreted as having risen from 71 companies in the fourth quarter of 2019 to 474 in the first three months of this year.
In a Harvard Law School blog, researchers from the NYU Stern School of Business and the CECP [Chief Executives for Corporate Purpose] describe several pilot studies of ESG discussion during quarterly earnings calls. Speaking to sell-side analysts, who are the typical target audience for earnings calls, the researchers found that few had any real ESG knowledge and that there was little demand for the information, but also that there was a “tension” between the time horizon of earnings calls – quarterly – and the long-term value concepts of ESG. So it was difficult for companies to make, for example, period to period and/or peer-to-peer comparisons.
In order to remedy this, the CEO Investor Forum at CECP and Stern conducted research and ran pilots with some major companies that had already begun to integrate ESG into their quarterly earnings calls, including medical devices company Becton Dickinson (BD), Dow Chemical, conglomerate General Electric, real estate firm Jones Lang Lasalle and consumer goods company Unilever.
The findings were that: “ESG should be reported through the lens of its relationship to core business strategy and that the financial impacts of ESG, rather than ESG performance alone, should be reported.” However, a brief review of Unilever’s last couple of earnings announcements reveals only a glancing and brief mention of climate issues, or nothing substantive at all, and little or no reference to social issues – except for COVID-19.
The group also recommended taking a slow approach to building ESG discussion into quarterly earnings calls, starting with proper disclosure of material sustainability metrics, introducing board oversight, then hosting investor-focused ESG ‘education’ calls, and finally incorporating material ESG disclosures into earnings calls. At this point, they say, investors – even sell-side analysts – should have begun to realise that these issues are material to value.
Just Capital, a non-profit dedicated to promoting stakeholderism, began hosting earnings-like ‘Quarterly Just Calls’ in November last year, starting with finance company PayPal; it has since hosted calls with electronics companies Intel and HPE, as well as health insurance company Humana. According to the announcement of the inaugural call, they build “on the traditional quarterly earnings call by providing a platform for CEOs to speak directly with investors about the ways in which they are creating value for all their stakeholders – workers, customers, communities, the environment, and shareholders – over the long term.”
Again, late last year, Just Capital began collaborating with shareholder communications platform Say to help companies hold the calls with investors and interested parties. I spoke to Alexander Lebow, co-founder of Say, to get his perspective on the development.
“Our basic mission is to use technology to connect companies and shareholders,” he said. “A company’s shareholders are undoubtedly an important stakeholder group to influence a board’s prioritisation of a company’s ESG factors. There needs to be a more transparent and efficient way to connect shareholders and companies to discuss these issues, as well as for proxy voting and other regulatory communication. We are creating frictionless channels for these two groups to communicate.”
I asked him if he thought that ESG was typically being overlaid on top of existing calls or given its own call. He said that companies were taking both approaches, but of the ESG-only call, he said: “Anecdotally, it seems like ESG calls are happening annually rather than quarterly.”
Which is the best vehicle, the ESG-only call or the amended earnings call? “The general argument that we are going to cede the ground of the quarterly earnings call to short-termists is not a good one. Is long-term value creation not a proper subject for these calls? Are those who want to focus on ESG admitting that it is only of use in long-term value creation rather than being able to move the stock price in the short term? And conversely, are those only interested in the release of quarterly numbers saying that these figures are irrelevant to long-term value? That is an argument for not moving ESG discussion out of the earnings call.”
Although Tesla, with whom Say has been working for 18 months, hasn’t raised ESG issues at its investor presentations, Lebow described how the platform allows both retail investors and massive mutual funds to ask questions of the car manufacturer’s board and management. Voting power can support a question, but also the number of people asking the same question can support that question. Board and management have flexibility in how they choose the questions to answer, but the aim is fairness for investors, rather than the somewhat opaque virtual annual meetings that inevitably dogged the US proxy season which give all power to management. In order to be fair to retail investors as well as large holders, Say ensures that questions from each group can be seen by management in different streams.
This format could, of course, benefit any kind of investor call as it replicates the physical shareholder meeting where any shareholder can walk up to the mic. It would also allow all those retail investors the SEC is so insistent on saying that they don’t believe ESG has a material effect to demonstrate that they do believe it does, and ask questions about it.