Investor Relations: where capital meets corporate accountability

For some 250 years, responsible investing has been a key means of aligning our influence with our values.  The Investor Relations function is squarely at the nexus between the strategies and performance of the company and the primary leverage point for stakeholder expression of sustainability goals.  What does this mean for the Investor Relations professional?

Perhaps the very earliest occurrence of socially responsible investing took place in 1758 when the Yearly Meeting of the Religious Society of Friends, better known as the Quakers, issued the first of a series of denunciations of the slave trade, advising its members to “avoid being any way concerned, in reaping the unrighteous Profits arising from that iniquitous Practice of dealing in Negroes and other Slaves” and “endeavour to keep their Hands clear of this unrighteous Gain of Oppression.”

John Wesley, founder of Methodism

Around the same time (between 1744 and 1760), John Wesley, an English preacher and founder of the Methodist Church, delivered his sermon entitled The Use of Money.  You may have heard the saying, “Make all you can, save all you can, give all you can.”  That is John Wesley, paraphrased.  What it doesn’t capture, however, are the boundaries he drew around the first of his three rules: “gain all you can.”  Wesley advised his followers to gain but without hurt to body, mind, or soul, of either ourselves or our neighbours.  He spoke of unhealthy work environments, cheating, lying, anti-competitive behaviour, the sale of anything that may impair health, and what he called “sinful trade”.  He advocated honest industry, diligence, continuous improvement, and best practice.  Religious institutions have been at the forefront of socially responsible investing, or SRI, ever since.

In the last five decades, we have seen a steady rise in interest in SRI.  [For a brief history of SRI, see these entries on Wikipedia and About.com.]  We know environmental, social, and governance (or ESG) issues are not new to investors.  So what has changed?

One thing that’s new is the information that we have available to us.  Today (and especially in the last 10 years), there is growing empirical evidence that companies that actively and effectively manage environmental liabilities, social issues, and governance risks deliver comparable or better financial returns than companies that do not.  [For example, see the cumulative performance of the KLD 400 Social Index here and the Social Investment Forum’s review of SRI mutual funds here.]

This has contributed to rapid growth in the ethical investment market.  [See the Social Investment Forum Foundation’s recent 2010 Report on Socially Responsible Investing Trends in the United States and Eurosif’s 2010 European SRI Study for trends and statistics.]  As the interest in sustainable and responsible investing grows, and investors are demanding improved governance and greater disclosure and transparency around ESG issues, the investment community is responding with broader application of sustainable management strategies and criteria and more SRI products and services.

At the same time, we are seeing major banks and commercial lenders increase their scrutiny of lending to companies involved in activity with potentially significant environmental and social impacts, in part to protect themselves from liability created by the actions facilitated by their financing.

So, why is all of this important?

It’s important because it means that companies’ access to capital is increasingly predicated on the ability to demonstrate good environmental, social, and governance practices.

These trends are being driven by the convergence of, on the one hand, new technologies that enable unprecedented access to and exchange of knowledge and ideas, and, on the other hand, growing awareness of and demand for corporate responsibility.

And what does it all mean to the Investor Relations professional?

The Investor Relations professional is at a critical interface between capital and corporate accountability.

As the conditions for access to capital change, so must the role of the IR professional.

Investors are looking for more information about companies’ ESG practices.  Therefore, the IR professional must have answers.  Investor relations professionals need to know what ESG issues are relevant to their company and they need to understand those issues.  They need to know what their company is doing about those issues, how their company compares to its peers, and what are their company’s weaknesses.  And importantly they need to be able to effectively tell their company’s story in a compelling and convincing way so that they may build social capital and brand value.

But more than just information about performance, in many cases, investors also expect companies to improve their ESG practices, and to play a part in addressing local or global environmental and social problems.  Therefore, the IR professional has a role to play not just in answering questions but in developing solutions.  Thus, the IR professional needs to understand and communicate investor expectations to the company, understand and champion the business case for sustainable practices that address those expectations, and engage internally to develop, implement, and communicate appropriate sustainability strategies.

To accomplish these things, the IR professional needs to:

  • collaborate with colleagues to identify priority non-financial issues and document and communicate corporate performance effectively;
  • collaborate with in-house and external specialists with technical expertise in the ESG issues most relevant to the company;
  • cultivate relationships with external stakeholders, especially investors and stakeholders who influence investors;
  • get engaged in the dialogue around emerging standards for disclosure, reporting, and performance to better anticipate, shape, and address emerging requirements; and
  • understand what people are saying about their company and be prepared to respond quickly, effectively, and constructively.

Many of these conversations are taking place in the social web, and social media offers tremendous opportunities for collaboration and engagement.  You can choose to not participate in the conversation, but the conversation will go on nonetheless and you will miss the opportunity to build trust and social capital, understand changing expectations, and access new ideas for growth.

For some 250 years, responsible investing has been a key means of aligning our influence with our values.  The IR function is squarely at the nexus between the strategies and performance of the company and the primary leverage point for stakeholder expression of sustainability goals.  As an investor relations professional, you might look at this exposure as a risk, but I encourage you to see the opportunities for yourself and your company that await a proactive approach to corporate responsibility.

Presenting to CIRI in Calgary, 11/25/2010

 

This is a condensed version of a talk I gave to the Canadian Investor Relations Institute in Calgary last week.  If you want to see the whole presentation, in all its contextual and statistical glory, get in touch!

 

  1. I have a couple of really great studies in this area that you might find really helpful – they are from a larger s=post called “Stock market says CSR = $” on H&K’s ResponsAbility blog: http://blogs.hillandknowlton.com/responsability/2010/09/29/stock-market-says-csr/

    An August 2010 working paper from Harvard Business School, The Impact of Corporate Social Responsibility on Investment Recommendations delves into how sell-side analysts perceive CSR information, and how this information affects their recommendations. Check it out here: http://www.hbs.edu/research/pdf/11-017.pdf

    Another collaborative study, Does Corporate Social Responsibility Affect the Cost of Capital? from Principles for Responsible Investment, used a sample of 12,915 U.S. firms. This study found firms with a better CSR score had a lower cost of equity capital – even after controlling for firm-specific issues or type of industry. This link is here: http://www.unpri.org/files/Article4_EG.pdf

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