A version of this appeared as an Op. Ed. in IR Magazine.
By Kevin Eckerle, Director of Corporate Research and Engagement, NYU Stern Center for Sustainable Business; Brian Tomlinson, Director of Research for the CEO Investor Forum at Chief Executives for Corporate Purpose (CECP); and Tensie Whelan, Director, NYU Stern Center for Sustainable Business, CEF Forum Advisor
The universal uncertainty driven by the Covid-19 pandemic and resulting economic shutdown has made the job of communicating with the market more complicated. The information issuers share on the earnings call has had to be adjusted to address the core risks and scenarios presented by this crisis.
Prior to the Covid-19 crisis, content on the Environmental, Social and Governance (ESG) strategy and performance of individual companies was, at best, a small part of the earnings call. More commonly, ESG was completely excluded from the discussion.
The most recent earnings season has been different, driven, at least in part, by the impacts of the Covid-19 crisis on the safety and pay of employees, the treatment of suppliers, and the prominence of broader stakeholder issues at a time of increasing expectations for corporate behavior. As a result, ESG content has been a feature of more calls[1].
This increase in ESG content in earnings calls amidst the Covid-19 crisis extends and accelerates recent trends in ESG disclosure. More ESG information is appearing with greater frequency in proxy statements, 10-Ks, and across a variety of other disclosure formats like investor day presentations[2]. Investor-focused ESG calls and webinars are also becoming more common. This trend responds to growing pressure from investors for more and better ESG information direct from company disclosures (rather than second hand through ratings providers).
But integrating ESG issues into the earnings call is difficult. In our recent research into integrating ESG content into earnings calls, our conversations with sell-side analysts highlighted several challenges[3]. Limited or low quality disclosure on ESG made meaningful discussion and analysis difficult; the time horizon and inter-period availability of ESG information made it harder to incorporate ESG data into valuation analyses; and there was an expectation that discussions of ESG on earnings calls would be a time-consuming distraction from the core financials and commentary required to update valuation models.
A concomitant set of worries on the corporate-side (expressed by IROs and sustainability professionals) included disrupting a long-standing, well-orchestrated dialogue with analysts; finding time for ESG content in an already crowded agenda; and, the much repeated concern about the comparability of relevant ESG metrics (though SASB and TCFD were widely seen as part of the solution to that).
Recommendations: Stemming from our project, we offer advice to issuers looking to integrate ESG data and the impact of ESG execution on quarterly earnings and long-term value creation, into the earnings call[4].
- Establish the foundation for success by getting C-suite support, conducting a materiality assessment to identify the most financially-material ESG issues, developing a robust strategy and execution plan to mitigate the risks and capture the opportunities presented by those most financially-material issues, and implementing the technical systems that will enable the recording, auditing, and reporting of ESG information.
- Build towards the earnings call by integrating ESG and long-term strategy content into existing disclosures sequentially (from sustainability report to proxy statements, to investor day presentations, to ESG-specific webinars / presentations, to earnings calls) to build comfort and confidence with the investor base, as well as the management team.
- Include the financial impact of the ESG strategies in your quarterly calls. How does your climate change strategy drive energy savings and reduction of risk, for example, in addition to GHG reductions?
- Share ESG-specific questions with your sell-side analysts to shape the Q&A discussion, with a connection to financial implications ,and more regularly bring ESG and long-term strategy into the conversation.
- Develop a plan for how you will use each of the four earnings calls in the fiscal year. Provide quarterly updates on key ESG performance and financial measures in three of the four quarters, but use one of the four calls (either Q1 or Q4) to provide a deeper discussion of ESG and long-term strategy and how recent performance compares to expectations.
The objective is to make ESG and long-term strategy content, including the impact of ESG execution on financial performance, a consistent component of your value creation narrative. By sharing ESG information, you will be able to provide a more comprehensive understanding of your long-term value frameworks[5] and provide insight into the capabilities and resilience of the firm as it navigates mega-trends such as the transition to a low carbon economy, automation, and yes, the rise of zoonotic diseases[6].
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For more on this research, please see: https://cecp.co/wp-content/uploads/2020/05/CECP_ESG-and-the-Earnings-Call_FINAL.pdf; and Eckerle, Whelan and Tomlinson, 2020, Embedding Sustainability Performance and Long-Term Strategy in the Earnings Call, Jour. Applied Corp. Fin. 32(2): 85-99.
[1] Tim Human, Six Trends from Earnings Season Under Covid-19: https://www.irmagazine.com/covid-19/six-trends-earnings-season-under-covid-19.
[2] Disclosing Environmental and Social Issues in the Proxy Statement: https://www.irmagazine.com/content/disclosing-environmental-and-social-issues-proxy-statement.
[3] For more on this research, please see: https://cecp.co/wp-content/uploads/2020/05/CECP_ESG-and-the-Earnings-Call_FINAL.pdf; and Eckerle, Whelan and Tomlinson, 2020, Embedding Sustainability Performance and Long-Term Strategy in the Earnings Call, Jour. Applied Corp. Fin. 32(2): 85-99.
[4] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3607921.
[5] Kotsantonis, Rehnberg, Serafeim, Tomlinson and Ward, The Economic Significant of Long-term Plans. November 2018.