Prepping for AGMs - Three ESG issues to cover

The annual general meeting (AGM) is a yearly gathering of a company's interested shareholders and provides an important opportunity for investors to learn more about the company's performance, strategy, and portfolio. This year, companies have a lot to cover, from revised performance goals to COVID-19 updates. This is also an opportunity to showcase ESG (Environmental, Social, Governance) actions and outcomes.

ESG investing is growing exponentially. BlackRock CEO Larry Fink recently stated that from January through November of 2020, investors in mutual funds and ETFs poured $288 billion worldwide into “sustainable” assets, an increase of 96% over all of 2019. In short, sustainability topics such as climate and diversity are proving to be more than just trends; they are becoming the bedrock of investor decisions. In turn, companies can use the AGM to address key issues and prepare for investor questions surrounding ESG.

What should be on the agenda?

The World Economic Forum reported that the rate of ESG-oriented investing has risen significantly, and for the first time, environmental issues are the dominant concern for investors. The 2020 Institutional Investor Survey found that climate change and human capital management were cited as the top sustainability topics investors will focus on when engaging with boards, and this theme is expected to continue in 2021.

As the appetite for investing in ESG-driven companies increases, investors are beginning to closely examine how businesses are accounting for environmental challenges such as climate change, social issues such as employee diversity, and governance decisions. Here are three primary ESG issues investors will be focused on.

Governance: Remuneration

When it comes to governance issues, companies should be particularly cognizant of ESG metrics related to executive remuneration. The scrutiny over executive compensation is far more relevant and important today than it might have been a decade ago. In light of COVID-19, there is a widespread expectation that companies should adopt an approach to executive pay appropriate for the specific impacts of the pandemic on the business.

Now that we are officially one year into the pandemic, compensation committees will need to use more discretion than they have in the past. Companies should be ready to present a plan of action for compensation decisions while accounting for previous company metrics and goals that may no longer be attainable or rational.

In order to prepare for stakeholder questions regarding compensation, companies can prepare by thinking through these types of questions:

• How much should executives and employees be rewarded for results during the pandemic? And how should those rewards be delivered?
• How does the company measure performance when previously established performance measures or goals no longer align with the company’s current environment?
• Should compensation committees move from formulaic to measured judgement? And, if so, how?

When thinking through changes to compensation plans, companies should assess how the pandemic has impacted them thus far and be prepared to share short-term and long-term company goals. Helping investors answer key philosophical questions, such as “What pay-for-performance, governance, and stakeholder considerations will guide judgment for compensation actions in 2021 and beyond?”, will help stakeholders understand the principles behind company decisions.

Environmental: Climate

The “E” in ESG, environmental is the leading and best-known consideration of the ESG equation as climate has become the number one issue for investors. This issue is being driven by the Paris Agreement, which seeks to limit the global temperature increase below 2°C (3.6°F) through the reduction of greenhouse gas emissions and climate-resilient development.

Disclosures on climate change-related risks as well as strategies to mitigate these risks, information on direct and indirect greenhouse gas emissions, stranded assets, and the true cost of carbon are becoming mandatory, and companies should be sure to get up to speed on any required disclosures.

For example, TCFD (Task Force on Climate-related Financial Disclosures) is implementing a “comply or explain” disclosure policy for premium listed commercial companies. This means premium listed companies must make disclosures for the financial years beginning on or after January 1st, 2021 consistent with the recommendations of TCFD or explain any non-compliance.

Given the increased focus on ESG reporting, companies should consider how to implement suitable and effective reporting guidelines that enable the company to provide meaningful climate related disclosures and support communication with investors.

Social: Diversity & inclusion

Diversity & inclusion (D&I) has become a critical issue within the workplace and this year’s social spotlight will be on diversity reporting. The COVID-19 crisis created significant challenges that heightened social inequalities while stronger mandates for equal rights grew as movements like Black Lives Matter gained momentum. In 2021, we’re seeing a growing awareness of Asian hate and recognizing companies still greatly lack the diversity and inclusion needed for equal ethnic and gender representation. Consequently, awareness of and action around diversity and inclusion has never been more important.

Investors are demanding more transparency on diversity and inclusion in the workplace, particularly on boards and within the C-Suite. Companies should be prepared to provide investors with disclosures on the steps being taken to ensure at least one non-Caucasian board member and more female board members. More broadly, stakeholders will want to get a sense of the ethnic and gender representation across all levels of the workforce.

The best way to prepare: ESG reporting

The focus on ESG is just beginning; investors will continue to demand rigorous, verifiable ESG data and information that they can incorporate into their own models and use to compare and value companies. Problems such as carbon emissions, human rights violations, and corrupt governance create complex risks that can cripple investments while increased regulations and market volatility complicate these issues even further. Because of this, more investors are insisting that ESG factors are specifically included in the due diligence process to better manage risk and enhance performance.

ESG materiality assessments

With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.

An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.

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Michelle Winters

Michelle Winters is our VP of Sales. Previous to this role she oversaw the account management & consulting teams. Michelle's roles have allowed her to successfully ensure that our clients see increased value, optimization of their strategies, and the right solutions to position them for growth and success.

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