The great communication gap between CSR and investment communities

Effective communication about their sustainability strategy and practices is one of the focus advisory areas of PGS Advisors with its clients.  In an interesting article in GreenBiz, Cindy Mehallow recapped the proceedings of a recent corporate social responsibility (CSR) and investor relations’ forum. The core of the article’s argument points to a problem that is persisting although CSR/sustainability/environmental, social and governance (ESG) investing have gone mainstream over the last decade: bad communications between the sustainability and investors camps.

Participants in the forum identified as the critical issue that both sides rarely speak the same language. A typical analyst will not necessarily ask questions about sustainability but is certainly interested in issues concerning succession planning, regulatory compliance, energy efficiency or customer relations. All of these issues of course about corporate sustainability, when defined by a company’s triple bottom line of social, environmental and economic performance, but it might not be apparent to the investor. While a company with a strong sustainability strategy and record shows superior risk management and long-term growth prospects, the terminology used to describe sustainability practices may alienate investors. Eric J. Hespenheide, global leader of Deloitte’s Sustainability Audit and Enterprise Risk Services is quoted in the article as raising the question: Is the disconnect “all a grand misunderstanding? It sounds like analysts are actually interested in this but not getting through because of the language.”

And, at least in the US and Europe, the language is clearly the problem, since there is no shortage of disclosure on nonfinancial performance data anymore. On the contrary, as one senior investor pointed out, there is lots of bad and irrelevant data released, essentially creating noise, preventing investors from seeing the real CSR picture of a company.

To allow companies to remedy this communication gap, Mehallow summarized five steps suggested by participants at the forum.

  1. Investors need industry-specific data. While companies can and need to produce the data, it is difficult to know what exactly individual investors are looking for. The work of the Sustainability Accounting Standards Board (SASB), which is developing standards for ten sectors and 88 industries and is set to release standards in 2015, will facilitate bridging this barrier.
  2. Avoid loaded language. The term CSR is a good example in itself, as its terminology suggests that there is no economic benefit for the company and investors involved. Communicating that a company’s sustainability engagement is really about integrating social, environmental and economic performance to create lasting value is more accurate and certainly more appealing from an investor perspective.
  3. Talk to the right players. Issues of sustainability should be a routine and integral part of an investors’ assessment of companies and part of the conversation with management, not just a company’s sustainability officer.
  4. Provide useable data. Where sustainability performance can be measured and standardized, companies need to go ahead and provide such data as easily digestible as possible to investors, so it can be fed into models. Examples include carbon emissions, human capital, natural resources and other sustainability performance metrics.
  5. Explain the meaning behind the data. Companies need to explain why their sustainability performance is good for its bottom line.