Earnings Calls and ESG

Companies periodically provide financial and increasingly non-financial information to the public to reduce the information asymmetry between investors and the company. Apart from annual reports, communication takes place through three mechanisms: (a) investor’s day, (b) earnings calls and (c) guidance calls. While some companies have started ESG calls, they are not particularly common.

The time is ripe to stop treating ESG as a sidebar and integrate them into financial reporting. Management fusses over quarterly earnings and reports. Investor relations see it as a vehicle to see the equity story. Many studies show how quarterly reports emphasise short-term profit generation. Long term investments and research and development take a backseat. Sustainability often does not even merit a mention even though ESG has a significant long term impact on the company. As companies increasingly integrate ESG into corporate strategy, communicating ESG to investors.

So, how should companies go about doing this? A joint project between the New York University Stern Center for Sustainable Business and the CEO Investor Forum of Chief Executives for Corporate Purpose suggests the following steps: 

  1. Integrate ESG and long-term content sequentially: Begin to integrate ESG and long-term strategy content into existing disclosures to build comfort and confidence within the investor base and management.
  2. Prep the analysts: Get your sell-side analysts to ask questions on ESG. This prep provides an opportunity to discuss these issues fuller.
  3. Develop an earnings call schedule: Figure out how you would use each of the four quarterly calls to drive the discussion on ESG. Usually, ESG updates are annual. So, investor relations can use the quarters to drive conversations on ongoing work.
  4. Highlight sustainability and financial value: Describe management’s thesis on the impact of ESG strategy and performance on the company’s financial performance. Investor relations can build this link through the following means:

a. Growing the top line: Studies show that consumers increasingly make their purchase decisions based on the product’s sustainability. Thus, a sustainable product is likely to add value to the company.

b. Cost reduction: Reducing energy usage or water usage is likely to reduce costs for the company.

c. Avoidance of regulatory roadblocks: Regulators increasingly see companies with strong ESG practices positively. Also, increased regulatory pressures are less likely to impact a company focused on ESG and may even gain subsidies and faster regulatory clearances.

d. Productivity improvements: Like the consumers, employees also see sustainable companies positively. A company’s focus on ESG will likely raise employee morale and productivity.

e. Reduced stranded assets: Companies that proactively move towards newer technologies or have reduced investment in older technologies are less likely to be left with stranded assets.

5. Monetise risk: Consider including an assessment (and specific examples) of the value at risk associated with not acting on a particular ESG theme, e.g., the potential costs of avoiding human capital expenditures. 

A robust mechanism to incorporate ESG into earnings calls will go a long way in telling the corporate story. 

Published by Utkarsh Majmudar

Utkarsh Majmudar is a Fellow, IIM Ahmedabad and a professional with experience encompassing academics and administration at top business schools in India (IIM Lucknow, IIM Udaipur, and IIM Bangalore) and working with large corporations. His interest areas include corporate finance and CSR.

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