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. 

Where organisations go wrong on sustainability

The climate crisis has firmly pushed organisations to be more sustainable (or ESG-centric). While many organisations have done well and are on the path to becoming sustainable, others have struggled in their endeavours. Here are some roadblocks that hinder companies from becoming sustainable.

Hierarchical mindset: The organisational culture is that of obedience. Employees only do what their bosses tell them to do. Organisations are primed to follow government mandates. Both organisations and employees avoid going beyond what their superiors ask them to do. Thus even when the organisation or the employee has the competence and resources to be sustainable, they seldom do so as they wait for mandates or orders.

Not my job: Environment and sustainability are separate functions in most organisations. Executives often see sustainability as a different programme or function and do not integrate it with purchase, production, marketing, sales, design etc. This siloed approach often leads to the status quo. For an organisation to be sustainable, sustainable actions need to cut across departmental boundaries.

Lack of vision for sustainability: Many organisations do not have a clear vision on sustainability. They rely on either ad-hoc actions or believe that mere compliance with regulations is enough. A clear vision motivates and excites people leading to increased commitment and energy.

The cause and effect confusion: Most companies tend to take actions that reduce emissions and discharges. These emissions and discharges are the effect and not the cause. Emissions and discharges come from the way products and processes are designed. The materials, chemicals and energy used to produce are the cause. Emission control temporarily masks these problems.

Information gaps: For sustainability actions to succeed, people across levels require information on the benefits of sustainability programmes. Unfortunately, many organisations fail to communicate the needs and purpose, strategies and expected outcomes of their sustainability efforts effectively..

Learning gaps: Many executives have grown up without studying sustainability. The topic is now gradually entering syllabuses. Thus, executives need to be incentivised to expand their knowledge, test new ideas, and learn how to overcome barriers to change.

Failure to institutionalise sustainability: The success of sustainability programmes depends on how sustainability is institutionalised in an organisation through operating procedures, policies and culture. Benefits accrue when an organisation links compensation, promotions, new hiring, and succession planning to sustainability. However, with many organisations failing to embed sustainability into their core policies and procedures, employees’ commitment to sustainability remains superficial.

Profit and Purpose

In the movie Other People’s Money, an exciting debate between Larry the Liquidator (Danny Devito) and Andrew Jorgensen (Gregory Peck) highlights the current discussion of the trade-offs between profit and purpose. Larry the Liquidator insists that the prime objective of business is to make money, while Andrew Jorgensen stresses the needs of the stakeholders.

Companies are increasingly being pushed to change – to tone down the single-minded pursuit of profits and pay closer attention to the impact on stakeholders (employees, consumers, communities and the environment.

While the term profit is easily understood, the term purpose is relatively ambiguous. An article in HBR suggests that purpose can be construed in three ways
Competence: the function that the company’s product serves
Culture: the intent with which the company runs its business
Cause: the social good that the company aspires

While the cause-based meaning is most commonly implied the other implications are equally valid. The purpose should come from the mission statement and get translated into long-term goals and finally into actions that drive the company. Purpose is implemented by companies in many ways. Some companies have a convenient purpose – talk about purpose but act on it only in superficial ways. Another is purpose on the periphery – act on social causes but keep it separate from the core business. Yet another is the win-win purpose that aims to find the sweet spot between purpose and profit.

Business leaders decide based on their commercial orientation (profit maximisation) or social orientation (support stakeholders — purpose). A quadrant illustrates how business leaders make trade-offs between profit and purpose. In the diagram, these choices are shown. At the top left are leaders who are solely concerned with profits (remember, Larry the Liquidator). At the bottom right are leaders that focus exclusively on social outcomes – doing good for the world but not for the business. The top right quadrant highlights leaders who aim to achieve a win-win on both profit and purpose. The bottom left quadrant is where they lose out on both profit and purpose.

Business leaders need to take a hard look at how they create the right balance between profits and purpose.

IPCC Report: How to bring a change?

IPCC has released three reports in rapid succession. These reports cover:

August 2021: What is the problem?

February 2021 How serious is the problem?

April 2022: How can the problem be solved?

The latest report titled “Mitigation of Climate Change” focuses on three key aspects:

The target of 1.5 degrees is almost out of reach: The target of net-zero by 2050 appears to be almost unachievable. Carbon emissions have continued, and there is not much time left before temperature limits are breached.

Understanding what to do and the tools for doing it are there: Many countries have experienced shrinking emission rates and are a model. Cost-effective ways of tackling climate change now exist. Solar and wind power costs have declined rapidly – 85% between 2010 and 2019. Low carbon technologies Nuclear and hydroelectric power have gained ground. Digitalisation through robotics and the internet of things will increase the efficiency of renewable power.

Carbon removal is inevitable: Unless the overshoot of emissions is clawed back, the situation looks dire. Removal of carbon is unavoidable. There are many time tested methods of reduction, while several embryonic methods need attention. Newer techniques such as direct air capture face difficulty in attracting investment.

Behaviours are important: Given the report’s focus on prevention, the report looks at the demand side of reduction. Behavioural and cultural change can reduce emissions significantly. Social science now forms part of IPCC report. 

IPCC Report, April 2022

This IPCC report is an important step in helping countries and companies achieve their net-zero goals.

The Scrouge of Chemical Pollution

Chemicals have been instrumental in bettering our lives, and their use is ubiquitous. Chemicals are found in fertilisers used in agriculture, household appliances, soaps and detergents, clothes we wear, cars, packaging materials, sports shoes, helmets, hand sanitisers, medicines, computers, undersea cables, aerospace, mobile phones and many more products.

Photo by Stormseeker on Unsplash

While chemicals have benefitted humankind immensely, ey have several harmful effects. Unfortunately, the recent focus on greenhouse gas emissions has obscured the equally important issue of chemical pollution. So, what is chemical pollution? Chemical pollution is the presence or increase in our environment of chemical pollutants that are not naturally present or found in amounts higher than their natural background values. Chemical pollution comes from three primary sources – Persistent Organic Pollutants that come from fertilisers; oil that comes from urban-based runoffs, operational fuel discharge and oil spills; and toxic metals that come from industrial activity and waste dumps

There are many sources of chemical pollution. For example, fertilisers and pesticides used in agriculture can seep into the soil and contaminate it. Ships containing crude oil can cause oil spills and cause chemical pollution. Everyday household cleaner released in water carries several polluting chemicals. In industries, chemical pollution results from human activities like the manufacturing, handling, storing, and disposing of chemicals. Thus, chemical pollution pervades all human activities.

The impact of chemical pollution can be severe. In seas, rivers and lakes, many areas suffer from low levels of oxygen due to chemicals from land running off into the sea. As a result, there is a mass killing of fishes and destruction of water body ecology. As a result, fishing communities are finding it difficult to survive – the boats are getting spoilt, and their catch is reduced. On land, the effects are far-reaching. Fields poisoned by chemicals may become unusable. Crops may contain higher than permissible levels of chemicals. Contaminated water sources add to the problem. Compared to CO2 emissions, toxins in the soil remain for centuries. In humans, chemical pollution causes damage to the liver, kidneys, nervous system, blood, cardiovascular system, immune system, or reproductive system. Certain pollutants can also be carcinogenic.

What can be done? First, we need to create effective regulations with robust monitoring mechanisms. Awareness and education for responsible behaviour are essential. Companies need to take urgent steps. Chemical pollution is a scrouge that needs to be stamped out.