Escalated scrutiny, a global pandemic, volatility in the markets, and an increased focus on ESG issues and corporate purpose are all contributing factors to a growing demand on businesses to provide clear, timely and meaningful information. Here are seven trends shaping best practice investor communications in 2021:
In this environment of heightened uncertainty and increasingly complex messaging, with fewer analysts covering more companies, there is an increased demand for every company to define for itself how it is perceived.
Gone are the days when companies can expect stakeholder audiences to understand a fresh story every time they issue a report. Everything needs to be presented within the context of an overall story: what is the company purpose? What is its core value proposition?
As more and more companies are now embracing being purpose-driven, making a statement about their role in the world and how they are contributing for the benefit of all stakeholders – the commitment to creating a corporate narrative is gaining traction. What does this look like within an annual report – is it just a matter of stating the company purpose clearly at the front of the report?
Whilst clearly communicating the company purpose is the first step, it really means supporting the purpose narrative with every aspect of company direction and performance. The narrative needs to have an authentic link between the purpose, the strategy, the values and the value creation for all stakeholder groups. It is vital to ensure that the purpose is intrinsically connected to the business strategy, and by integrating information and speaking in one voice about financial and other performance indicators, disclosure is enhanced and trust between the organisation and stakeholders is strengthened.
This consistent corporate narrative will develop advocacy and trust with the market, helping them identify short-term misinformation. The more that stakeholders can understand the company story, the more it will help them comprehend the longer term opportunities available to the company, with less emphasis on the short-term ups and downs that every company experiences.
The necessity for businesses to document and demonstrate value creation is nothing new. Over the years, they have become increasingly astute communicators of why they are worthy of their shareholders’ invested capital, and how they will continue to generate wealth into the future.
What is new, however, is the growing demand for companies to demonstrate the value they create beyond financial returns for other important groups of stakeholders and society at large. This has been driven in part by geopolitical influences, such as climate change, globalisation, income equality and the growing power of technology. These factors have shaken our trust in large corporations and forced many people (investors included) to question the merits of capitalism without conscience, and the sustainability of companies that don’t make a positive contribution to the societies in which they operate.
Financial value created for the organisation and shareholders is inextricably linked to the value created for others, including key stakeholder and society at large. Recent strategic shifts from asset management firms like BlackRock show that companies that take a more balanced approach to the needs of broader stakeholder groups will outperform those that are purely fixated on short-term profits and shareholder returns. We have seen time and time again: companies that practice short-term thinking often put both shareholder value and stakeholder interests at risk. For example, banks in pursuit of profit at all costs triggered a financial crisis that wiped out billions of dollars of shareholder value, alongside global economic chaos and hardship. Similarly, companies that have failed to take their ESG responsibilities seriously, causing environmental disasters that destroyed shareholder value through fines, and clean-up costs and lingering reputational damage.
At the awakening of this realisation, progressive corporate communication strategies include a company’s value creation process, which connects their value drivers (inputs), business activities (operations) and the value created for their stakeholders, including employees, communities, customers and shareholders (outcomes). The value creation model has become a useful communication tool for companies to quickly and effectively justify their social licence to operate, establish trust with their various audiences and prove that they are a sustainable business that will continue to operate (and generate a profit) for many years to come.
While it is positive to see improved disclosures and the rapid uptake of sustainability in corporate reporting suites, one area where reporting fails is in its depth of disclosure. Many reports disclose only general and qualitative commentary, and have little evidence of metrics that articulate a company’s exposure to sustainability related risks and trends.
Morrow Sodali undertook an analysis of the TCFD disclosures completed within the ASX300 in 2020. Within the Index, only 19% of companies acknowledged TCFD, had a report and also had meaningful targets. A meaningful target is one that goes beyond just ‘disclosure of emissions’ and specifically mentions scenario-based reduction or mitigation strategies. Approximately 7% acknowledged TCFD and had a report with no meaningful target, and 13% acknowledged TCFD but had no related disclosure. Of those companies that had comprehensive disclosures, the majority were in the ASX100.
In a review of social sustainability reporting and performance of the ASX300, Morrow Sodali has discovered that only 25% of the Index has meaningful social targets, which include specific metrics to measure success. This means that three quarters of the ASX300 are providing either low-level or no social sustainability strategies. Companies that are leading the charge are attempting to improve equality, particularly through reconciliation, economic empowerment, impacts on health and wellbeing, financial prosperity, and local economic development.
Investors are increasingly requesting high quality and relevant disclosures that demonstrate companies’ understanding of sustainability risks and opportunities, have strategies to address them, and have meaningful and public targets set to measure their success. This is in direct contrast to the current trend of disclosure for disclosure’s sake, which is often criticised as being ‘greenwashing’.
Some of the leading investment firms in the world, such as BlackRock and Vanguard, have made public commitments that they are looking to companies for long-term value creation rather than short-term returns. In this context, better stakeholder engagement ESG is essential.
A proxy indicator of this shift is the rise of compliance with section 172 (s.172) in the UK. What is noteworthy about s.172 is the diverse range of stakeholders whose interests are said to “promote the success of the company”. Being affected by the directors’ decisions, these stakeholders typically include such varied groups as employees, shareholders, customers, suppliers, government and communities.
Previously, directors weren’t expected to display any particular sense of responsibility for these stakeholders. However, this change has encouraged directors to display a sense of social responsibility and in turn in turn promote enlightened shareholder value. In the words of Feike Sijbesma, former CEO of Royal DSM: “You cannot be successful, nor call yourself successful, in a society that fails."
While the compliance requirements are different in Australia, the fundamental shift is impossible to miss: companies must demonstrate clarity and confidence to report on their engagement with stakeholders, do it well to be ahead of the curve, or simply be left behind.
This is a real opportunity for Australian companies to paint a detailed picture of their business model, strategies, company structure, values, environmental impact, as well as act in a thoughtful and inclusive way. The pandemic has made customers, suppliers and communities demand more in regards to their expectation of companies. There is an increasing need for companies to have a sustainable approach to business, and contribute as much to society as they take out.
The COVID-19 pandemic has forced every company to reassess its 2020 narrative. As a result, COVID-19 response initiatives took centre stage in many annual reports, highlighting how the organisation adapted to new challenges to better serve customers, employees, communities and other stakeholders. Whilst this transparency is critical to building trust with the audience, it can overshadow the strategic outlook of the business and the progress made in the past year. Successfully balancing both of these considerations will be critical in 2021.
Investors, analysts and other stakeholders look at investor communications to better understand an organisation’s long-term objectives, and the strategic drivers and resources necessary to achieve them. The ability to paint a picture of the future and define a path to get there is a critical outcome of a strong investor brand, and every touchpoint – from annual report to investor website to results presentation – should bring consistency and clarity to this effort.
In 2021, leading companies in investor relations will continue to integrate COVID-19 related stories into the larger strategic picture of the organisation. By treating these stories as proof points of their strategy (or layers of an overarching narrative), companies can demonstrate how their plan for long-term value creation can help tackle short-term challenges, even those as unpredictable as a pandemic.
Increasingly, companies are realising and acting on the fact that the market has come to expect immediate access to meaningful, high quality information, and that investor engagement should be a year-round conversation about improving long-term value.
Digital transformation, a global pandemic, climate change, increased corporate scrutiny and distrust, trade wars and political unrest – the world is changing faster than ever before. And in this increasingly volatile, competitive market landscape, stakeholders are looking for comprehensive information about a company and what sets it apart from its competitors before allocating their capital.
They want to clearly understand the business model, the strategy, the competitive advantage, the prospects, and how the company manages risk and plans to create sustainable value into the future. Delaying the provision of this information until the release of the annual report or results presentation creates ‘dead air’ and opens up space for speculation and misinterpretation (usually erring on the cynical side).
By maximising communication opportunities and proactively engaging and informing the market year-round, companies can build trust, nurture and deepen relationships with their stakeholders, and ensure consistency while maintaining control over their corporate narrative.
‘Same day reporting’ (publishing a full annual report side by side with the full-year results announcement) continues to be a best-practice investor communications standard emerging in response to the information demand from investors. By closing the information gap and complementing the financial results with sufficient contextual information, companies have the opportunity to ‘continue the conversation’ and inform the market about the broader material issues affecting the business’s results and prospects.
As investor communications continue to evolve and adapt to an ever changing-landscape, there is now more emphasis on the impact of digital engagement and how this connects to a broader investor communication strategy.
Using digital channels to inform and influence investors isn’t a new trend, but the behaviour and engagement of these investors has changed significantly. Today, they demand richer content and easier access to data, and they have become more sophisticated in how and where to get this information. As a result, there is growing pressure on listed entities to deliver on all these fronts.
The importance of seamlessly integrating digital media with investor communications is becoming increasingly critical to businesses. A great example of this change can be seen in corporate websites. Only two or three years ago, many listed companies would have content developed specifically for their investor audience and place it in the ‘About’ and ‘Investor’ sections of their website. The goal was to provide investors with as much information as needed to get a comprehensive understanding of the company’s operations, performance, strategy, key markets and so on.
Today, investors and other stakeholders like employees, communities and regulators are asking for more. How is value generated? What is the company’s sustainability strategy and how is this reported?
Over time, the architecture of corporate websites has evolved to incorporate this information in a way that makes it quick to access and easy to understand. In a recent study by Designate, we found that amongst the ASX 200, 68% of companies have dedicated sustainability sections, and almost a fifth of these companies clearly communicate their value creation.
In addition, many listed organisations are incorporating their annual reporting content and investor-focussed video content into their website, creating a richer digital experience. In light of this change, social media is the primary platform being used to enhance reach and engagement, with 57% of ASX 200 companies frequently using video and infographics on LinkedIn.