ESG Insights

NYSE Issuer / Investor engagement and disclosure

Over the last decade, conversations around environmental and social issues between companies and their investors have grown substantially. This communication tends to take two key forms: one-way disclosure by companies about their approach to environmental and social issues, and two-way discussions between companies and their investors that cover companies’ strategies and governance around these topics.

The NYSE’s listed company community includes pacesetters on sustainability topics in nearly every sector, as well as sustainability officers spearheading the work being done by these companies. Further, NYSE maintains close relationships with many institutional investors’ ESG research and stewardship teams which evaluate the work done by these companies and form the “other side of the table” in engagement.

In October 2023, NYSE convened a Chatham House session featuring sustainability leaders from the NYSE’s Sustainability Advisory Council (SAC), as well as ESG research and stewardship leads from some of the largest asset managers globally. The asset managers represented a combined $3.2 trillion in equity assets under management, and the SAC members represented companies with a total of $1.4 trillion in market capitalization, across broad sectors of the economy.

The below recommendations for investor / issuer engagement and disclosure are presented by the NYSE, under the advisement of SAC members as well as with the input of the investor community.

We split the recommendations into three categories: investor engagement, sustainability disclosures, and oversight.

Investor engagement

1 - There should be plenty to be gained from dialogue with your largest investors.

A simple glance through the proxy statements of some of the leading companies in your sector will highlight the value they see in shareholder engagement; many companies publish details regarding the portion of their shareholder base covered in engagement outreach (usually the top 25 or top 50 holders), the topics most often covered, and any changes the company has made based on this engagement.

If your fiscal year end is December 31, proactive engagement with investor stewardship teams usually takes place in the proxy offseason (typically September through December, though sometimes into Jan/Feb), and will generally involve one or more group calls with an investor’s stewardship and/or investment research teams, following a pre-agreed agenda incorporating both issuer and investor input.

2 - The best engagements cover the company’s business strategy and the board’s oversight of it — with E&S issues arising in context.

The overarching goal of stewardship starts with evaluation of the company’s governance. A company with strong governance identifies risks to its business and its strategy. Investors will often ask the company to define the business strategy and show progress against that strategy, and at that point, important environment and social issues that affect that strategy become part of the discussion.

Note that inbound investor engagements that focus on just one or a small number of environmental or social issues may be a signal of pressure that you’ll receive not just from the investor across the table, but from other investors down the road as well.

3 - Make sure the right company team is involved in such engagements.

Issuer / investor engagements generally include:

Some investors ask for participation from an independent board member with who has oversight responsibilities of areas of interest to the investor, or ask for the lead independent director to be involved. Companies should handle these requests with care, as they present both risks and opportunities. Directors who sound overly scripted or are not sufficiently familiar with the specific areas on the agenda can be a red flag for investors.

On the other hand, a director who shows a strong grasp of the issue in question and can express the board’s approach to evaluating it may build trust with investors and lower their concerns about governance on the topic.

4 - Listen to investors who regularly update the key issues on which they’ll engage companies, based on feedback from asset owners.

Companies should not assume that last year’s investor issues are the same as this year’s. Review your investors’ most recent publications that include their key areas of focus with companies. This often can be found in both investors’ voluntary and regulatory reporting.

This year’s “net new” from our US investor audience includes topics like:

Sustainability disclosures

1 - Stay focused on the most important issues to your business.

Like issuers, active investors are focused on financial materiality and are looking for information that helps them tie your sustainability program to shareholder value creation.

Asset managers, especially those working on behalf of large asset owners, usually think first and foremost about fiduciary duty and value creation. Every item in your sustainability reporting that you can tie back to the value it’s producing (especially in terms of outcomes as opposed to process) helps investors justify the decisions that they’re making around evaluating your company.

The converse is that an excessive focus on areas that are perceived by investors to be immaterial to your business might draw raised eyebrows. A clear materiality assessment or discussion of your key issues included in your sustainability report shows investors that you’ve done the work with stakeholders to define the topics on which the company is focused, and not focused.

2 - Be mindful that your investors’ regulatory requirements may nevertheless incentivize them to request data on areas that are immaterial to your business.

Many investors are subject to increasing regulatory requirements, and these rules often require or incentivize them to collect data on portfolio holdings outside of material areas.

A clear example here is the European Union’s Sustainable Finance Disclosure Regulation (SFDR), which requires investors claiming Article 8 “light green” or Article 9 “dark green” status to report on the principal adverse impacts (PAIs) of their holdings. This may require investors to ask companies for data far afield from their usual reporting, such as a software company being asked to disclose waste metrics.

3 - More is not necessarily better in sustainability reporting — and single-page views for different stakeholder groups may stand out amid thickening reports.

It’s long been a cliché of both the financial and the sustainability world that company reports never get shorter — as additional regulatory requirements arrive and stakeholders’ needs change, most companies add a certain amount of “net new” each year to their reporting, while very few cease reporting items. That said, as a single report designed to meet multiple stakeholders’ demands begins to split out into newly-required regulatory reporting rather than voluntary reporting, companies may have an opportunity to refresh how they present information.

No different than any other stakeholder, investors tend to appreciate the “elevator pitch.” A single-page view that shows what a company’s strategy is, what’s important to the company, what is being measured, and what progress the company is making, can have an outsized impact for a time-pressured investor.

4 - Present both narrative and data…

At this stage in the evolution of ESG-focused investing, active investment (with security-selection decisions made by humans) is a far larger piece of the pie than passive investment (with decisions made by algorithm or inclusion in a particular index). Therefore, your message to an investor either managing a dedicated ESG portfolio, or integrating ESG into a broader investment decision, will likely be evaluated by an investment team that, while using data, will be taking your story into account. The companies often best regarded by investors provide both data and the context around why that data is important and how it should be considered.

5 - …but make sure the narrative is not just a marketing or compliance effort…

The reporting lines within a company for its sustainability function are often mentioned by investors as a way to understand how the company operates. Sustainability organizations more aligned in structure with marketing can be a concern to investors, especially in industries where sustainability’s inputs to the strategy should line up with the CFO, COO, CHRO, chief legal officer, or even the CEO. Further, with a seemingly tightening focus on “green claims” by not only regulators but also the plaintiffs’ bar, an aggressive marketing strategy not backed up by action internally may stand out to investors.

The vast majority of sustainability disclosures from NYSE-listed companies today are made on a voluntary basis and are designed to meet stakeholders’ needs. As regulation steps in, each company’s legal team should be aware of how each disclosure will be seen by regulators in their evaluation of a company, but we do not think this should preclude the company from being able to tell its own story to other stakeholders.

6 - …and make sure any data you present is “investor grade.”

Investors are used to working with financial statement data that has gone through a formal assurance process with a third party and comes from a controlled environment where there’s minimal risk of the company reporting the wrong value. As sustainability data starts to be used to make investment decisions, it may need to take on the characteristics of financial data, including, for example, a clear delineation of the scope of the company business and the date ranges covered by each reported metric. Investors are already beginning to report to their asset owner clients on the percentage of the companies in their portfolios that have assurance applied to climate reporting. Companies might consider setting up processes for collecting and reporting non-financial data that are similar to those for financial data, especially as anticipated upcoming regulations from EU, SEC, California and others begin to mandate assurance or other forms of third-party verification.

Changing methodologies on company-calculated metrics can trigger skepticism from asset managers. While companies may make changes to improve comparability, or in response to standards changes, investors will likely look closely when a company makes adjustments to current or previous values of its own volition. Any language you add to explain these changes will likely be evaluated by active investors, but it may be missed by more automated tools or ratings firms that attempt to scrape data from reporting. Make sure your explanations, if footnoted, are easily understandable and accessible, with links to any external resources if needed.

7 - It’s likely still too early for investors to consume your narrative disclosures through an AI lens, but this may change quickly.

Researchers are just dipping their toes into using AI tools to extract value from or summarize extensive sustainability reporting. There are very few tools purpose-built for this evaluation today — but expect investor demand to lead to the development of these tools soon. The use of automated tools by researchers means your narrative may need to become clearer, include less jargon, and be simplified in order to produce the right results. In any sense, the AI tools of the future will likely be trained by the generalist ESG research and stewardship teams of today — a message that works for them will be more easily consumable by AI tools.

8 - Keep the major frameworks in mind when reporting and communicating, but companies also should tell their own story.

Investors often bemoan the lack of standards harmonization as much as issuers do. The pressure for issuers to report on multiple frameworks is frequently matched by asset owners that present to asset managers unique due diligence questionnaires, with some issues aligned with global frameworks and some not. Frameworks that focus on “double materiality” topics are often defined by stakeholders other than investors, and there may be pieces of these frameworks that aren’t important to the investment process.

Oversight

1 - Share the results of your shareholder engagement efforts with your board.

Investor feedback that potentially affects both investment and voting decisions can come directly from engagement sessions with investors, and this feedback may differ from what’s shared with the board by the investor relations team in its discussions with fundamental analysts. A primary difference is around time horizon — an analyst simply looking to maintain a financial statement model needs to understand the next quarter, but the investment timeframe considered by ESG research and stewardship teams that are facing large asset owners is often measured in years. We think that this more strategic, as opposed to tactical, feedback should line up with the board’s long-term approach to fiduciary duty.

2 - Educate your board members on sustainability oversight, and then educate them some more…

As above, the topics that investors are adding into their issuer evaluations and voting policies are constantly evolving, which we think means that any education program for board members is never “complete.” Companies should periodically update boards so that directors keep abreast of new regulations that will affect the company and topics that the company’s stakeholders consider important.

3 - …and take advantage of any sustainability-related skill sets that exist on your board.

The structures for oversight of environmental and social issues involve assigning responsibility for the key issues either to the entire board, to multiple committees, or an individual committee. We believe a key goal should be to limit the risk of overlapping discussions or of missing an important topic. Directors are increasingly likely today to bring specific skills around sustainability topics, such as climate or human capital management and, where possible, aligning the board’s structure for overseeing environmental and social issues to match directors’ areas of knowledge should make sense.