Brexit, ESG and shareholder value: The IR Society conference 2019

The theme for the IR Society’s 33rd annual conference, held in London’s King’s Cross last month, might have been ‘IR: Leading change, driving value’ but it was Brexit, ESG and the changing nature of markets that dominated the day. The first is hardly surprising given that the UK’s seemingly ever-impending exit from the EU remains as uncertain today as it did on the original deadline back in March, while ESG and the apparently outgoing idea that shareholder value is king are closely tied and a growing issue for IROs. 

On Brexit, moderator Evan Davis, economist and BBC journalist, rather pessimistically declared: ‘If you want to know what’s going to happen next, just ask yourself how it could possibly get any worse’, which drew a chuckling response from the no-doubt Brexit-fatigued audience of UK IROs.  

The first of three keynote speakers, John Allan, chairman of Tesco and Barratt Developments and president of the Confederation of British Industry, assured the audience that ‘you won’t starve’ in the event of a no-deal Brexit – ‘though you might have to get used to eating Somerset brie’. 

He didn’t just talk Brexit, though. Allan also discussed the changing attitudes toward business, big corporations and business leaders – all essentially lacking public trust – and how shareholder value is no longer the only goal. Much of that has been driven by the concerns of younger generations and the realization that good ESG is also good for long-term returns, he noted, taking on themes that cropped up throughout the day.

What it essentially means is that ‘companies now have to exist as citizens – they’re no longer just there for shareholder value,’ Allan said. Highlighting just how far things have changed since the idea of shareholder value really took hold in the 1980s, he shared an anecdote where a large investor ‘queried a small, charitable donation my [then] company had made. These were his words, which I’ll never forget: Listen hard sunshine, when we decide to invest our money in charities, we will do so. You just get on with delivering shareholder value.’ 

Not only is it hard to imagine such a conversation taking place today, but Allan went so far as to say: ‘I now think that doctrine was fundamentally flawed. Nowadays I believe most companies realize they have to satisfy the needs of multiple stakeholders.’

Shifting attitudes

This shift in shareholder attitudes was certainly reflected in the first plenary session of the day, made up of a five-strong panel of experts from the buy side: Steve Davies, head of strategy and UK growth at Jupiter; Patrick Harrington, director and investment manager at OLIM Asset Management; Gareth Hayward, senior investment manager at Charles Stanley; Ben Lambert, interim head of sustainable investing at CPP; and Anne Scott, investment service manager at Kames Capital.

For Davies, this is something that has really picked up pace very recently. ‘I think it’s changed more in the last six to 12 months than in the previous five years,’ he noted. Hayward added that at one company he’d spoken with recently, management spoke of a ‘triple bottom line’ or ‘the three Ps: planet, people and profit’, though he noted that while the concept was very interesting, it doesn’t necessarily follow that each ‘P’ carries equal weight.

Talking about a ‘social license to operate’, Lambert said ‘finance is behind the curve’ on shifting attitudes, particularly among millennials, where a majority say the most important thing about a corporation is that it adds value to society.

‘It would certainly be my view that the most successful companies have always been the ones that have balanced the interest of all their stakeholders,’ said Lambert. ‘You can’t go on taking advantage of customers forever, because they’ll cotton on.’ 

These shifting attitudes, which very much tie into the ESG movement, are not mutually exclusive as far as investors, companies and other stakeholders are concerned. ‘Whether it’s something very environmental such as reduced fuel bills for airlines, for example, [companies now realize] they’re not only doing the right thing in terms of long-term sustainability – they’re also saving themselves a lot of money,’ Lambert added.

As well as shareholder value, the buy-side discussion took on everything from the impact – and unintended consequences – of Mifid II to the rise of passives and more, but it eventually veered back to ESG, something that flowed on into the second plenary session of the day.

Following a presentation of certificates to successful graduates of the IR Society’s diploma program, the conversation moved from the buy side to IR perspectives. Many of the same themes discussed by the buy side were picked up by the panel of seasoned IR professionals and a CFO in the form of Richard Amos of Wilmington, who was joined by James Collins, head of IR at J Sainsbury, and easyJet’s head of IR Stuart Morgan.

The ESG gap

The conversation kicked off with Mifid II, covering everything from the fall in coverage for small caps to the ‘juniorization’ of the sell-side analyst role, and a potentially optimistic outcome that sees low-quality analysts whittled out, leaving a better standard of research. But before the panel could get bogged down in the weeds of regulation the discussion moved onto ESG – something of particular interest to an airline like easyJet.

Morgan – naming no names, and not needing to – referenced a peer he described as ‘pretty unsustainable in terms of customers, employees and pretty much anyone it talks to. But when it comes to the bottom line, it has a very successful business model.’

While he said he wouldn’t go as far as to use the term ‘hypocrisy’, for all the talk of changing attitudes to shareholder value or the ESG focus of millennials, in reality, everyone hopes the seat next to them in economy class is empty – and very few people ticked the box to pay a couple of pounds extra to offset their carbon emissions when buying flights with easyJet.

Collins agreed, adding that while some customers voice animal welfare concerns when it comes to produce, for example, there will always be those looking for the lowest price. And even from an investor perspective, for him, there’s a clear disconnect.

Highlighting this gap, he explains that J Sainsbury uses an app to record how much time is spent talking about different topics in investor meetings. ‘It produces charts that show, for example, that we spent 15 minutes out of the hour talking about the core grocery business. I can tell you that ESG would not register in terms of our normal investor conversations. 

‘There is undoubtedly a significant disconnect right now between the huge number of investment managers telling us that ESG is far more important, and the conversations you have when you go into a meeting with management to talk about the business.’

An afternoon of IR – and more ESG

Breakout sessions followed, with the 400-plus delegates choosing between ‘Responding to changing sell-side dynamics’ and ‘How to get the best shareholder register’.

After lunch, the afternoon saw another keynote speaker in the form of Susan Hooper, a senior board director who sits on the boards of Uber UK, the Department for Exiting the European Union, the Rank Group, Affinity Water and Wizz Air. 

More breakout sessions followed, this time allowing delegates to choose between ‘Leading from within’, a panel looking at ‘how the role of IR has expanded across a wider range of stakeholders, and how IROs can balance the role between internal and external communications’ and ‘Winning the competition for capital’, which aimed to address the ‘ways in which companies can differentiate and bring their story to life’ in a crowded field.

A final plenary session took on ESG specifically, with a panel made up of: Martin Dunwoodie, director of IR at Johnson Matthey; Stuart Lemmon, managing director at EcoAct (UK); Andrew Parry, head of sustainable investing at Hermes Investment Management; and Valeria Piani, sustainable and impact investing strategic engagement lead director at UBS Asset Management.

Talking about how much ESG has grown in just the last few years, Parry said that at the same conference maybe four years ago, it wouldn’t have echoed around the day in the same way it did this year. This rapid growth of ESG has also created ‘the rise of engagement,’ he noted, adding that many conversations have ultimately become about corporate strategy.

Piani agreed that the rise of ESG has resulted in a shift in the way both investors and company management should be thinking. ‘It’s not a marketing exercise. It’s not about looking better, it’s about actually going into the fundamentals of what is making money in the long run,’ she said. ‘So it’s about increasing revenues, decreasing costs, retaining the human assets in companies. The way we look at it is as a new way of investing. It’s a more holistic way of thinking about stocks.’

She also highlighted what UBS Asset Management would like to see when it comes to ESG reporting. ‘We really frame our conversations around the Taskforce for Climate-related Financial Disclosures (TCFD),’ she explained, adding that companies often say they are overwhelmed, with IROs seeking input on what ESG questionnaires to fill in and what kind of KPIs UBS wants to see. 

‘I understand that there is a lot of confusion and there is even maybe too much data,’ said Piani. ‘So when I talk to companies I say: if you need to choose just one [reporting framework], choose the TCFD because it is broad enough and it gives a good structure – but then it is still up to you to define which KPIs are material for your business. We are exposed to so many sectors and to so many companies, we cannot identify every single, material KPI for each business.’

What she ultimately wants, however, is to see targets and see how performance is tracking against those targets – without having to trawl through reams of reports. ‘If after two or three pages of your company disclosure I can understand where the advantage of the business is and how it will be positioned in five or 10 years, I get the picture,’ she said.

Following that final plenary session, the day closed with one last keynote speaker, this time in the form of Sarah Bates, chair of Merian Global Investors. Closing her speech – and the IR Society Conference 2019, before the drinks reception – Bates summed up what good IR looks like to her: ‘When it works well, IR is a really good bridge between the company and the investor.’