Silent Engagement

Autor: Joaquín Garralda, Dean of Academic Affairs, IE Business School

In a previous post I commented on the importance of the word ‘impact’ in the way of approaching sustainability in companies. In this post, I would like to comment on the relevance that regulation, and changes in regulation, has to Investor Relations departments and the behavior of institutional investors.

Traditionally, for Investor Relations departments, the company’s actions framed within sustainability were not ‘material’ insofar as they had not any appreciable impact on its economic results. Although they use to assum that there are a certain positive impact on the company’s reputation, due to the difficulty to quantify its economic impact,  it was often not included in presentations before analysts and investors.

The increase of regulations and recommendations from regulators and supervisors of financial markets in developed countries is forcing large institutional investors to be more transparent and active in their ‘engagement’ (commitment) with Boards and senior management. In the case of large Spanish companies – as can be seen from my study carried out with the cooperation of the SERES Foundation – they have not noticed an increase in ‘engagement’, except for large international enterprises, or those that have an environmental impact highlighted by their operations.

However, the proliferation of rating agencies and indexes that include issues related to ESG (Environment, Social and Governance ) suggest that, indirectly, the ESG  topics will also be ‘material’ for companies that have not experienced an increase in engagement in these aspects. It is this tendency that suggests the increase in ‘engagement’, but with ‘silent’ characteristics. That is, it is not that analysts ask, but that, if companies do not report rigorously on ESG issues, investors might perceive managers as not thinking about the long term, and may consider selling their shares.

Added to this, as a consequence of the Paris 2015 agreements and according to the UE policy of a “Socially fair transition to a green economy”, companies that have a certain social relevance, will have to consider the ESG issues in their financial communications. The transposition in Spain of the UE directive that obliges companies with more than 500 employees to publish a “non-financial information” annual report, is in line with this trend.




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