ESG Insights

NYSE Issuer / Investor Dialogue - 2024

The NYSE sits in a unique position as both a resource and guide to listed companies in helping them meet the needs of an ever-evolving investment community, as well as serving as a division of ICE, a provider of data and workflow solutions to the investors evaluating those companies for investment. Particularly in the sustainability world, this allows us the ability to bring together investor / investee audiences to help improve the information flow between our communities.

NYSE held our second annual session featuring sustainability leaders from the NYSE’s Sustainability Advisory Council and responsible investing and stewardship leads from major active asset managers globally in October 2024. Council members consist of heads of sustainability of NYSE-listed companies encompassing nearly every sector of the economy and totaling $1.4t in market cap, while investors represented equity assets under management of $1.3t, including nearly every type of investment strategy.

These recommendations build on those from our 2023 session (here), as many of the same topics remain relevant. In addition to this annual event, the NYSE hosted 11 roundtables in 2024 with issuers and investors across the country.

We look forward to continuing this dialogue in 2025.

Sustainability strategy & integration

- Responsible investing teams increasingly seek to quantify the financial impact of sustainability programs at investee companies. This means not just environmental or social risks and the capex associated with addressing them, but also the commercial sustainability-related opportunities that companies may identify, extending into their products and services. Investors may even build their own estimation methodologies for these impacts, such as Climate VaR models or capex projections. Investors almost always prefer more detail to less, but even if your company does not disclose revenue / cost information, being clear with investors that you are conducting such evaluation internally should help build trust.

- Investors increasingly apply asset-level analysis to both physical and transition risk for investee companies. There are numerous tools available to investors containing physical location data for company facilities, as well as relational tools that can help identify physical risk for major customers and major suppliers, even if companies don’t include such data in their formal disclosures. Further, in certain industries, asset-level geospatial data is being analyzed as part of a company’s approach to energy transition, including alignment with the transition policies in place for locations. Your company’s physical risk disclosures should be the start of this analysis, but expect investors to do more to evaluate climate-related risk across their entire portfolio.

- Long-term investors time-match their evaluation of companies. Investors tell us they’re interested in how investee companies plan their sustainability program’s strategy over the next 1-3 years, which aligns with the typical holding period for active mutual funds. This should preclude a short-term approach (part of the reason sustainability topics aren’t on the top of the agenda on quarterly earnings calls for most companies), but it does come with an expectation of an investor being able to see forward on a company’s progress. Viewing from this timeframe should allow you to speak about your long-term strategy to investors in the same terms that you do with your internal teams.

- Investors are increasingly evaluating your debt issuance with nearly the same level of scrutiny as your equity story. Investors are increasingly centralizing their knowledge between equity and credit research teams and are more likely to have a responsible investment evaluation conducted prior to companies’ debt offerings. While credit rating agencies include some evaluation of companies placing new debt issuance, more sophisticated investors will often do far more than simply reading the credit rating report; this means a strong story may have a direct impact on your cost of capital. Separately, simply seeing a label of “green / social / sustainable” applied to a debt issue will likely not the end of the evaluation – investors are conducting deeper dives on the use of proceeds and will evaluate associated activity on additionality, permanence, and other characteristics, whether specified or not.

Disclosures

- Major investors have their own “materiality maps” that line up with what your company presents. SASB standards and “materiality maps” are widely distributed in the investment community, but each firm will have its own approach. As you present your company’s own prioritization, be prepared to explain how you selected the issues on which you report and, in cases where you do not report on matters identified by SASB as potentially relevant to your industry, why those matters are not relevant for your firm.

- Investors are improving on their ability to collect data in an automated fashion. AI tools for summarizing sustainability reporting and extracting specific data are improving quickly, in contrast to our 2023 audience feedback that the toolkits were still in their infancy. Large language models trained on sustainability data can enable investors to extract useful data from company disclosures, as well as summarize, but are not a substitute for analysts making their own evaluations.

- Third-party ESG ratings appear to mean less and less to investors as data quality advances. Investors are gradually replacing external ESG ratings with internal evaluation systems that rank companies using their own methodologies and the viewpoints of the investment staff. That said, there are some asset owners that either have third-party ratings built into mandates or will evaluate an asset manager’s decisions based on third-party ratings. Company sustainability and investor relations teams may want to have answers prepared for investor questions around ratings, and may in fact be preparing the asset manager for the conversation with the asset manager’s client.

- Over time, sustainability disclosures may start to cleave into what looks like “GAAP-style” and “non-GAAP-style” metrics. With respect to accounting standards, most companies go beyond the mandatory, using metrics that make it easier to evaluate their performance and providing the requisite reconciliations. With the onset of CSRD, California, and other mandatory regimes, investors are starting to see companies produce reporting that will meet other stakeholder needs but is not necessarily lined up well with investors. The process that investor relations teams use to select non-GAAP metrics, evaluate them through a disclosure committee, and present them could be mirrored for sustainability reporting down the road.

- While investors are aware of the “greenhushing” trend, there may be issues with removing sustainability disclosures that are important to investor decision-making. Especially when it comes to companies that have disclosed their approaches to specific sustainability risks in regulatory reporting, omission of future reporting on those risks might bring outsized scrutiny and questions about whether the board continues to act effectively. As with financial information, any change to disclosure should be considered carefully.

Investor engagement

- “Net new” engagement topics for investors this year are more diverse than in prior years. The most common topics cited as gaining more focus among investors are (a) responsible AI, (b) biodiversity / natural capital, and (c) water usage.

Additional engagement themes this year from investors included: (d) board age diversity / succession, (e) geopolitics / risk management, and (f) physical climate risk / asset-level focus. (Notably absent from this year’s discussion was any proactive discussion of lobbying / political spending - potentially a reflection of the election calendar).

- Investors are narrowing their focus on engagement. Many investors cite engagement programs with fewer companies and with more targeted approaches. One investor noted that “a lot of the work we call ‘engagement’ is actually ‘due diligence,’ and can and should increasingly be done by fundamental analysts, not responsible investing or stewardship.”

- Engagement at its core is about building trust – companies that are willing to discuss challenges stand to gain. While published sustainability disclosures are going to naturally focus on the positive, investors see one-to-one engagement as a critical opportunity to hear directly from companies, particularly with respect to their challenges. A company that’s willing to add candor on an issue it struggles with may see benefits from it – investors noted that constructive dialogue can often prevent a negative proxy vote.

Some investors may ask for board members to be directly involved in engagement, especially around a particular issue – while this is a common practice for some companies, it obviously carries risks in addition to the opportunity to build trust.

- That said, it’s difficult to measure trust, and investors struggle to measure what a “successful” engagement is. As companies present their view of engagements in the proxy statement (i.e., what the company has heard from investors, and what the company has done in response), engagements initiated by investors are usually measured over a multi-year period – raising an issue in the first year, escalating in a second, and possibly taking more public actions in a third year. (You can see each investor’s disclosures as to how an investor manages escalation tactics in their UNPRI transparency reports). One active investor mentioned that sometimes a “successful” engagement involves selling the position if a company has either declined to engage or chosen not to address a particular material risk, for example.

- Asset manager stewardship teams are making more independent decisions on E&S proposals... Rank-and-file analysts with more data, tools, and knowledge are able to make more decisions independent of ISS and Glass Lewis. Multiple asset managers noted that they engage directly with shareholder proponents on shareholder proposals and take into account where the proponent is seeking a broader thematic goal as opposed to a company-specific materiality-based view. One investor noted that their firm has created specific guidelines around what they’re allowed to evaluate and not evaluate with respect to proposals to ensure that the firm is never seen as politically aligned.

- …and your opposition statement is the start of the evaluation process. Opposition statements presented by the company that clearly provide the costs and risks involved in a proposal often make it easier for an investor to support the company’s position. Further, it’s helpful to show where a proposal relates to a low-priority topic for the company. Because larger investor stewardship leads sometimes engage directly with proponents, company statements of opposition could serve as an outline for questions the investor may ask the proponent.

Oversight

- Investors with a longer-term investment horizon often speak about effective board oversight over the company growth cycle. There are different issues faced by rapid-growth companies relative to, say, steady cash-flow generators. We also heard alignment between investors and companies in preferring broader experience over “expert” directors that have a single area of focus, as the key topics faced will evolve over time. As an example, investors noted that board discussions on climate topics increasingly spread into overall views on business risk management, either around energy security or geopolitics. This type of conversation naturally lends itself to the director with a wider background in balancing operational issues.

- A corollary to the point above is the need for consistent board education – companies that are not cycling in directors with deep issue knowledge may need to spend more agenda time on education, possibly bringing in outside experts that have worked with other boards. Director onboarding programs are a great opportunity to fortify a board with new ideas – where a new director will have oversight responsibility for a topic either in a committee or on the overall board, it may be worth investing in upskilling on that topic.

For newer companies

We also heard suggestions from both companies and investors for newer companies just starting out in the public markets.

- Start small with respect to your sustainability disclosures. There’s an understanding that sustainability disclosures can and will evolve over a period measured in years, and investors often do tilt more of their engagement time towards their larger positions, so younger / newer organizations don’t have to bite off more than they can chew.

- Begin with the strategy. At any stage, and especially at an early-stage company, investors want to see companies forming a strategy first, then producing the disclosures. The telling should never replace the doing, and the levers that drive commercial performance should be first on the minds of the team tasked with building an effective sustainability strategy.

- Focus on key issues. Investors will often give smaller companies more leeway to focus their disclosures on a narrower set of core issues, as they’re telling the story for the first time. Companies that are actively listening to stakeholders on an ongoing basis should have a clear view of issues that are arising in conversations, or potentially falling in importance. This consistent feedback also should help the company avoid falling into the trap of simply reacting to the “headline of the day.”

- The proxy is your first narrative to investors focused on the long term. As with an “initiation report” from a sell-side analyst, the story you tell through your initial proxy will likely be referred to by those who begin looking at the company even several years hence. Use it to set the expectations for how the board oversees the business and how the company intends to listen to and engage with investors.

- Educate your broader organization. In order to make progress, companies will likely need buy-in from across the company, not just at senior levels. Communicating to your entire organization what issues are important and what the company’s strategy is should help build support for your program.