CSR and the Investment Market: coming together

Preparing for investor engagement

ICA, the leading corporate access specialist, has combined with Smithfield, the leading financial communications consultancy, and Burson-Marsteller the leading public relations and communications agency, in a survey of investment analysts working within 27 institutions. The audience was asked to consider whether CSR policies were currently important to investment decisions, how this position could change in the medium term and which specific areas of policy were and would be influential. The majority of responses (72%) considered current CSR policies as either playing a small part or no part at all in their view of investment potential. Most commented that CSR was important from a risk-management point of view and was pivotal in determining the non-investment perception of the company. However, only 28% suggested that they consider CSR policies play an important role in the investment case. This position altered materially when the audience was asked to consider the importance of CSR policies to medium-term investor perceptions. 63% of responses highlighted that this area was likely to be increasingly important or very important. Critically, only 9% suggested that CSR was unlikely to be important in this context. This change from current views is based on expectations of further development of social media within sales and marketing functions and the need to demonstrate commitments to key areas within CSR when moving into new markets. The need to not only behave appropriately but be seen to do so was regularly highlighted as a pre-requirement in these two areas. Asked to rank a series of specific CSR policies which could be increasingly important, responses clearly favoured those areas which directly impact operational and financial performance. 59% of respondents stated that employee relations were critical, a reflection that good employer status has gained considerable traction within a range of marketing activities while the maintenance of strong industrial relations was also highlighted given a more costconscious economic environment. Environmental sustainability was also highlighted as important with several respondents commenting that regulation was likely to get tougher and operate on a multi-national basis. Finally, supply chain management is seen as an essential area for CSR policies to operate. The experience of several high profile brands and the nature of their outsourced product manufacture was commented upon. Finally, there were some comments which appear to indicate that CSR in general should combine with corporate governance. Executive pay was seen as a key area of development despite not being within the current remit of traditional CSR. Given the current topicality of this subject and moves to redefine shareholder powers, the research may indicate that this is also an area for CSR professionals to consider. It is clear that measurement of general or specific risks to performance is important. Within this, the commitment to CSR policies and initiatives is likely to grow in importance. However, for it to play this part in the investment perceptions of companies, CSR must move away from its current status as risk mitigation and onto a proactive growth basis. The results of this survey suggest that there is an appetite for greater communication with the investment community on CSR policies and actions. This must be placed, however, in the context of the wider corporate investment case; demonstrating why and how these policies can assist a company in developing its key performance metrics. CSR initiatives should be placed alongside key marketing, product development and other strategic actions when describing performance and prospects. From this research, CSR professionals should prepare to play a greater role in the communication with investment audiences. Scott Fulton, Head of Investor Relations, Smithfield Consultants

Corporate Social Responsibility and the Investment Market

2: Considering the next two years, what is your view of CSRs importance to investment percepSmithfield Consultants canvassed investment (sell-side) analysts tions?

The Findings

working for 27 different investment banks and brokers. The survey posed three specific questions designed to elicit this groups views on CSR policies and their impact on the investment perception of companies.

Increasingly very important 13%

Not likely to be important 9%

1: When considering a companys investment story, with which of the following statements do you agree?
CSR policies play no part 9%

CSR policies play an important part 28% CSR policies play a small part 63%

Increasingly important 50%

Likely to be slightly important 28%

There was general agreement that CSR policies in general play a part within the investment story. While the majority agreed that this was a small role, an important 28% of the survey agreed that CSR policies play an important part in the investment markets views on companies. Commenting on this question, the following points are of interest: Sustainability of the business model is key and depends on corporate governance and on what the company does to preserve and improve its socio-economic environment. I expect companies to be more than merely compliant with relevant safety regulations. Most CSR policies are related to how the company behaves within its chosen markets which is important but more from a risk control basis than investment case. In general, respondents clearly feel that CSR policies are there to ensure that the company complies with key regulations or is protecting its position with regard to employees and markets. There were no comments highlighting that CSR policies provide a competitive advantage or were part of companies wider sales and marketing functions.

Smithfield believes that the survey shows a growing acceptance of CSR aligned with corporate purpose within investment decisions. The majority of respondents believe that CSR policies will become more important to investment perceptions of companies. Half of the survey views them as increasingly important, while 13% view them as very important. Although over a third of the survey believe that CSR policies are likely to be only slightly or not likely to be important, Smithfield believes that the survey shows a growing acceptance of this area within investment considerations. This question attracted a range of comments, the highlights of which are shown below: Social responsible investment will be more and more important due to the emergence of social networks and consciousness of consumers. CSR policies are more likely to have an impact on my investment perception when they go wrong think clothing retailers and labour practices. The first thing that comes to mind is environmental sustainability. This is important, but on a global rather than a specific investment basis. CSR policies appear to be driven by the media agenda. In my experience, they are better at generating headlines than they are investment returns. The whole area of corporate responsibility is going to become more important but I have yet to see any company show this as a positive advantage. Yet there will come a time, sooner rather than later with the growth of social media, when the promotion of these policies will have an impact on sales and margins. I see the growth of brands like Apple as signalling a change here. Consumers want to associate with good companies not those who behave badly.

Corporate Social Responsibility and the Investment Market

The comments support the quantitative results, highlighting a growing appreciation of the impact of CSR policies on investment perceptions. However, they also highlight a certain uncertainty as to the exact nature of this impact. Some clearly see CSR policies as mitigating risk, be it reputational or operational, while others appear to view the adoption of these policies as a communications initiative. It is instructive to note that other respondents view CSR as growing in importance given the growth of social media and socially responsible brands. Building CSR policies into sales and marketing is a clear opportunity for this audience but there remains uncertainty as to how CSR would actually manifest itself within a marketing strategy. to associate CSR with environmentalism. Supply chain management came third in this analysis but only just ahead of executive pay. Reflecting on this point it is instructive that the former, which is a core component of operational management, should come just ahead of an issue which is topical for its reputational issues. Again, it is the comments offered alongside this question which provide more colour: There are few operational options within this list which highlight my concerns over CSR. Employee relations and supply chain management speak directly to the companys ability to maintain market positions and grow earnings. The rest are reputational and do not form part of an investment case unless the company has an issue. You have to say that executive pay is an issue right now but for how long? There are moves to address this through binding shareholder votes and it may go away. The obvious areas of cross over are the employees and suppliers. Sustainability is going to be more important, particularly for industrial companies as local regulation goes global. It is all about reputation. Making sure that management does not cause an industrial relations issue or that the nature of the supply chain does not harm customer perceptions, that is where I see CSR coming into its own.

3: Which three of the following issues have the most impact on the investment perception of a company?
Employee relations Environmental sustainability Supply chain management Executive pay Socially responsible investment Commitment to internationally recognised CSR Gender composition of the board Carbon neutrality Community engagement programme 59% 50% 44% 41% 28% 28% 9%

6% 6% The responses to this question, both quantitative and qualitative, clearly highlight a recognition that certain elements of CSR The issue which attracted the most votes within the survey was can impact investment perceptions. The fact that this is a small employee relations; a critical component in any companys op- number of issues only serves to highlight further what CSR proerational strategy, particularly in the case of multi-national op- fessionals could be doing to improve the perception of their erations. Surprisingly, environmental sustainability attracted the own work. Reputation management and risk mitigation are well next highest number of votes, recognition of the growth of understood increasingly so from this survey but there reregulation and the impact non-compliance can have on compa- mains more work to be done on raising the profile of CSR polinies although it may also highlight that this audience continues cies that speak directly to corporate growth and strategy.

Contact

SMITHFIELD
Christopher Lowe Tel: +44 (0) 7800 927865 Email: c.lowe@independentcorporateaccess.com www.independentcorporateaccess.com Scott Fulton Tel: +44 (0) 20 7360 4900 Email: sfulton@smithfieldgroup.com www.smithfieldgroup.com

Lawrie McLaren EMEA Practice Leader Corporate Responsibility & Sustainability Tel: +32 2 743 6648 Email: lawrie.mclaren@bm.com www.burson-marsteller.eu