The Autocorrect - Investors Lag on ESG Training, and the LIBOR Transition

Week Ending 15 January 2021

This week's Autocorrect features zero (0) articles that are written primarily for a corporate IR audience. We think the investment community is seeing more rapid change than issuers in aggregate, and has a lot of ink to spill - see topics below with more focus on investors, including ESG integration, LIBOR transition, and green finance, all areas that need immediate attention from asset managers in an exceedingly tough competitive environment. Our role, as usual, is to search farther afield, find the most important IR takeaways that help you do your job... 

...as well as help you get...(1)

Buy-Side

- We’ve had a banner year in terms of inbound interest from companies looking to get their story out to dedicated ESG-focused portfolios, including positive screener and impact funds. We will say – this ESG audience is quite a bit different than traditional mutual funds in terms of structure and scale, and part of every conversation around targeting these names from those used to approaching fundamental-focused investors is the “many small funds, not one big fund” discussion. George Serafeim (Harvard) and Gabriel Karageorgiu (Arabesque) have some of the reasons why we see so much dispersion in ESG mutual fund assets in this piece from II – Why ESG Funds Fail to Scale. Note that this article is written more for the operators and sellers of these strategies, but it surfaces a few truths we thought were important to bring forward.  

Up front, the authors point out that many investment platforms put minimum limits on the duration of “live track record” (i.e. proven “in-the-market” investment performance) at 3 or 5 years, which obviously is too long for many of these newly-launched strategies to be included. Second, there’s some “chicken or egg” in the market, as a new strategy that’s currently managing $200mm might not be an effective vehicle for an asset owner to invest an incremental $100mm…at least until the strategy reaches $500mm or $1b where the allocation is an easier fit. Third, in an industry where allocation changes might be made only once a year, branding does matter, and many asset managers are still establishing their brands in the ESG space. No matter what the path of any particular portfolio, Serafeim and Karageorgiu drive home the massive growth in aggregate of the space – the capital is there, it’s just more distributed than the concentrated capital in mature fundamental investing.

IR Best Practices

- Yes, yes, The Autocorrect is going to cover another edition of the Edelman Trust Barometer. You forgave us the last few times we went back to the well on Edelman’s surveys – so what’s one more, especially if it’s coming off the annual flagship edition? As usual, this is an excellent read from an IR viewpoint, with a few takeaways we’d encourage you to jump to. First off, with trust fading across most spokespeople and many news sources, “employer media” remains one of the most trusted sources (61% believing it’s a source of “truth” – pg 26) – your internal communications is likely to be one of the most reputable sources you and your employee base see every day. A corollary – respondents increasingly believe CEOs should speak out about societal issues, with 86% believing that management should openly discuss issues like the pandemic impact, job automation, society or community issues (pg 35). The concept of business as a “guardian of information quality” appears here as well (pg 36); companies have an increasing role to play. Page 47 shows the evolution of trust by sector over time – if you’ve picked up a newspaper recently, you won’t be surprised by the decline in trust in the technology sector over a 10-year span…but you might not guess the sector with the largest increase in trust (financials). Excellent background read that may change how you think about trust among stakeholders.

 - We don’t often put on our corporate treasury hats inside the Autocorrect editorial board conference room – but we were promptly reminded by one of our sector teams about how important LIBOR is across every industry. IHS Markit’s Derivatives Data and Valuations team is responsible for providing valuation marks on swaps and loans based on LIBOR, and given the heightened interest offered this primer on where we’re headed with the presumed end of LIBOR. As with Brexit and the Fast and Furious movies, any indication of finality might be a bit premature – while traditional LIBOR publication is scheduled to cease as of December 31, 2021 across most currencies, recent announcements from the ICE Benchmark Association state that a range of less-used LIBOR tenors will still continue to be published through June 30, 2023, essentially extending out the final sunset of LIBOR by as much as 18 months. The US Fed and UK FCA have both stated that no LIBOR-based contracts should be initiated past the end of 2021, but more guidance is forthcoming as to whether some synthetic version of LIBOR might need to be published after that date to cover legacy agreements. Either way – according to Factset, 411 of the S&P 500’s 10K reports mention LIBOR, meaning good odds your company has at least one enterprising young sell-side analyst that’s modelling out your LIBOR-dependent financing or derivatives values and wondering what the impact might be of a switch to EURIBOR or any number of replacements. Make sure you’re square with your treasury and finance teams on how you’ll be handling LIBOR transition before the aforementioned analyst (presumably with a green lampshade on their desk) is. 

ESG

- Lots of new content this week from the CFA Institute on ESG, including a “quick-hit” blog post on several ESG policy items – but the core was the release of an CFA-wide survey and study showing the progress of ESG integration across its membership from 2017 to 2020. A few headlines – 85% of CFA Institute members are now using ESG factors in investing, up from 73% in 2017. Interestingly, the number using ESG company ratings as part of data analysis is a bit lower, 63%, and 73% expect that ESG ratings will have a greater bearing on companies’ cost of capital in the next five years.  

We especially liked the review of ESG skills and roles inside the investment firm covered here. 32% of respondents note their firm has dedicated ESG analysts, with another 33% suggesting their portfolio managers are responsible for ESG analysis. There's a supply-and-demand equation in terms of ESG knowledge: a review of portfolio manager job postings on LinkedIn noted that 18% mention a requirement for sustainability-related skills, while on the supply side of the equation, LinkedIn profiles of portfolio managers only cite sustainability capabilities about 1.5% of the time – yes, there’s bound to be some move toward equilibrium there. One theme we’ve had in this space over time is the need for companies to educate investors on how to evaluate their companies effectively – note that just 11% of respondents believe they’re “already proficient” in ESG analysis, with 72% suggesting they plan to pursue training in the future. Against this kind of audience, your ESG presentation may be the exact “training” your investors may need.

- Ten months removed from the last time any of us involuntarily sat through a movie trailer, we debated having to explain the phrase “previews of coming attractions” as the leader to this piece…but we’ll hope all of you have a long enough memory to remember what those are. Consider this Bloomberg article discussing the EU Green Taxonomy as a preview of the types of screens your business will be put through for inclusion in green-focused portfolios, and/or consideration for green finance projects, going forward. Written for PMs starting to review their portfolios in advance, each investment must meet a number of different criteria, namely, “substantially contribute to climate change mitigation or adaptation”, “meet Do No Significant Harm requirements”, and “comply with Minimum Social Safeguards.” More importantly, the analysis does require portfolio managers to look at the whole of the investment - potentially at segment level - and hence might start to generate pressure for segment-level disclosures from companies. As often happens with regulation - the presence of a standard in one region often means de facto adoption by other regions (MiFID, for example). For those of you thinking about your ESG messaging to investors in any region, making sure managers can get what they need to make these affirmations should be part of your sustainability reporting strategy for 2021 to make sure you’re eligible for inclusion.

Questions? Comments? Thankful both that Bloomberg's Matt Levine has finally returned, and that he again brings us such gems as "Quant Fund or Metal Band"? Reach out to your IHS Markit team, or [email protected].

(1) Obviously...caught up!