After a successful Society conference, the IR community has returned to the familiar challenges from politics, regulation and markets. Richard Davies reviews the trends, particularly in corporate governance.
The IR Society conference in June affirmed several of the trends long discussed in this column:
- the rise of passive investment, leading to the increasing importance of ESG issues to the working lives of IROs;
- the changing qualities of the sell-side and buy-side as MiFID II finally starts to bite;
- the challenge for public companies to find capital in an equity market which no longer supports them as it used to do;
- the shrinking of public equity in terms of number of companies listed in the UK and beyond; and
- the difficulties of squaring sustainability with the continued quest for growth.
As ever, it was easier to pose the question than find the answer but at least there was lively debate and the will to keep on trying to find the solution.
Like many others, I was struck by the impression of the IR profession in the UK being placed at the centre of capital market changes, good and bad, but also as reactive and informed by the wider economic and political realities of the current situation.
It seemed difficult to posit any way forward on any issue when our general future as a nation remains, to use that now hackneyed adjective, uncertain. In a world where our potential (and, as I type, seemingly likely if only perhaps initially for a few short days) future prime minister, has given an expletive-led rant about British business, it is difficult for any profession to imagine its future or set itself any goals.
We find ourselves in a perfect storm of regulatory change, structural shifts in markets and an increasing focus on non- directly financial issues such as sustainability, which were until only recently viewed as niche and marginal.
The governance debate
Life has become more difficult for the IRO but the new paradigm also brings new opportunities. As discussed in previous columns, this is a chance for IROs to take charge of the governance and wider ESG story at public companies and make IR a wider brief, the hub of how companies explain themselves to the markets.
We know increasing numbers of IROs are seeing themselves as the centre of the governance debates at their companies, working with their company secretary teams to produce the best outcomes at AGMs (by way of consolidated outreach campaigns to portfolio and governance fund managers and analysts at both active and passive managers), ensuring that the reporting on non-financial metrics and general ESG issues is to the highest quality and appropriately focused, and building towards a situation where investors believe that ESG concerns are ‘baked-in’ to the business in terms of board conviction.
Of course, boards have to believe in all this for this to really work but there has been a major shift in attitudes in recent years, driven by the realisation that not only do increasing numbers of investors take these issues seriously but also that their own roles are at stake in the new harsh world of annual re-election.
The challenges of ESG
ESG has seriously gone mainstream and so quickly – the rate of change of uplift of interest in this issue in IR in the UK is phenomenal (as witnessed by our recent conference). The challenges of the industry remain:
- the lack of a common measurement of value (which would help develop the theory of social accounting and provide a quantitative financial modelling scenario);
- the over-abundance of rating agencies whose similar questionnaires clog up the inboxes of UK plc;
- the reliance (whatever they may say) of investors on ratings agencies to influence investment decisions, with the unintended consequence of box- ticking having significant power over the life of the company potentially;
- the lack of a centralised common format for ESG reporting which encourages multiple overlapping data points for similar data categories with correlated time-wasting by companies filling out forms;
- the lack of a regulated framework within which rating agencies should operate, other than the generic market regime, which can produce market distortions not helpful to either issuers or investors; and
- the trend towards process becoming more important than insight, with safety found by companies in boiler-plate disclosure and investors moving more to an AI investment approach based on a quantitative rating of company behaviour.
We are still in the early days of ESG. The sector and issuers are still finding their feet, both in terms of understanding what should be reported and how. Given that some of the issues in the space have become partly political – the current emphasis by the government on the application of Section 172 of the Companies Act being a good example – these are debates that are only beginning. It is very sad therefore that during these turbulent times, one of the wisest minds of the governance world, Peter Montagnon, has recently suddenly passed away. As one of the godfathers of UK governance, Peter could always be relied upon to provide honest, intellectually robust and always useful insights into how the sector should develop.
A dear friend and a member of my company’s advisory board, I treasured his wit and grace, and I shall miss him deeply. I dedicate this piece of writing to Peter and give thanks for his contribution to our industry in ways we have yet to understand fully. May he rest in peace.