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Loud and Clear – March 2021

It’s not easy being green: SFDR and communicating your ESG credentials

 

It’s not easy being green, opines Kermit the Frog as he wanders slowly through a claustrophobic garden of lush leaves and bright flowers – and he doesn’t even have to contend with the new Sustainable Finance Disclosure Regulation (“SFDR”). The bad news for you (at least if you ever plan to raise capital from European investors), is that you do.

Today is March 10, the day that SFDR comes into force, meaning that if you are currently raising funds from investors in Europe, or intend to do so, you will need to make sure that you have the correct disclosures on your website and in your precontractual documentation (read: fundraising materials).

The SFDR regime obliges financial markets participants, including fund managers, to make certain disclosures bout their firm, their products, their portfolios and how they manage sustainability risks in each. But while an ESG communications strategy that consists only of regulatory disclosures may keep you out of trouble, it won’t win over investors. When my friends in our ESG & Sustainability team describe their framework for a sophisticated ESG approach, they often start with six key concepts:

  1. Integration
  2. Materiality
  3. Targets (not themes)
  4. Standardisation
  5. Delivery by management
  6. Transparency

It strikes me that this is also a rather useful way of thinking about what belongs in your ESG communications strategy…

Integration

Whilst you absolutely should go to the effort of producing a beautiful investor report (digital, of course!) outlining your ESG credentials, a successful ESG communications strategy demands much more. You need to put into play a more pervasive, integrated approach. If ESG is as important to you as you professed in that last investor call, this will be visible, pretty much everywhere a stakeholder in your firm cares to look: in your fundraising materials; on your website; in your job interviews; in the canteen; in your origination marketing. Everywhere. Anything else, and you reveal your ESG strategy to be not quite the tightly integrated instinct you claim. It’s not “in your DNA” if you have to remember to tack it on.

Takeaway
While it shouldn’t be crowbarred in or dominate more relevant messaging (see below!), the aroma of sustainability should usually be discernible, at least.

Materiality

In the same way that ESG factors need to be evaluated in accordance with how relevant they are to any particular investment strategy or portfolio company (“my online dating tool for dogs has a lower CO2 footprint than your medical device factory”), you must always evaluate the detail and scope of your ESG messaging in accordance with the expected audience and, y extension, what they need and want to know. You absolutely should do the data work to corroborate the bold claims of that ESG slide in your pitchbook, but that mountain of data belongs in the data room -accessible to those that want to see it, but not foisted on those that are trying to understand the strategy that generated the data in the first place. Likewise, ask yourself how relevant your portfolio diversity and inclusion statistics really are to the digital breast pump deal announcement you are writing.

Takeaway
Just because you can stick 12 pages of ESG reporting data somewhere, doesn’t mean you necessarily should…

Targets (not themes)

Writing about ESG is not a strategy, less still an effective one. Yes, by all means introduce relevant environmental topics into your newsletter and, certainly, you can invite an expert on social mobility to share their rags to riches story at your AGM dinner, but that’s not an effective communications strategy. You need goals. Measuring the impact of your communications is key to understanding what works and what doesn’t. A properly set up communications analytics system (ask me how!) can show you who is engaging on what granite jawed MBA students call “softer issues” – and, importantly, who really isn’t. And measuring your communications against clear targets helps provide direction.

Takeaway
You are communicating for a reason, so best to write that reason down in a way that can be measured…and then don’t forget to measure it.

Degree of standardisation

Standards exist for a reason. There are simply expected ways to talk about ESG and the smart communicator will sue these shortcuts to their advantage. However (I think you saw this coming, right?), there comes a point when you have done the work to demonstrate your relevance and the robustness of your approach and a slightly more cavalier approach is advisable. Taking an ESG element out of its normal context (but remember the importance of materiality) or finding some other way to talk about ESG in a light-hearted way may be just the thing to get a bored investor to actually read the whole of your ESG year in review. Worthiness does not have to be the enemy of creativity.

Takeaway
Don’t forget to stay relevant and respectful, but a dash of the unexpected can do wonders for the penetration and memorability of your ESG messaging.

Transparency

OK. I’m not suggesting you send out a huge slide deck to prospective investors apologising about mediocre diversity gains in your shoelace factory (the bits on the ends are called aglets, by the way – biglaces.com has a colourful selection), but investors need to know that you are not just sharing the good stuff. Sorry to get all biblical on you , but opacity begets uncertainty, which begets hesitation, which begets a lower re-up percentage, which begets a longer, less successful fundraise. You do not want this. If there are issues in the portfolio, get the facts and then present them, plainly. Explain how you found out and what you are doing about it (to address the situation and to prevent a recurrence there or elsewhere in the portfolio). Then beg for forgiveness…

Takeaway
You have to tell the truth, the whole truth and nothing but the truth if you are in the dock in the court of investor opinion.

I don’t want to pretend that this is the whole enchilada, but f you get these six things right, you’ll be well on your way to running an ESG communications programme that works for your investors, your other external and internal stakeholders and, importantly, for you.


And if you have more questions, please contact Matthew Craig-Greene, using the details below.

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