Treasury Practice

Materiality matters: investors pile on the ESG pressure

Published: Nov 2021

When it comes to ESG, shareholders are increasingly prepared to ask tricky questions of boards, vote against directors and file shareholder resolutions. Investor and treasury teams need to ensure they have a grip on what is material.

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A recent conversation between executives at asset manager AllianceBernstein and Swiss multinational food and drink group Nestle offers a window into the types of discussion companies now have with their shareholders. Speaking at Bernstein’s Pan European Strategic Decisions Conference, Bruno Monteyne asked Nestle’s CFO François-Xavier Roger how, given some of Nestle’s mainstream food and drinks are still not “healthy enough,” Nestle planned to balance growth and health ahead.

When the conversation turned to Nestle’s recent sale of a US water business to a private equity group, Monteyne suggested it amounted to “passing the moral buck.” Long in the sights of environmentalists who argue water businesses in the region drain natural water supplies to bottle and sell it at a profit, he said “disposing doesn’t really solve the issue for society.”

A growing cohort of investors now believe that climate change and broader sustainability issues are a material risk and can damage returns either through physical or transition risks, such as regulation and carbon pricing. Nestle’s Roger’s insistence that the company was not taking an “easy” route but was facing the “challenge” and “responsibility” of sustainability shows how ESG sits alongside performance and outlook in corporate conversations with their shareholders, prepared to ask tricky questions of boards, vote against directors and file shareholder resolutions.

All the while the conversation often leaves corporate teams frustrated and overwhelmed by the ESG noise and information out there. Anecdotally, corporates say their shareholders often don’t ask the right questions, honing-in on a particular ESG risk that is not as material or relevant as others to seize the narrative and muddy what should be a powerful and effective conversation.

Shareholder power

Shareholders are growing increasingly vocal and emboldened. Companies which don’t engage with investors regarding sustainability risk escalating, collaborative shareholder engagement. Like activist investor Engine 1, which only held a tiny stake in Exxon Mobil but argued that the oil giant has been too slow to recognise the transition, endangered their portfolio and destroyed investor capital, managing to persuade other investors including pension funds and asset managers BlackRock, Vanguard and State Street Global Advisors to back their campaign for different leadership at the top. “In the most polluting industries, investors are realising that climate risks pose a short-term, existential threat to the viability of entire business models,” says Simon Rawson, Director of Corporate Engagement at pressure group ShareAction.

Beyond climate, investors have shunned businesses with unsustainable labour practices as employee health and safety, now a key topic for SASB (the Sustainability Accounting Standards Board which identifies the ESG issues most relevant to financial performance across industries) increasingly pushes centre stage because of the pandemic. Fears of a legal challenge regarding gig worker rights contributed to Deliveroo’s IPO performing well below expectations and caused M&G, Aberdeen Standard Investments and Aviva Investors, which collectively oversee more than £1trn in assets to drop out. In another example, fast fashion company Boohoo saw its share price tumble as allegations emerged of exploitative labour practices.

Investor benefits

On the flip side, companies that have strong sustainability stories reap the investor benefits – like a reduction in the cost of capital. Research from ratings agency MSCI shows that across both debt and equities, advanced and emerging economies, companies with higher ESG ratings have a lower cost of capital by up to 40 basis points. “The relationship between ESG scores and the cost of capital was the strongest in the US, where the lowest-ESG-scored companies faced significantly higher cost of capital than the highest-ESG-scored companies,” said Ashish Lodh, Vice President, MSCI Research. “In Europe and Japan, the relationship was not entirely consistent, although the cost of capital for the lowest-rated companies remained significantly higher than for the best-rated ones.” Elsewhere, research by Aegon Asset Management finds that companies in the most polluting industries have shrinking investor bases.

When German logistics giant Deutsche Post DHL Group published its accelerated roadmap to decarbonisation in March this year, it saw a significant rise in its share price, said Adam Pradela, Executive Vice President Corporate Accounting & Controlling and Klaus Hufschlag, Senior Vice President, CREST Finance Business Intelligence & Analytics in an interview with Treasury Today. “Importantly, our stock price went up at the same time as we announced plans to spend €7bn on sustainability by 2030 – the world of investment is going in this direction. Investors appreciate what we are doing.” The company has cut carbon emissions by 37% since it started its CO2 reduction programme, and carbon is now the most relevant KPI for the company’s investors, they said.

“There are a couple of risks posed by not working with investors,” says Madeleine Szeluch,

ESG Director, Investor Relations at Novartis, speaking from the pharmaceutical group’s Basel headquarters. “The first risk is that not engaging with shareholders could be reflected in a lower share price in the long-term for corporates. Secondly, investors could divest in favour of companies that prioritise sustainability, thus resulting in corporates losing out on a growing segment of sustainability-minded investors.”


Novartis was the first pharmaceutical company to hold an ESG Investor Teleconference in 2014, now grown into an annual ESG Day for investors with the CEO, Vasant Narasimhan. “We wanted to create an opportunity and a platform for engagement between our senior management and investors on issues that have been increasing in importance for a number of years, both for us as a company and our investors,” says Szeluch, one of two full-time ESG directors sitting within the investor relations team.

For treasury and finance teams wondering where to begin improving their ESG dialogue with investors, Szeluch suggests a good place to start. Novartis’s Materiality Analysis is central to its approach to ESG and involves a process that allows all stakeholders, including investors, to contribute to the most material risks that define the company’s value creation potential ahead. “We conduct our Materiality Analysis every four years, engaging with several thousand internal and external stakeholders to identify the most critical areas that we want to focus on from an ESG perspective.” The most recent analysis revealed patient health and safety, access to health care, innovation, and ethical business practices as the most material.

The fruits of the analysis were evident in investor enthusiasm for the company’s first Sustainability Linked Bond last year, structured so that bondholders receive a higher interest if Novartis fails to meet targets around expanding access to innovative medicines. “We were encouraged by the strong investor feedback that we received. Our SLB was recognised as innovative and industry leading.” She adds that Novartis’s commitment to being carbon, plastic, and water neutral by 2030 has also been “very positively received by investors.”

Similarly, corporate finance and treasury teams’ conversation with ESG-focused shareholders will be much easier if they have a firm grip on what ESG issues are most material to their business. By identifying just a couple of the most material around energy use, supply chain management or how a product is made, corporates can get back in control of the narrative, guide investors on what matters most and position the company in the market, allowing the investor story to flow.

The need for materiality is even more important given the debate is set to get more complicated. Investors are increasingly drilling down into companies net zero pledges and commitment to being carbon neutral by 2050. They are honing in particularly on companies that are not decarbonising, opting instead to compensate via carbon offset initiatives. “Leading practice amongst investors is now starting to interrogate the credibility of these plans in the short, medium, and long-term,” says ShareAction’s Rawson. Biodiversity loss and other impacts are also pushing centre stage. “They are asking questions about how companies are taking these related issues into account in their planning and how they measure and account for their impacts.”

Many corporates’ teams expect ESG conversation with their investors to get more discerning as investors hunt down truly compelling green stories in the years to come. Today, most companies are playing on the transition, arguing they are on the path to net zero and greener endeavour, just not wholly green yet. But in the years to come it should only the greenest companies that attract the easiest and cheapest capital.

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