Research on the importance of ESG communication towards institutional investors and some practical recommendations

Umicore is a global materials technology and recycling group formerly known as Union Minière. Starting as a polluting mining company, it transitioned into the innovative company it is today with sustainability in its core. This sustainability-focus is visible in the activities of the company, its R&D efforts towards clean technologies and recycling and the company’s mission ‘materials for a better life’. Its activities are grouped in three business groups ‘Catalysis, ‘Energy & Surface Technologies’ and ‘Recycling’. Sustainability has been increasing in importance for quite some time, yet ESG is a fairly new concept. ESG (environmental, social and governance) is a concept within the jargon of capital markets where investors look for superior risk-adjusted returns. Demand for more transparency, ESG disclosure and communication from both investors and regulatory bodies. More concretely, this translates through increased regulation, more inquiries from investors and an increased amount of voluntary disclosure standards. This is reinforced with extensive quantitative research that has been conducted regarding the advantages of more ESG disclosure/practices on performance as well as valuation of (listed) companies. The aim of this research is to analyse and answer two main questions: Should Umicore put more effort in environmental, social, and governance (ESG) communication towards institutional investors? If yes, how should Umicore put more effort in ESG communication towards institutional investors? To answer these research questions, qualitative research was conducted. The qualitative research consisted of an analysis of a broad range of existing studies and surveys, a peer analysis based on a self-made scoring framework to compare Umicore with its peers and additional questionnaires sent to existing investors of Umicore. For the peer analysis, a group of peers of Umicore and best practices regarding sustainability were selected. These companies were rated on their communication strategy based on three main topics, being ‘completeness’, ‘accessibility’ and ‘news’. Important to note is the fact that this analysis was conducted using only publicly available information through company websites, annual reports, sustainability or ESG reports, third party websites, social media pages, etc. The final score of Umicore is well below the average mainly due to the lack of specific KPI targets and the lack of ESG information on the company website. Furthermore, these scores were compared with the Bloomberg disclosure scores of the peers, the ESG ratings and indices in which peers are included/excluded and the fact whether the peer has sustainability in its core. This study came to the following conclusions regarding the question whether Umicore should put more effort in ESG communication towards institutional investors. The answer undoubtedly is yes and is supported by several arguments based on this research. First of all, Umicore is not disclosing sufficient ESG information especially compared to its peers and best practices in the market. Secondly, other companies that also have sustainability in their core such as Stora Enso, BASF, Roche and Solvay perform well in ESG ratings and indices, obtain higher Bloomberg disclosure scores as well as higher scores in our own scoring framework. Through peer analysis and conducted research it became clear that sustainability in its core really does matter. It is highly valued by investors and companies with good ESG practices are also perceived less risky. A final argument derived from the conducted research, shows that the importance of transparency is increasing with some quantitative consequences as well. More precisely, more disclosure on ESG leads to a lower cost of capital and a larger investor base. Furthermore, better ESG practices contributes to better stock price performance and higher operational performance. Therefore, it is advised for Umicore to disclose more ESG information through different channels. This research concludes with short-and long-term recommendations to answer the question on how Umicore should put more effort in ESG communication. On the short term, quick wins include: mentioning the ESG contact person on the website and in the report, regular news updates on ESG topics, a clear overview on sustainability awards, ratings and indices on the website, a feedback form and an overview of FAQs concerning ESG, a greater focus on carbon emissions on the website and additional numbers and ESG facts on the website as well (e.g. an iterative overview of non-financial KPIs, figures on environmental and social performance etc.). On the long-term, it is advised to target ESG-focused investors, initially European and US investors and in a later stage also Asian (especially Japanese) investors. It is also advised to choose the right ESG ratings to engage with by finding out which ones are most important for key investors of Umicore. Research and results from the investor questionnaires have proven that very often investors’ own analysis on ESG is still more important to them than the provided ESG ratings when making investment decisions. However, ratings are often used by investors to assemble a first set of ESG-focused investment options. Moreover, research on ESG provided by ESG data providers is consulted regularly by the interviewed investors. Overall, it is worthwhile conducting further research on the importance of ESG ratings agencies and ESG data providers. Lastly, some suggestions for Umicore’s 2025-strategy are made such as providing clear KPI targets, complete disclosure on CO2 and implementing a variable remuneration system linked to specific ESG targets