Quarterly earnings calls need an overhaul. Management expends great effort preparing for them, investor relations officers view them as crucial venues for sharing the equity story — the strategic vision that provides a rationale for investing in the company’s stock — and quarterly results still move markets. So why should these calls emphasize short-term profit-taking over long-term investments in employees, research and development, and sustainability, given that environmental, social, and governance (ESG) issues have direct, material effects on how well companies succeed in the long run?
We believe that companies must integrate ESG wholly into their business strategies rather than relegating them to a sidebar. But we also recognize that it’s challenging for corporations to include more ESG information in quarterly earnings calls for a variety of reasons.
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First, companies are in the habit of reporting on ESG through other channels, such as corporate websites, CDP (formerly the Carbon Disclosure Project), annual sustainability reports, and ESG investor calls. These channels may not require or receive the same level of analysis that earnings call disclosures do — and thus companies may be unaccustomed to reporting with rigor on ESG activities. Also, companies generally do not track ESG’s financial effects but instead report on financials and ESG completely separately. The result is that ESG data may seem “soft” to some observers.
In addition, on quarterly earnings calls, companies may be playing to analysts who they assume don’t care about ESG. CEOs often say that analysts do not ask for ESG information; analysts say that if the CEOs are not providing it, ESG issues mustn’t be material to the business. Wherever the blame lies, the effect has been limited discussion and disclosure of ESG themes.
Nevertheless, companies are making modest progress. From 2018 to 2020, earnings call transcripts saw a 671% increase in references to ESG — and a 751% increase in references to diversity, equity, and inclusion (DEI).1 Early evidence also suggests that companies’ increased discussion of ESG issues correlates with enhanced ESG performance and that earnings calls are featuring more — and more specific — discussion on human capital, racial equity, and related DEI topics.
1. The data set, from Intelligize, was derived from an analysis of earnings call transcripts.
2. E. Tylenda, E. Jones, S. Chetwode, et al., “The Corporate Commotion: A Rising Presence of ESG on Earnings Calls,” PDF file (New York: Goldman Sachs, 2020), www.goldmansachs.com; and J. Butters, “100% Increase in S&P 500 Companies Citing ‘ESG’ on Earnings Calls in Q2 vs. Q1,” FactSet, Sept. 11, 2020, https://insight.factset.com.
3. K. Eckerle, B. Tomlinson, and T. Whelan, “ESG and the Earnings Call: Communicating Sustainable Value Creation Quarter by Quarter,” PDF file (NYU Stern Center for Sustainable Business; and CEO Investor Forum at CECP, 2020), https://papers.ssrn.com.
4. “Return on Sustainability Investment (ROSI) Methodology,” New York University Stern Center for Sustainable Business, accessed March 16, 2021, www.stern.nyu.edu.
5. D. Fuscaldo, “Say Gives Retail Investors a Voice and Tesla Listens,” Forbes, Feb. 19, 2019, www.forbes.com.