Guest Posts

The emerging importance of ESG rating agencies

We recently had an interesting set of conversations with Charles Nelson, Head of UK at Morrow Sodali, about the role of ESG rating agencies and their impact on the investment decision making process. This guest post by Charles summarises key takeaways from recent Lighthouse publication and takes a look at ESG rating agencies, their focus and their influence today as well provides a few very helpful pointers for IR teams about engagement with investors on ESG topics.

Background

  • ESG ratings are becoming more prevalent and are commonly used by institutional investors in assessing the ESG performance of their portfolio companies.

  • According to the Principles for Responsible Investment’s (PRI) 2018 Annual Report, the total value of assets managed by institutional investors (AUM) who integrate ESG into their investment process is US$89.65 tn and is growing rapidly.

  • The sheer scale of the portfolios where ESG is integrated means that the largest global asset managers are increasingly having to rely on often external, quantitative assessment of ESG performance.

  • Just like the credit ratings, ESG ratings are based on past performance, whether policies, practices or in some cases controversies.

  • However, “ESG-worthiness” may not be as straightforward as credit worthiness, and the use of event indicators means that ESG agencies may penalize companies for controversies long after they have addressed and rectified the underlying problem.

  • Furthermore, unlike financial information that underpins credit worthiness assessments, ESG information varies a lot in scope and quality as international standardisation is in its infancy. For Emerging Markets, one key issue is that disclosure is often less extensive than it is in equivalent DM sectors and markets. The outcome may be that they could be penalised in their ratings for lack of disclosure, not for poor performance.

  • For this reason, understanding 1) the rating agencies and how they determine their ratings, and 2) how investors use these ratings, is essential when planning corporate reporting and it is recommended that it is based on shareholder outreach and engagement, to make the dialogue productive and efficient.

Rating agencies and their focus

  • ESG rating agencies use publicly disclosed information (ie that is broader than just the annual report, for example sustainability disclosure or information available on the company’s website). Additionally, especially when it comes to event indicators, indicators may draw on media and social media reports, and sometimes information gathered from direct data inquiries and requests (for example, via survey questionnaires).

  • Data points analyzed by the rating agencies typically depend on the materiality assessment they conduct on market, industry and/or company level with respect to Environmental variables, Social aspects and Governance areas.

  • Most of the large ESG rating agencies operate internationally, employing their own methodologies to generate their own ESG ratings. The raw data collected tends to be uniform across markets, with ratings then adjusted to reflect relativities. This means that data biases such as for size (eg indirectly penalizing smaller companies who usually have more limited disclosure), market or sectors (eg penalizing sectors with more pronounced environmental impact) are addressed but some could remain.                                                                                                         

  • While some ESG rating agencies are taking a more risk-based approach and therefore position themselves as a natural tool for investment decision-making, others employ methodologies that are more ethically driven.

  • While companies and their investors are typically aware of business material factors, the visibility of companies over reputational sensitivities of their shareholders and their beneficiaries is limited.

  • As a result, one of the first steps in the process of understanding the impact of the ESG ratings on a company and its shareholders is to ensure that the difference between the business materiality (value) and reputational risks (values) is acknowledged and addressed.

 

How do investors use ESG ratings?

  • Investors use sustainability ratings in their investment decision-making process, as well as investment management process and prioritization of company engagement.

  • The ratings are considered complementary to traditional investment processes and existing strategies, in that they allow investors to screen for good and poor ESG performers with the aim of reducing their risk exposure, particularly in the long term.

  • We are aware of a growing interest and in some cases use of ESG ratings in investors’ custom voting policies, use of proxy voting platforms with proxy research which allows investors access to ratings that can automatically determine their vote for a specific resolution, and as basis for engagement and targeted call for action to other investors.

  • An interesting trend to note is the rise of investors compiling and applying their own, in-house ESG assessment on portfolio companies. This is based on their own interpretation of raw data and in some cases also systematically capturing information gained through direct company engagement for internal sharing.

  • The rationale behind these initiatives, as we understand it, is that investors are aiming to put forward their own view of the ESG themes and on how it is applied to their portfolio companies.

 

ESG-focused engagement

  • Naturally, companies are wishing to optimize the communication with their shareholders and demonstrate responsiveness to consensus expectations, but to do this they need to have clear insight of the shareholder base. In Emerging Markets shareholder bases can be rather board, with a mixture of domestic investors and international ones.

  • As a roadmap to understand the ESG views and expectations of your shareholders:

    • MAP your existing shareholders – consider investment strategies, geographic spread, stewardship profile.

    • TARGET investors you wish to become your shareholders, even if their current level of holdings reflects an underweight position. Particularly important is to identify responsible long-term providers of capital – for example investors targeting “real world” impact that is within the scope of your commercial activity.

    • CLARIFY Gain clear and granular understanding of your investors’ agendas. Do your homework before reaching out - it will support higher quality of engagement.

    • EMBARK on a programme of ongoing dialogue. Do not confine the contact with investors to pre-meetings touch points.

    • EVALUATE – as regulatory appropriate and commercially possible – to share ideas with your investors and to consult on significant changes of direction.

Navigating institutional investor expectations : Tips for EM boards and executives

This is a guest post by Alissa Amico, Managing Director of GOVERN Center.

ESG (environment, social and governance) investing might well have emerged as the most fashionable acronym in the financial media in the past year. It encapsulates the growing expectations of the institutional investor community regarding the quality of corporate governance frameworks internationally, while demonstrating that investor expectations have in the meantime have also expanded beyond G(overnance).

With the growth of institutional investors - notably developed countries’ pension and insurance funds – these actors have become active not only domestically but also in emerging markets (EMs). Overall, of the almost 14 trillion USD of capital tracking MSCI indices, close to 2 trillion are now allocated specifically to Emerging Markets. In Turkey for instance, foreign institutional investors have until recently have accounted for half of the market capitalization.

This is significant for a number of reasons, including their influence on corporate governance. In many EMs, foreign investors are more active than domestic from a voting perspective since the latter’s participation in the capital market can be limited by law. Equally, many EM institutional investors lack the engagement culture and experience, despite having a better knowledge of the domestic market.

While developed market institutional investors are active in their own domestic markets, the extent of their participation in EMs varies depending on their risk appetite – Canadian institutional investors for instance tend to shy away more from EMs such as the Middle East than their American peers. Importantly, their participation is contingent on their perception of the quality of national ESG regulatory frameworks in individual emerging markets.

As such, Brazil has become a darling of foreign institutional investors due to the introduction a voluntary corporate governance listing segment (BOVESPA). While the success of BOVESPA has proven difficult to replicate, EM capital market regulators and stock exchanges have raised corporate governance requirements over the past decade, often at a faster pace than their developed market peers.

Both for EM regulators and companies this approach has delivered. On a macro-level, higher governance practices have proven to correlate with higher foreign inflows, as highlighted by the World Federation of Exchanges in its recent analysis of EM investing. Markets where a full set of well-established corporate governance requirements was in place received additional foreign inflows as high as USD 756 million over 2006-2018 period.

Indeed, foreign institutional investor participation in emerging markets is fundamentally linked to their appreciation of national corporate governance regimes, which generally include the governance code, listing requirements and any relevant provisions of the corporate law. It is likewise connected to their perception of the quality of oversight and enforcement which generally tends to be more problematic in EMs.

In many instances however, foreign institutional investors are not always aware of the extent of governance regulatory change that has taken place in EMs. Few investors are aware for example that listed companies in Oman are required to have a fully non-executive board. In part to make enforcement easier, the regulatory philosophy adopted by EM regulators tends to lean more on the side of mandatory regulations as opposed to UK-inspired “comply-or-explain” codes.  

Furthermore, foreign institutional investors’ understanding of strategy and governance of individual EM companies can be limited. Indeed, smaller companies not included in EM or large cap domestic indices often do not get any research coverage. Our earlier work in Egypt has demonstrated that only 10% of listed companies where followed by analysts whereas close to two-thirds of listed firms had no coverage whatsoever.

Indeed, collecting quality ESG data is frequently cited as the number one challenge by foreign institutional investors in different EM regions. They may not have access to annual reports in foreign languages or fully understand issuer disclosure, which in many cases remains not comparable due to the discrepancies in disclosure frameworks.

While the ESG data reported by EM companies remains patchy, expectations of its disclosure have high-rocketed in recent years. Encouraged by the recent stewardship trends worldwide, developed market institutional investors have introduced voting policies that reflect their specific investing philosophy.

In many cases – and this can indeed  be problematic – ESG priorities are not set in a country or region-specific manner. Blackrock, the largest institutional investor globally, has one voting policy for the entire Europe and Middle East region. Nonetheless, voting policies are an instructive read for boards and executives of EM companies wishing to differentiate themselves from the market based on the quality of their governance.

In particular, they may need to understand how foreign institutional investors’ stewardship and voting policies differ from national governance requirements. This can indeed be important especially for mid-cap companies that may not be automatically noticed by passive, index-tracking investors. In examining institutional investor voting policies, understanding their rationale and objectives is primordial.

For instance, in OECD member countries, having a majority independent board is a prevalent requirement whereas many EM regulators have shied away from imposing it as a standard. While EM company practices tend to mirror their domestic standard, expectations of foreign investors remain higher or different. In many instances, large institutional investors expect to have a largely or a majority independent board in listed companies.

Compliance of EM companies with foreign institutional investors’ ESG criteria matters and proxy firms voting their shares are instructed to do so with respect to these policies. For passive investors, lobbying for change may be conducted through a long-term engagement process. For active, stock-picking institutional investors, the approach may be more hands-on  since they often take risks in smaller, less known EM companies.

A key question then for EM firms is how to demonstrate their commitment to ESG in order to attract foreign institutional capital. Examining internationally recognised disclosure frameworks such as the IIRC to ensure the comparability of reported information is a critical first step. Too many annual reports of listed companies boast their philanthropic contributions and their positive environmental impact without any connection to company-specific risk factors, strategy or industry comparisons.

Some aspects of investor expectations may actually reflect priorities in their own markets and not necessarily those in EMs. This is perhaps most obvious when we consider the issue of executive remuneration. While executive and board remuneration has emerged as a major regulatory concern following the financial crisis, remuneration in EMs tends to be less of a concern.

As most EM companies are controlled either by the state or a family, board representatives who are often also major shareholders tend to be compensated by dividends, not sitting fees. In addition, board compensation in some EMs such as Saudi Arabia has been capped by law and hence remuneration does not represent a high risk.

The corollary of this for boards and management of EM firms wishing to attract foreign capital, is that they need to report on the information that institutional investors are seeking, even on issues that they may consider material or that are not required by domestic ESG regulations. The flexibility provided by the comply-or-explain (CoE) approach provides a possibility to address these criteria and concerns.

EM companies can use CoE not only as a mechanism for communicating to their own regulator and the local public, but also as a means of explaining to foreign investors why certain global governance standards may not be fully relevant. Explaining how a firm has gone above the national governance regulation can also be of benefit for all investors, as it demonstrates that the board does not take a minimalist, compliance – driven approach to governance.

Likewise, a demonstration by a firms’ reporting of how it has adapted its governance framework to the risks it faces geopolitically, financially and operationally is key. In doing so, EM firms can benefit from drawing a better connection between their strategy and their ESG practices. Boards and management need to stop considering ESG as E & S & G but instead as interconnected pillars of their corporate strategy.

The GOVERN Center works with boards and senior executives of leading EM companies to develop its governance practices in support of better financial performance and investment attraction. For more information: email: inquires@govern.center


The rise of alternative funding and implications for the effectiveness of investor relations

The value of assets managed by the global investment management industry and the amount of assets that sit within global mandates continue to rise year on year. Research from PwC predicts that global assets under management will rise to $101.7 trillion by 2020, from roughly $70 trillion today. This will be primarily driven by pension funds, high net worth individuals and sovereign wealth funds, all of whom have been steadily increasing the global component of their investment portfolios.

Tapping into this capital efficiently, however, is far from straightforward for global issuers. As a result there has been a surge of interest in alternative funding methods and new technologies, which aim to boost speed, efficiency and transparency throughout the capital markets. Where exactly is the impact likely to be largest for investor relations teams?
Tapping into this capital efficiently, however, is far from straightforward for global issuers. As a result there has been a surge of interest in alternative funding methods and new technologies, which aim to boost speed, efficiency and transparency throughout the capital markets. Where exactly is the impact likely to be largest for investor relations teams?

Supply-demand matching

First, we can expect to see improvements in how companies target investors. Currently the tools for efficiently understanding who is interested — and to what level — in a given investment story, whether on a deal or non-deal basis, do not exist today. Technology drives the matchmaking process across a multitude of industries. The finance industry has arguably been one of the slowest to embrace its potential to improve the process for the 40,000-odd listed companies and more than 100,000 institutional investors. Potential benefits include increased accuracy of targeting, a greater degree of access and control, reduced cost and a more diversified range of options.

Peer-to-peer funding platforms for listed companies

Second, we can expect improvements in how companies reach and engage new pockets of liquidity, especially within the retail investor segment. Investment-based “crowdfunding” (or market place investing — both equity and debt) has existed in limited forms for several years through online sites that allow investors to invest in specific projects predominantly for private companies. This model allows companies to raise capital to fund new ideas and more importantly, cultivate new clients who now feel they are participating in the growth of their businesses.

These new marketplaces may work in tandem with existing processes. The crowdfunding platform SyndicateRoom has revealed a tie-up with the London Stock Exchange that will allow ‘crowdfunding investors’ to participate in initial public offerings and placings on the main market of the LSE and AIM.

Blockchain applications

Third, we can expect vast improvements in efficiency and transparency in a variety of shapes and forms. One such form will be Blockchain technology applications within the equity and debt capital markets, which aim to tackle the vast inefficiencies which adversely affect the industry today through a centralised, digital ledger.

The scope of Blockchain’s pilot projects in this area has grown exponentially over the last three years. While these projects have so far generated more hype than tangible applications, the benefits that ‘distributed ledger’ technology can bring to the broader industry seem appealing enough to continue with its funding and development. The prize on offer, as one consultancy recently put it, is a new architecture, where all capital market participants work from common datasets, on an almost real-time basis, and where supporting operations are either streamlined or made redundant.

To take one example of what is already being done, BNP Paribas has designed a pilot scheme permitting private companies to issue securities on a primary market with e-certificates, developing a ‘live’ share register and access to a secondary market all via blockchain technology. We should expect similar progress in the near term in public markets, with increased accuracy in the identification and recording of shareholder movements and interactions.

Initial Coin Offerings and fundraising

Lastly, in niche areas, we can expect new blockchain based applications to support the fundraising process. Initial Coin Offerings (ICOs) are a fundraising exercise for cryptocurrency tokens such as Bitcoin or Ethereum, and have received a lot of press in recent months. Speculators continue to chase this new asset class. While these might at face value seem like attractive fundraising structures, they are ultimately of limited interest in a corporate context. The recent moves by the SEC (stating in July that cryptocurrency tokens can be securities) and China (banning fundraising through ICOs in early September), mean that an ICO is unlikely for the time being to work in an established corporate outside of a new tech startup scenario.

For IR officers, there are nevertheless some newly emerging areas of interest which are raised by the cryptocurrency experience.

  • ICOs have turned the traditional fundraising process on its head, marketing for a long time then fundraising in a matter of hours. The co-founder of Ethereum said “We managed to grow our base of ambassadors by attending meetups around the world, targeting groups and leaders in certain communities. Once they got on board… about 9,000 people participated in the crowdsale”. Might traditional equity capital raising follow this in certain circumstances, for instance where the fundraising is well flagged? For instance, a company with a well-prepared public market-style equity story can spend time educating potential target investors for up to two years pre-IPO. The public phase of the IPO could then be significantly cut.

  • The rise of cryptocurrency as a liquid means of exchange, irrespective of the underlying use-case, suggests that corporates could treat cryptocurrency as one of the currency options for the fundraising. In August this year, Fisco used a 200 bitcoin 3-year bond (worth $860,000 at the time) for an internal M&A transaction, as a test case with Japan’s approval of bitcoin as legal tender.

  • Primary transaction processes are slow, and investors who are not existing clients of the banks managing the deal are usually not able to participate. Blockchain authentication of the investors’ know-your-customer (KYC) status would broaden the addressable investor base. And this is just one application. In July this year, Daimler used a private version of Ethereum in a test case to issue a €100m 1-year bond. This used Blockchain to manage the whole transaction cycle from origination, distribution, allocation and execution of the loan agreement, to the confirmation of repayment and of interest payments.

The journey from today’s system to a new paradigm for our industry will take time. The obstacles to be overcome along the way may be significant, and it is far from clear what will ultimately emerge. However there is little doubt that technology will eventually transform our industry faster than we think. We can take clues as to how this may happen from examining just how communications, music, transportation, or even video rental industries have been transformed in the last 5 years alone. As in those industries, the finance industry will come face to face with huge opportunities, the beginnings of which we can see today.

The article was co-written by Michael Chojnacki from Closir and Julian Macedo from ECM Team and originally appeared in fall edition of IR Society’s Informed magazine.

Have IR professionals lost their enthusiasm for social media?

This is a guest blog post from Sandra Novakov, a Director with Citigate Dewe Rogerson’s Investor Relations practice. Citigate Dewe Rogerson is the leading international consultancy specialising exclusively in investor relations, financial communications and corporate public relations.

Citigate Dewe Rogerson conducts an annual survey into investor relations trends across Europe and one of the topics which has yielded somewhat surprising results this year is the use of social media in communications with analysts and investors.

Looking back two years, when social media channels were expected to have a profound impact on the dynamic of communication between companies and their investors, it seems excitement levels have since dropped significantly.

The findings of our survey show a decline in the popularity of social media when it comes to five out of eight IR activities shown in the figure below. Whilst nearly all companies used these channels to publicise news and events in 2013, this figure has now dropped 26 percentage points, to 65%. Another notable change can be seen in the popularity of IR blogs — only 12% of IR teams use these to promote their views against 23% in 2013. So this is, somewhat ironically, an IR blog about the declining popularity of blogging in IR.

Looking at trends in other IR activities, one thing is clear. The declining use of social media by IROs is by no means indicative of declining engagement levels with investors. When it comes to roadshow activity, 46% of companies are planning more meetings in 2015 compared to 2014. In particular, following several years of focus on continental Europe and Asia, there is a clear shift towards targeting US investors in 2015. In response to declining broker support when it comes to corporate access as a result of tightening regulations aimed at preventing fund managers from using dealing commissions to pay for services outside of research, companies are also taking greater control of investor targeting — only 5% rely solely on brokers and 24% are investing in either targeting tools, personnel, or both, with the aim of increasing their in-house competence. Furthermore, engagement at Board level is on the rise with a greater number of chairmen and non-executive directors seeing investors on a regular basis.Looking at the possible drivers of this trend, we see several contributing factors. Firstly, companies are increasingly more disciplined about their use of social media — 45% state they have a formal social media policy, against 38% in 2013. This undoubtedly slows down the process of issuing a tweet or publishing a blog, thereby restricting somewhat the effectiveness of such communication channels. Secondly, IROs have come to realise the significant time commitment that regular social media engagement requires leading some to the conclusion this is not the most productive use of their time. Thirdly, the extent to which investors value disclosure through such channels, in addition to the announcements and direct engagement they receive on a regular basis, remains debatable.

In addition to the greater frequency of contact, companies are engaging with investors on a broader variety of topics. The scale of engagement with investors on executive remuneration has almost doubled since 2014. In addition to board effectiveness and director tenure, which the majority of IROs across Europe touch on in their conversations with investors, our findings show that more than half of European IROs are engaged with investors on board diversity. Following the exponential rise in the number of information security breaches over recent years, a new topic to emerge on the agenda is that of cyber security. Given the significant financial and reputational impact of such events, investor scrutiny of companies’ preparedness for potential breaches is expected to increase going forward.

With rapid technological innovation and regulation-driven changes to corporate access and financial reporting, investor relations has entered a new era of opportunity and challenge. Now it is down to each company to make the best of use the new tools at their disposal and address the challenges they are facing.

About the survey

Citigate Dewe Rogerson first started investigating trends in investor relations in 2009 to gain insight into how companies were adapting to the uncertain times brought about by the 2008 financial crisis. Since then, our annual IR survey has gained a growing number of supporters, not least from IR societies across Europe including the UK IR Society, Germany’s Deutscher Investor Relations Verband (‘DIRK’) and IR Club. This has led to a record number of 193 IROs from Europe’s leading companies participating in this year’s survey to provide the most comprehensive insight to date into changing attitudes and practices from objective-setting, reporting and guidance to analyst coverage, investor and activist engagement to the changing use of technology.

The full report is available on our website at: http://www.citigatedewerogerson.com/wp-content/uploads/2015/07/Citigate-Dewe-Rogerson-Investor-Relations-Survey-2015.pdf

Saudi Arabia: Long March Forward

This is a guest blog post by Dr Nasser Saidi. It originally appeared in CPI Financial

The Saudi Capital Market Authority, under new leadership, has announced that qualified foreign institutions will have access to the Tadawul stock exchange from 15 June 2015 with the final rules to be revealed on 4 May. This comes as no surprise, given the announcement in July 2014 of plans to allow direct foreign purchases of shares in the first half of 2015.

But why does opening up the Saudi equity market matter? What could be some of the macroeconomic effects? With Saudi and other oil exporters facing an oil price tsunami, economic policy should be directed at mitigating the negative consequences. The IMF estimates that there will be a massive loss of $380 billion in exports, equivalent to a 21 per cent hit to GDP. The expectation is that opening up the market will attract foreign capital that previously did not have access to Saudi investment opportunities. The capital inflow, in theory, could lead to increased investment in promising sectors, bring in new technology, boost IPOs, galvanise mergers & acquisitions and improve corporate governance all of which would translate into greater economic diversification and job creation, the overarching economic policy concern. The underlying risk is that asset prices get bid up, a bubble forms, Saudi investors sell and real invest does not happen.

LIBERALISATION AND OPENING UP

Opening of the market comes as part of a continuing policy of opening up, economic liberalisation and gradual international integration that has been pursued over the past 10 years. Saudi Arabia has been successful in upgrading infrastructure, strengthening education and skills, boosting access to finance for SMEs, and significantly improving the business environment. Substantial progress has been made on lowering the cost of doing business over the years. Saudi Arabia is today the only Middle East country and only OPEC member among the constituents of the G20. It joined the WTO in 2005 (which included clauses like allowing 60 per cent foreign ownership in banking and insurance, and 75 per cent foreign ownership of distribution within three years). Saudi built economic cities and industrial zones to move away from its over-dependence on oil. But oil still accounts for about 92 per cent of government revenues and though the share of non-oil real GDP has increased over the past two decades, non-oil sector exports remain limited. Foreign investment can support economic diversification.

SAUDI CAPITAL MARKET LIBERALISATION NEEDS ACCELERATION

The conservative Saudi capital market regulator had initiated several steps to liberalise the market over the last few years, including aligning working days with other GCC and international markets with Tadawul opening on Thursdays, and improving corporate governance standards to make the Saudi market attractive to foreign investors. Draft market access rules, shared in August 2014, included a 10 per cent cap on foreign ownership of the market’s value and that a single foreign investor could own no more than five per cent of any listed firm, while all foreign institutions combined could own no more than 20 per cent. If this limit is confirmed then the promised Saudi overture might prove to be too timid, a damp squib.

The Saudi and other GCC stock markets are massively dominated by retail investors. Retail investors currently account for more than 90 per cent of the share trading volume of the Tadawul, while foreign investors have been restricted to buying Saudi shares indirectly through swaps or exchange- traded funds. But retail investors may be prone to fickleness and bouts of irrational exuberance leading to volatility. Institutional investors such as pension funds, insurance companies, and investment funds are less likely to be prone to animal spirits, or so it is hoped. Increasing the share of institutional investors should help stabilise markets.

Opening of Saudi capital markets has been proceeding in phases, initially opening up to GCC investors, then opening to investment funds and now opening to qualified foreign investors.The opening up provides foreign investors access to the largest economy and

capital market in the Middle East. Saudi Arabia is the largest economy in the Middle East, with a nominal GDP of $752 billion in 2014. Tadawul has over 160 stocks, a market capitalisation of approximately $530billion and relatively more diversified compared to other exchanges in the region, with sector representation from petrochemicals, banking, telecom companies, retail and real estate. The chart below, shows the market capitalisation and turnover of the GCC markets, underscores the importance of the Saudi market: Tadawul alone accounts for more than 50 per cent of the market cap of the GCC countries and is the most liquid.

TADAWUL WILL MOVE FROM ‘FRONTIER’ TO ‘EMERGING’ MARKET STATUS

Saudi’s ouverture finally allows foreign investors to diversify risk and gain exposure to GCC investment opportunities through UAE, Qatar and now Saudi markets. Indeed, it is only in the past year (May 2014) that both UAE and Qatar were reclassified from Frontier to Emerging Market Status by the MSCI. MSCI considers both size and liquidity requirements and market accessibility for its country classification into Frontier or Emerging. The former are based on the minimum investability requirements while the latter are based on qualitative measurements that reflect international investors’ experience in investing in a given market, including laws, rules and regulations that provide for investor protection.

Will Saudi Arabia go through this process of a reclassification as well? According to MSCI, based purely on the existing size of the Saudi market, Saudi Arabia would have an equivalent weight of about 63 per cent in the MSCI Frontier Markets index, and about four per cent in MSCI Emerging Markets — the inclusion would attract passive foreign institutional investors or index investors that would have to rebalance their portfolios to include Saudi. The index house has already stated that a market does not necessarily need to pass through frontier status before entering the Emerging Markets universe. The earliest Saudi Arabia could officially enter either the frontier market or emerging market (more likely) would be mid-2017 considering the usual timelines for the evaluation and consultative process. Saudi Arabia, at present, has a standalone classification from S&P.

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FINANCIAL MARKET LIBERALISATION IS KEY TO ECONOMIC DIVERSIFICATION

What can Saudi Arabia look forward to with the opening up of its capital markets and subsequent foreign investment? Opening the stock market is only one step in what ought to be a Saudi financial markets development strategy. Efficient financial markets require breadth (a wide variety of financial securities and instruments), depth (sufficient size to enable transactions without leading to large bid-ask spreads) and liquidity (ability to enter and exit markets without affecting price).

Saudi needs active money markets, bond and Sukuk markets, and a mortgage market for housing finance. Saudi Arabia should however use the opening up of its capital markets to encourage more listings of both Saudi and GCC companies (dual listings). The exchange is largely dominated by energy-related companies and financial firms. It is necessary to reduce the high concentration of capitalisation in a limited number of stocks: for example, the top FIVE names (including SABIC and Al Rajhi Bank) account for more than one-third of Tadawul. Developing the financial markets should also be part of a strategy of economic diversification, via attracting capital into promising sectors such as tourism and hospitality, transport, education, health, services etc. but the time is also opportune to start a programme of privatisation e.g. Saudi Airlines and greater PPP in infrastructure and logistics.

OPENING TADAWUL SHOULD BE PART OF A ‘LONG MARCH FORWARD

The ouverture of Tadawul should be part of the equivalent of a Chinese ‘Long March Forward’ of a continuing modernisation and reform strategy and of greater regional and international economic integration. The move should be a harbinger of further reform providing wider market access and establishment of foreign companies and persons via deep legal and regulatory reforms,public private partnerships,and privatisation and labour market reforms to create a dynamic,vibrant economy able to create jobs for generations of young Saudis, both women and men. But why stop there?

As the region’s biggest economy, Saudi can and should be the region’s engine of growth. Given Saudi’s massive wealth and being a major capital exporter, the Saudi market should be open to foreign listings (including government and corporate bonds and Sukuk) and cross-listing from the other GCC and Arab markets. An example would be allowing Egyptian companies and government to list equity, bonds and Sukuk that would help finance Egypt’s infrastructure, inclusive economic growth and development. Finance and trade are better than aid! Saudi’s Tadawul should move away from being insular and inward–looking to become a regional market helping finance economic growth and development across the Arab world and wider region.



Handling Investor Relations during a Crisis: Lessons Learnt from the 2011 Egyptian Revolution

This is a guest post from Omar Darwazah, Director, Investor Relations at OCI N.V.

It seems that the entire world is in a constant crisis today. From Argentina to Russia to Turkey to the United States, there has been no dearth of crisis management situations which investor relations (IR) professionals have had to face. Whether it be political upheavals, civil wars, border disputes, fiscal disasters, wild foreign exchange fluctuations, military coups, capital controls, crazy presidential candidates or deeply entrenched state-sponsored corruption, investor relations professionals globally are finding it more difficult to craft their respective companies’ equity theses and messages to the investment community without finding themselves having to discuss geopolitics and global socio-economic trends. In 2011, I was Director of Investor Relations at Orascom Construction Industries (OCI) in Cairo, Egypt. I found myself in the middle of a historic event; I faced a systemic crisis that plagued the entire country as well as the company, it would forevermore change Egypt and its investment landscape.

On January 25, 2011, I readied to attend an annual Bank of America Merrill Lynch investor conference like I had done in years past. I boarded an 8am flight from Cairo to London to kick-off to OCI’s investor relations program and prepared presentations to current shareholders and prospective investors. Upon my arrival in London five hours later, however, the Egypt I had always known — run by the ironclad dictatorship of Hosni Mubarak and the brutality of his state police — had changed forever. A revolution was in the making. Thousands of people took to the streets to peacefully demonstrate en-masse against the regime. While I conducted meetings with investors on January 26, the state police clashed with protestors, the demonstrations turned violent, and the Egyptian equity index crumbled. The investors I was to meet at the conference turned to me for unbiased, candid interpretations of events on the ground.

As the revolution unfolded, the company’s CEO entrusted me to continue meeting investors. For 3 weeks I operated in crisis management mode and conducted over 70 one-on-one on-site meetings in London, Dubai, New York, Boston, Chicago, Frankfurt, Zurich, Geneva, Amsterdam and The Hague.JPMorgan invited me to lead a conference call with investor relations directors from other Egyptian blue-chip companies to advise them on handling the crisis. There was no hand-in-glove approach to managing the situation but I did share the following observations with my colleagues:

  1. The challenge of speaking to investors throughout the Revolution was primarily exacerbated by the lack of visibility on the ensuing chain of events

  2. Communicating with senior management on the ground in Cairo proved to be difficult given the lack of internet or mobile phone access throughout the 18 days of the Revolution

  3. For a contemporaneous update, I relied on speaking to various team and family members as well as friends by landline in order to provide investors with candid advice on the situation

  4. The routine questions on the performance of the company were never even asked and investors turned to me for unbiased interpretations of the unfolding events

  5. I combined my in-depth knowledge of Egypt, undergraduate training in Political Science and Economics and oratory skills to field difficult questions and deter a crisis within the global investment community. Speaking on behalf of the company and its performance became secondary in importance

In hindsight, the mere fact that I was present outside of Egypt and able to travel and meet investors proved to be extremely valuable. While serendipitous, the lesson learnt during my experience was that irrespective of the gravity of the crisis at hand, it is pertinent for IR professionals and management to be readily available and present to meet with the investment community even if they have bad news to report to them. That year, I ended up conducting over 300 one-on-one meetings in 25 cities globally. Here are some key takeaways from my experience:

  1. Investors appreciate full transparency and candidness during periods of high market uncertainty

  2. As an IR professional, be ready to simulate various scenarios during one-on-one meetings with investors with subsequent potential risks and mitigants of these scenarios

  3. Be ready to discuss broad topics that are typically not addressed during routine investor meetings

  4. Exogenous factors affecting company performance in times of uncertainty should be quantified as much as possible (i.e. impact on earnings, days of business interruption etc.)

  5. During a crisis, liaise closely with senior management and provide key updates and feedback from the broader investment community including analysts and investors as this helps with internal risk management

  6. Keep an open line of communication with the market, be ready to conduct a significantly larger number of investor meetings and global roadshows

  7. Disseminate factual information in writing in official company documents (i.e. press releases and results presentations) but leave speculative discussions, political opinions and forward looking statements in conversation only

  8. The best line of defense in a period of high and consistently evolving uncertainly proved to be a good offense (i.e. an aggressive roadshow strategy and meeting schedule)

That year, OCI’s share price outperformed almost all blue-chip companies on the EGX30 declining 30% versus almost 50% for the EGX30. Moreover, my crisis management strategy was acknowledged by the Middle East Investor Relations Society (MEIRS). As voted by the global buy-side and sell-side community, I won the MEIRS “Best Investor Relations in Egypt” award that year. I will no doubt face other crises during my IR career, they might not carry the same severity and intensity of the Egyptian Revolution in 2011 (or maybe they will!) but I believe the aforementioned takeaways are valuable in a multitude of crisis contexts; remember candidacy first, always.

Are investors ready for a Digital Reporting Future?

This is a guest blog post Thomas Toomse-Smith from the Financial Reporting Council. The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment.

The internet and technology has revolutionised many aspects of communications; however, communications between companies and investors does not appear to have taken full advantage of this revolution.

In order to understand why this might be, and how reporting might evolve in the future the UK Financial Reporting Council’s Financial Reporting Lab (Lab) launched a project to look at digital reporting by companies. The Lab has issued its first report from this project. The report called Digital Present is based on analysis conducted by the Lab from in depth interviews with companies and investors. The interviews were supplemented with the results of an online survey of retail investors.

The report provides practical guidance to companies and highlights some areas where improvements could be made to what currently exists.

The importance of annual accounts

Annual reports remain of paramount importance to investors. However, investors prefer PDF for digital annual reports. They consider PDF not as a substitute for a hard copy, but as a progression from it. PDF provides the best mix of attributes of paper and digital annual report, but companies still could improve the PDF by thinking more about how to deliver the best experience with it on-screen.

Making sense of multi-channel

Alongside the annual report, companies use a range of other channels to communicate information Investors need to consume information on multiple companies in an efficient manner. However, company-produced tools, by their very nature, focus only on the individual company, and the multitude of channels leads to a significant proportion of them too failing to gain traction with investors.

Investors have specific feedback for companies on the most significant channels and tools:

  • Delivery of annual results presentations — Investors want multiple channels to be available (e.g. phone and webcast) preferably with supporting slides. Transcripts of the entire event, including all Q&As, is also deemed important.

  • Social media — Investors do not currently view social media as a useful channel for company produced, investor-focused information. It is seen as repetitive of other channels.

  • Investor relations videos — Many Investors are cynical about the use of video by companies. They consider them to be promotional in nature, and unfocused in aiming at many audiences. Those Investors that value them concentrate on nonverbal information such as body language.

  • Investor relations apps — Apps are not popular with investors. Many Investors find the need to have an IR app for each company prohibitive; they are concerned that this uses up space and adds clutter to their devices, especially when following multiple companies.

Investors who participated in this project suggest that companies:

  • Reduce duplication and focus development towards tools and channels which provide new or additional information.

  • Acknowledge that investors follow more than one company by making tools and channels more consistent in scope and operation with other companies, making them easy to access and locate.

  • Make the purpose of each channel or tool clear to investors, and clarify its contents.

Investors have shown they are open to innovation when it meets their needs to access information relevant to their analysis, across companies and time. To enhance current digital reporting methods and innovate further, it will be important for companies to build on the attributes of current reporting that investors identify as being most helpful.

The Lab will build on the findings from this stage of the project to inform remaining phases. In the second phase, ‘Digital Future’ the Lab will work with companies and investors to develop ideas of how companies could use digital reporting in future to improve their communication with the capital markets. Do you have views on this area? The Lab would be interested in hearing from ClosIR users. The Lab has released a survey alongside the Digital Present report seeking views from those involved in the production and use of corporate reporting. The survey will be open until the end of June and can be accessed here.

You can read the full Lab report here.

BNY Mellon: Insights into North American Investors’ Views of Corporate Access

BNY Mellon recently interviewed 40 institutional investors to gauge opinions on non-deal roadshows by foreign issuers. The profiles of investors, their assets under management, styles and location varied. Findings make an interesting reading, especially in the light of current wave of regulatory spotlight surrounding Corporate Access in the UK.

Trends in North American Investor landscape:

* There are $13.3 trillion in active equity assets under management in North America (approximately 60% of the total active equity assets managed globally), compared to $6.4 trillion in 2008.

* Over 3000 active asset management firms invest internationally in North America, a 75% increase since 2005.

* Top 5 investment centres for international investors are New York, Boston, San Francisco, Los Angeles, Toronto.

Survey findings of the survey (from report’s executive summary)

* 43% of investors rate their current level of corporate access to non-North American companies as ‘Average’ or ‘Poor’, driven mostly by dissatisfaction from investors located in secondary investment centres.

* Regardless of investors’ overall satisfaction with their current direct access, over three-quarters of study respondents state that they face limitations in obtaining access to non-North American companies. This is most pronounced with investors from secondary investment cities, where 87% claim to face some limitations in gaining access to non-North American companies versus only 69% in primary centres.

– 60% of respondents assert that lack of corporate access eliminates a non-North American company from their investment universe.

– Over a quarter of investors have decreased the number of investor meetings
facilitated by the brokerage community — with the mean percentage of meetings
facilitated by brokers at 68%.

– Before initiating a position in a non-North American company, 72% of investors
require at least one meeting with senior management in order to establish confidence in the team and gain a detailed understanding of the company story and strategy.

– A majority of study respondents agree that operational heads of non-North American companies should be more visible to investors, because their technical knowledge and unique perspectives provide additional invaluable insight to the investment community.

The growing equity assets under management of investors with global mandates will continue to present opportunities for IR teams around the world. However, it will be increasingly difficult for IR teams to facilitate face to face meetings with growing amount of investors, especially in tier 2 and tier 3 investment centres. We believe effective use to technology in investor engagement can play a large part in bridging this gap in the future.

Download full report