Investor Relations and Esg Reporting in a Regulatory Perspective: A Practical Guide for Financial Market Participants

ISBN-13: 9783031057991 / Angielski / Twarda / 2022 / 346 str.

Laurits Louis Kjaergaard

Spis treści

Overview of main sections

1.    The financial markets – an overview

2.    The participants of the financial markets

3.    Major legislation themes related to the European financial markets

4.    Optimizing the investor relations department, and a fair valuation of the company through good investor relations

5.    Investor relations in special situations

6.    ESG-reporting for listed companies

7.    Future trends in financial and non-financial reporting

Section 1: The financial markets – an overview [including the benefits of a stock market listing, how stock prices are formed, and understanding the valuation methodology of investors, equity analysts, and corporate finance professionals]

Chapter 1.1: The benefits and drawbacks of a stock market listing

·       Why is a company listed on the stock exchange? [a summary of the main motivations, including access to capital, liquidity, ownership transition, credibility, marketing, transparency, and employee engagement]

·       The terminology of the financial markets [with an emphasis of the importance of distinguishing the different participants and stakeholders of the financial markets, including their motivation, and why tailoring communication improves the company’s standing with the stock market]

Chapter 1.2: The formation of stock prices

·       What determines the price of a stock? [a framework on the social interactions within the financial markets between different participants, and how information volatility forms stock prices - based on the works of e.g. Robert J. Schiller (1984/2003) and Ho & Lyke (2017)]

·       The social interaction within the financial markets [the interaction between buyers and sellers, and the deviation between market price volatility and intrinsic value]

·       Information is king [defining types of information (asymmetric/symmetric, disclosed/undisclosed, grey areas) and types of markets (perfect/imperfect/hybrid)

Chapter 1.3: Ethics on the financial markets: Why a solid IR framework is key

·       Important considerations on ethics in the financial markets [Outlining insider information, including DOs & DONTs]

·       Understanding the difference between forward-looking views and investor communication with material sensitive information

Chapter 1.4: Understanding valuation methodology  

·       Introduction to different valuation methods of investors, equity analysts, and corporate finance professionals [qualitative and quantitative methods, including their use, input and limitations]

·       The importance of the financial accounts [identification of the most relevant ‘lines’ of the profit & loss account, the balance sheet, and the cash flow statement)

·       Enterprise multiples [different earnings/sales/cash multiples, including in combination, with selected growth rates and earnings margins]

·       Discounted Cash Flows (DCF) [description of mythology, assumptions and inputs]

·       Others (e.g. M&A multiples, subscriptions)

Chapter 1.5: ESG and other non-valuation methods (inspiration from ‘Beating the Market with ESG, Silvalo, H. and Landau, T.)

·       Motivation and methods for sustainable investing

·       Active ownership

·       Qualitative and quantitative methods

·       The investment trends of ESG (Environmental, Social and Governance) in the investment community 

Chapter 1.6: Valuation methodology from the perspective of different investors

·       Investors and their valuation preferences [integrating the valuation methods with the social context of the financial markets, before exploring the relevant stakeholders in detail]

 

Summary of advice and best practices [brief and operational]

 

Section 2: The participants of the financial markets [including understanding their respective interests, and the collaboration between them]

Abstract [of section content]

Chapter 2.1: Understanding the financial markets’ stakeholders and their motivation

·       The dynamics between the various stakeholders of the financial markets [incl. an illustrative diagram connecting all stakeholders]

Chapter 2.2: The buy-side - from institutional to retail investors

·       Investors (the ‘buy-side’) [including an illustrative diagram connecting risk profile, investment tenure and return expectations – and typical shareholder composition of various investor types in listed companies]

Chapter 2.3: Understanding the role of institutional investors

·       Portfolio managers [tier 1 and 2, who are they, including e.g. the internal process with institutional investors which leads to a decision to invest in a certain company, including investment focus, investment themes, valuation, and selected 'political' considerations]

·       Buy-side analyst [identifying thematic investments themes (asset classes and equity classes) over the investment cycle]

·       Other investor groups, including private equity and proprietary trading

Chapter 2.4: How to communicate with retail investors

·       Traditional retail investors

·       High net-worth individuals

·       Exchange traded funds (ETFs) (passive investors) [types of fund specifications, incl. traditional such as index, size, region, industry, factors to new such as ESG-compositions, investment themes and SRI)]

Chapter 2.5: The sell-side - brokers, corporate access, equity analysts, and corporate finance [including an illustrative diagram of the collaboration framework]

·       Sell-side analysts [including an illustrative diagram of sell-side analysts’ role among the financial markets’ participants, types of equity research (comprehensive research reports, analyst notes and chat commentary and ESG reporting), financial modelling and maintenance, external data]

·       Sales and trading [client relationship management (client onboarding and maintenance), as intermediate between institutional investors, trading and institutional investors, and research analysts - interpreting analyst reports, and qualitative analysis for example management composition and ESG-trends]

·       Corporate access [managing roadshows and ad hoc investor events]

·       Broker reviews and ratings [including what dictates the distribution of investors’ commission among brokers]

·       Credit/debt analysts [including brief explanation of the different focus of equity analysts and credit/debt analyst]

·       Corporate finance advisers [types of financial market-related corporate finance transactions, and the collaboration between the various financial market participants on the one side, and the corporate finance advisers on the other side of the ‘wall’]

Chapter 2.6: Considering the role of other non-financial market stakeholders

·       Other stakeholders in the financial markets [e.g. competitors, customers, external IR advisors (elaborated in chapter [5]), employees, media etc.]

·       How does regulatory and legislation influence the stock markets [bridging to the following chapter]

Summary of advice and best practices [brief and operational]

 

Section 3: Major legislation themes related to the European financial markets [including the wave of new regulations and laws which have flooded the on financial markets in recent years; their impact; as well as ESG and mitigation methods]

Abstract [of section content]

Chapter 3.1: How is regulation implemented on the European financial markets?

·       Introduction to, and a legislative overview of, the legal framework governing the EU financial markets [including an illustrative diagram and timeline of the comprehensive regulatory framework governing the participants of the financial markets]

·       Relevant EU legislation and its context [including how are EU laws encapsulated into EU jurisdictions (via. legislation and directives) and how does EU legislation generally tie in with the local legislation of the different EU jurisdictions. Inclusion of illustration of overall financial market legal framework in the EU and table related to local laws]

·       MiFID II (the Markets in Financial Instruments Directive) [including a summary of legal framework, and overview of implications]

·       MIFIR (Markets in Financial Instruments Regulation) [including a summary of legal framework, and overview of implications]

·       MAR (Market abuse regulation) [including a summary of legal framework, and overview of implications]

Chapter 3.2: Learning from the impact on financial markets of recent regulation

·       MiFID II’s motivation to outline stakeholders and increase transparency 

·       The more detailed regulatory impact on the financial markets [EU’s impact of MIFID II on SME (Small and Medium-sized Enterprise) and fixed income]

·       Research coverage [the separation of research and trading remuneration has lowered the flexibility of research, consolidating it towards larger companies]

·       Road shows and other event services [the increasing difficulty of broker facilitated events due to the required remuneration]

·       Liquidity [overall lower attention from brokers has resulted in reduced stock liquidity]

·       Chinese walls and organisational silos [increase of internal compliance, bureaucracy, and procedures to navigate ‘the regulatory framework’ in an optimal, efficient best-practice ethical manner]

Chapter 3.3: Best-practice mitigation methods to increase investor interest

·       Possibilities to mitigate the adverse impact of selected regulatory framework

·       Sponsored research [the difference vs. traditional research (e.g. no recommendation and public distribution); examples from the market; the buy-side’s perception]

·       Event relationships [e.g. paid roadshows; motivating the sell-side; the buy-side’s perception]

·       Digital IR [e.g. marketing through social media; addressing private investors and the retail market]

·       Selected proactive media relations [incl. the impact on retail investors]

Chapter 3.4: The new wave of regulatory framework [ESG may be a central topic]

·       MIFID II / EU Commission ‘Financing Sustainable Growth’

·       EU Classification system ‘Taxonomy’ and changes in international politics and legislation (Silvola, H. et al.)

·       What may the future bring on the regulatory side? [potential themes of MiFID III; optimising IR activities as introduction to new chapter]

 

Summary of advice and best practices [brief and operational]

 

Section 4: Optimizing the investor relations department, and a fair valuation of the company through good investor relations [including the purpose, role, toolbox and transformative role of IR]

Abstract [of section content]

Chapter 4.1: The purpose of IR

·       Strategic management

·       Two-way communication

·       The goal of achieving a fair value of the share price

Chapter 4.2: Deciding on IR ambitions and its success factors

·       The basics of IR ambitions

·       Best practice

·       IR practicalities (central IR tasks)

·       What characterizes good IR?

Chapter 4.3: IR within the organisation

·       Organizing IR

·       The operational responsibility of IR

·       Management’s role

·       Board of Directors’ role

·       Collaboration with communication and ESG leads

·       Internal IR reporting

·       Internal collaboration

·       Competitor intelligence

Chapter 4.4: IR’s responsibilities of implementing policies and planning ahead

·       Quarterly reporting cycle [including silent periods, management priorities, pre-close calls]

·       Internal process and planning (the IR-wheel)

·       IR in a corporate governance context

·       IR policy

·       IR strategy

·       IR plan

Chapter 4.5: Tools to engage a company’s stakeholders

·       Website

·       Investor presentation

·       Annual report

·       Quarterly reporting

·       Q&A

·       Investor targeting

·       Investor meetings, roadshow and other IR activities

o    Webcasts

o    Psychical / video meetings

o    Group meetings

o    One-on-one meetings

o    Capital markets days

·       Financial targets [incl. pros and cons]

·       Perception studies [an under-rated IR tool]

Chapter 4.6: Managing investor expectations

·       Meetings with investors and analysts

o    Institutional investors [and buyside analysts]

o    Private investors (distinguishing between high-net worth and retail)

o    Equity analysts

o    Credit/debt analysts

·       Expectations management [without challenging existing legislation]

Chapter 4.7: Embracing the digital world of IR activities

·       The use of social media

·       Digital platforms facilitating contact between companies and investors

·       Potential pitfalls

·       Leveraging IR through the financial media

·       The IR function’s interaction with different stakeholders [external and internal]

·       Leveraging IR at the executive management and board of directors’ levels

 

Summary of advice and best practices [brief and operational]

 

Section 5: Investor relations in special situations [including contingencies, engagement, monitoring and Initial Public Offerings (IPOs)]

Abstract [of section content]

Chapter 5.1: IR preparation of difference types in contingencies

·       The importance of contingencies [including the role of IR]

·       IR’s role if a crisis emerges

·       Designing a comprehensive contingency

·       Balancing investor communication and transparency

·       The use of external advisers [e.g. IR and communications advisers, investments banks, legal]

·       Takeover response manuals [i.e. detailed contingencies in a takeover situation to ease the pressure on the company, and to obtain the best offer price for the shareholders]

 

Chapter 5.2: Valuation in a take-over situation and strategic alternatives

·       Overview of thresholds

·       The approach of investments banks [the investment banks works with management to perform a thorough valuation review, focusing on share price performance, broker outlook, SOTP (Sum-Of-The-Parts) intrinsic value, and comparable company valuation analyses]

·       Assess strategic value to competitors [e.g. synergies]

·       Understand the company’s weaknesses

·       Assess possible attack themes and responses

·       Review strategic alternatives as routes to value [e.g. acquisitions, capital returns, licensing, other collaborations, etc.]

 

Chapter 5.3: Shareholder engagement and monitoring market activity

·       How to stay close to and communicate with shareholders

·       Review list of major shareholders in detail and know them [investor perception, satisfaction, trust]

·       Continue developing the company’s equity story and communicate it effectively to the investor community; make sure guidance is both robust and credible, and that shareholders have proper visibility with respect to the company’s value drivers

·       Track trading flows in order to decipher whether or not stake accumulation is taking place

·       Monitor trading activity relative to historical averages

·       The implications of voting rights and dual voting right structures

·       Maintain awareness of short positions and related derivatives trading as indicia of potential activist activity, or a potential acquirer building a major shareholding

 

Chapter 5.4: Developing a comprehensive take-over response manual

·       Develop a comprehensive take-over response manual that can be relied upon by the board of directors and executive management in the event of an unsolicited approach from a third party [i.e. a document that illustrate the steps each party needs to take in the event of an unsolicited approach]

·       Prepare detailed ‘leak protocol’ and ‘aide-mémoire’ to ensure formal framework in place

·       Rehearsing the board of directors, and management, on a ‘situation simulation’ [i.e. where a possible takeover scenario is conducted on a ‘war games’ basis]

·       White knight analysis [i.e. understanding who friend is, and who is foe]

·       Compile list of possible acquirors and analyse their financial capabilities and borrowing/financing potential

·       Create short-list of ‘white knights’ and what steps might be taken to cultivate them in advance of a potential third-party bid approach

 

Chapter 5.5: A checklist for prober IR strategy during an IPO

·       A company’s collaboration with investment banks, lawyers and other advisers

·       IR, financial PR and media relations in an IPO process [i.e. the IPO process from an IR perspective]

·       Creating a new IR function [summary considerations]

·       Guidelines and procedures for onboarding new equity analysts

·       Public-to-private transactions, including contested take-overs [the role of IR]

 

Summary of advice and best practices [brief and operational]

 

Section 6

ESG-reporting for listed companies [including integrating the growing strong focus and understanding of ESG within the relevant reporting structures among the stakeholders]

Abstract [of section content]

Chapter 6.1: A detailed insight to the importance of integrating ESG in the business and IR

·       The new world of business, and the financial markets, are dictated by ESG. ESG must be an integrated part of a company’s business strategy

·       The ESG stakeholders [illustration of a Stakeholder and ESG model by Kay I., et. al. (2020)] and how the IR and ESG departments can collaborate

·       Aligning the company’s internal actors (board of directors, management, and general senior staff) to embrace ESG

·       Why the importance of ESG has increased in the financial market [e.g. the fundamental, climate, business, political and emotional arguments to embrace ESG]

Chapter 6.2: The importance of good ESG-reporting [vis-à-vis the financial markets]

·       Investor attention: Better ESG performance relative to peers

·       Cost of capital: Companies with a focus on ESG provide more transparent financial information; may lower their cost of capital by attracting long-term institutional investors; and are superior in attracting equity analyst coverage

·       Raising capital - a long-standing focus on ESG has a positive impact on the ability to raise new capital, including the magnitude hereof

·       The stance of institutional investors

·       Pressure from stakeholders

·       Screening criteria’s and ESG investment strategies

·       The stance of equity analysts

·       Onwards – lack of good ESG will dry out companies’ access to new capital

Chapter 6.3: Setting the standards of ESG-reporting

·       ESG rating agencies [who are they and what do they do?]

·       What value do investors put into ESG rating agencies?

·       How do investors evaluate the ESG progress of companies?

·       The financial stakeholders’ demands to ESG-reporting, for both institutional investors, retail investors, equity analysts and other stakeholders

Chapter 6.4: ESG-reporting [how to approach and prepare it]

·       Where to start

·       Select the main audience

·       What do the financial stakeholders prioritise

·       Creating the right reporting framework

·       Select your focus areas [e.g. among UN’s 17 Sustainable Development Goals (SDG) to transform the world]

·       Develop relevant and realistic plans and reporting targets

·       Typical challenges [e.g. collecting the relevant data]

·       Integrating the financial and ESG-related/non-financial reporting

 

Summary of advice and best practices [brief and operational]

 

Section 7

Future trends in financial and non-financial reporting [summarizing a series of reporting trends related to financial and non-financial stakeholders]

Abstract [of section content]

Chapter 7.1: The next generation of EU budgets and policy

·       Outlining the inflow of capital into best-in-class companies, and the reporting challenges remaining

·       A monumental legislative and investment shift into best-in-class companies [outline the European Green deal (EGD), the NextGen EU Budgets and 2050 Co2 neutrality targets]

·       Motivation and challenges remaining for financial and non-financial reporting [EU evaluation study: Lack of comparability, reliability, and relevance – with strong support of simplification, stick audit requirements, digitalization and materiality assessment]

Chapter 7.2: Financial reporting

·       Relevant legislation in this context [international financial reporting standards (IFRS) and International accounting standards board (IASB)]

·       Forecasting [balancing transparent financial guidance with competition concerns]

·       Communicated non-recurring items [restructuring, write-offs, impairments, purchase price allocations (PPA), severance and variable compensation]

·       Short-term and long-term [liquidity status and risks]

·       Internal controls [physical inventory, cyberattacks, segregation of duties]

Chapter 7.3: Non-financial reporting

·       Relevant legislation in this context [The 2018 EU non-financial reporting directive (NFRD), the EU sustainability goals (SDG), the Paris agreement and sustainable goals, taxonomy eligibility and science-based targets, proposal of corporate sustainability reporting directive (CSRD)]

·       Defining impact, risk, and objectives among related disclosures:

o    Climate-related non-financial reporting [SDG performance (products), operational performance (climate and energy / environmental management / waste and recycling)]

o    Other non-financial reporting [operational performance (safety and social / corporate governance (including anti-corruption) / diversity and inclusion / wage gap]

·       Communicating a transparent supply network in accordance with taxonomy targets and objectives

·       Assuring forward-looking quality and relevant information [taking current and future challenges into account on a micro and macro level, using case examples, relative calculations and communicating ongoing progress/achievements]

Chapter 7.4: Global investment and financial reporting trends

·       Comparability, benchmarking and transparency

·       SFDR2 and technical screening of comparisons

·       Standardisation of data and rating disclose of companies on an EU level (a potential screening criterion for institutional investors)

 

Summary of trends [brief and operational]

 

*     *     *     *     *

O autorze

Poul Lykkesfeldt is managing partner, senior adviser and founder of Reliance A/S, a leading Danish financial PR and communications firm with an international client base. Poul has over 35 years of experience in the fields of investor relations, financial transactional PR, investor activism, corporate/ESG communication and media relations related to listed and private companies, and private equity firms. Poul has previously served as head of IR, and deputy head of corporate communications, of Novo Nordisk; as a top-rated senior equity analyst with ABN AMRO; and as an investment banker and corporate finance adviser in London (UBS) and Copenhagen (KPMG Corporate Finance). Today, Poul advises international and domestic clients within financial PR/IR in connection with transactions, annual reports and ESG reports, as well as crises communications and media relations/training. Finally, Poul is a trusted adviser for company boards and the C-suite. Poul holds a M.Sc. (Econ.) from the Copenhagen Business School, Denmark, and a PED from IMD, Switzerland.

Laurits Louis Kjaergaard is strategy and business development manager at I&T, one of Denmark’s most prominent independent asset managers. Having lived in six countries, Laurits has held finance and consulting positions at leading buy-side, sell-side, and regulatory advisory firms, including ABG Sundal Collier, PwC, Interogo (Inter IKEA Holding) and Danske Bank. During his career, Laurits has both worked with and prepared traditional company equity research, as well as ESG research reports, on listed companies in his earlier capacity as an equity research analyst. Prior to this, he advised companies on the implementation of selected EU legislation. Laurits holds a M.Sc. (Finance) from the University of Liechtenstein, a B.Sc. Business and Sociology from the Copenhagen Business School, Denmark, and a finance certification from the London School of Economics.

Blurb

Investor Relations and ESG Reporting in a Regulatory Perspective is a comprehensive and detailed practical guide for financial market participants, focusing on the stock market, written for practitioners by practitioners. The main themes of the book include the challenging integration of investor relations (IR) and the non-financial reporting of environmental, social and governance (ESG). Further, the book provides a comprehensive overview of the complex regulatory framework of the European Union (EU) related to the financial markets, including the expected global trends in this area.

Extracted Praise from Testimonials — Full Endorsements Featured in Frontmatter

“..… This book provides an excellent and competent overview of the challenges that senior management and boards are facing today relating to new ESG reporting requirements ….. I offer this book my highest recommendations as relevant and newsworthy reading regarding companies’ and institutions’ continued journey in pursuing the ESG agenda and meeting the increasing demands of investors regarding high-quality ESG reporting.”

—Lise Kingo, Independent Board Director in Sanofi SA, Covestro AG and Aker Horizons ASA; Former CEO and Executive Director of the United Nations Global Compact; and prior to this, Executive Vice President and member of Novo Nordisk’s Executive Management

“I doubt that a more insightful and practically-oriented handbook has been written, or may be written over the next decade, on the subject of investor relations, not only providing an essential overview but also illustrating how IR is executed in a best practice manner. This book integrates IR and ESG reporting, which is essential for global investors today ..…”

—Carsten Borring, Associated Vice President Global Listing, Nasdaq; Member of The Federation of European Securities Exchanges (FESE) Listing Expert Group; Former board member of the Danish Centre for ESG Research and the Danish Government’s Panel for Entrepreneurs

“ ..… I take pleasure recommending this book to any stakeholder with an interest in the EU regulatory framework related to the financial and capital markets, including to companies and investors outside the EU who wish a competent EU regulatory overview.”

— David Moalem, Partner, Ph.D., Bech-Bruun law firm, Capital Markets & Financial Institutions Team; Former Partner and National Head of Legal Services at Deloitte

“The authors provide unique and incredibly insightful practical information and recommendations for IROs and Executive Management teams in listed companies regarding organising and executing best practice IR. The combination of simple and straightforward information, and its many layers of solid theoretical understanding and real-life examples, makes this book invaluable for both the experienced and the newly started IRO …… This book is, in every manner, highly recommended.”

—Michael Bjergby, Senior Vice President, Head of Group Finance, ISS A/S; Former Head of Investor Relations at ISS, Pandora and GN Group