IR Monitor – 20 March 2024

In this week’s newsletter:

In this week’s newsletter:

• Recession mentions at two-year low: the latest Earnings Insight report from FactSet notes that only 47 S&P 500 companies cited the term “recession” in their Q4 conf calls
• Time for American companies to book their trips to Europe. An insight of the latest fund intelligence from ISS is that European investors are increasingly investing abroad in search of equity returns and are leaving their home bias at home
• SEC rules set new baseline for corporate climate disclosures: Glass Lewis provides a brief overview of the new rules, highlights several areas of disclosure that could become more relevant and discusses the potential impact on companies and their shareholders
• S&N seeks pay premium for US executives over those in UK: Company chair Rupert Soames tells the FT that British pay packages are “not sustainable” for attracting top staff
• Jefferies on the state of ESG 
• And finally … Chief Executives say a lot of questionable things about short sellers

This week’s news

Recession mentions at two-year low

FactSet’s latest Earnings Insight report notes that only 47 S&P 500 companies cited the term “recession” during their Q4 conference calls, the lowest point since Q4 2021. This is also below the five-year average of 85, and the 10-year average of 61. In fact, since peaking in Q2 2022 recession mentions have declined for six straight quarters. The pullback fits with the firmer macro outlook that has been supporting a number of sectors and stocks for a few months now. This is also evidenced by a two-year high in CEO confidence which, according to the Conference Board, increased to 53 in Q1 2024 from 46 in Q4 2023 – the first time in two years that optimism has outweighed pessimism. Real GDP growth accelerated to +3.1% in 2023 compared with only +0.7% in 2022. GDP in Q4 2023 increased at a 3.2% seasonally adjusted annual rate (SAAR), much better than the 2.0% expected. For 2024, GDP growth consensus currently stands at +1.8%, up from +1.2% at the start of the year and just +0.6% last summer. 

Time for American companies to book their roadshows to Europe?

Over the past five years, interest rates and equity market revaluations have made investor confidence very volatile across European markets. Insights from ISS show European investors are increasingly investing outside of the Old Continent in search of equity returns, leaving their home bias at home. The only outlier in this context has been Switzerland, where domestic equity funds have continued to garner investor interest pre-and-post-pandemic. This trend was in fact not related to investment performance according to ISS, which found no direct relationship between domestic equity performance and domestic equity net flows. In contrast, equity funds outside of Europe have garnered net inflows, leading to a significant uptick in fund launch activity abroad. Fundamentally, data suggests that European investors are increasingly looking further away to boost investment returns.

SEC rules set new baseline for corporate climate disclosures

Glass Lewis reports on new SEC rules that require a significant enhancement to the baseline requirements for corporate climate disclosures.  The new rules will force many companies to increase the quality and quantity of their climate-related disclosures, and specifically outline what information companies must disclose to shareholders, including risks and costs incurred from severe weather events. For large companies, these rules will come into effect in 2025, while smaller companies will need to ensure compliance by 2027. Given the scope of the requirements, the SEC has faced significant backlash from multiple industries, including oil and gas where some companies are suing the Fifth Circuit Court of Appeals to stop the implementation of the rules. Should this fail, sustainability-focused investors are expected to greatly benefit from more standardised disclosures and ultimately from a better understanding of investee companies’ climate risk exposure. 

Smith & Nephew seeks pay premium for US executives – Financial Times

Harriet Agnew and Michael O’Dwyer from the Financial Times report that UK listed companies with high proportions of overseas revenues are seeking to change executive pay packages to attract and retain top staff. As part of its efforts to address high executive turnover, S&N published a package of changes to its remuneration policy including a new restricted share plan worth 125% of salary. If the proposal passes, chief executive Deepak Nath would be paid $11.8 million next year if all targets were reached. Using US executives as a benchmark, more UK-listed companies with proportionally smaller revenue generated in the UK are expected to try and convince shareholders to approve higher pay packages at their next AGM. This comes as the London Stock Exchange faces issues around its market share and overall competitiveness, after a series of companies re-listing in the US.

Jefferies on the state of ESG

Both the Council of Institutional Investors’ (CII’s) Spring 2024 conference and the International Corporate Governance Network (ICGN) meeting took place last week in Washington D.C. Jefferies have highlighted the main ESG themes covered. The Inflation Reduction Act has accelerated the flow of capital into decarbonization efforts and solutions, however human capital and in-house expertise are a growing necessity to support climate scenario analysis and better understand material risks and opportunities. The panel highlighted how ESG serves to better understand the latter two, but that it shouldn’t be the only framework to create sustainable, long-term value. The concept of “rational sustainability” was mentioned, implying that not only ESG but all material factors should be considered for long-term shareholder value. Stewardship and corporate engagements are seen as an integral part of the investment process, and a fundamental non-financial ESG factor that builds insights across the value chain. While the ICGN conference stressed the absence of a “right way” to do good stewardship, being able to communicate on the “what” and the “why” is critical, suggesting that investors can play a vital role in long-term value creation.

And finally … Chief Executives say a lot of questionable things about short sellers

 Alphaville reports on this week’s concerning developments in the US defense and aerospace sectors, where a whistleblower who had voiced safety concerns regarding Boeing was found dead under suspicious circumstances. Meanwhile the National Transportation Safety Board faced challenges in determining the cause of Boeing’s door plug incident during an Alaska Airlines flight. Amidst these events, the SXSW festival faced criticism due to the US Army’s heavy sponsorship, and Alex Karp, CEO of software company Palantir, stirred controversy when he expressed love for “burning the short sellers” and joy at their financial woes.

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