A more rigorous approach to environmental, social and governance (ESG) issues is a hot-button topic for Boards of Directors, CEO’s and other senior leaders of publicly traded companies.
The topic is highly relevant because of the increasing weight institutional investors are giving to ESG issues and related metrics when making investment decisions. How a company addresses ESG is important to fiduciaries and shareholders who want their investments to reflect their values and who are taking a disciplined approach to ESG investing.
The complexity of proactively integrating ESG into a company’s strategy for long-term growth, its ongoing operations, quarterly financial performance, and risk management considerations can be daunting. The results of committing to strong ESG polices, on the other hand, can be extremely beneficial.
Because of these factors, a focused, deliberate and intentional approach to ESG combined with a robust strategic communications and investor relations strategy to leverage the company’s ESG efforts often is merited.
Why ESG Matters
ESG investing is becoming mainstream.
Once relegated to narrowly defined funds within portfolios, institutional investors are now including a company’s approach to environmental, social and corporate governance in their broader analysis and decision-making processes.
A company’s approach to ESG not only can impact investment strategies that meet conventional risk/return hurdles, but increasingly include environmental, social and corporate governance disciplines that are intentional and measurable.
Companies should assume that their institutional investors have easy and ready access to ratings services and other resources that already measure their ESG practices. Whether a company is approaching ESG management proactively or not, their profile already exists and investors on both the debt and equity side are using the information to inform their decisions.
Motivation to Excel at ESG
There’s plenty of motivation to excel at ESG management. Studies abound – about 2,000 to date from organizations such as Deutsche Bank Group, MIT and Breckenridge Capital, and the Journal of Financial Economics – correlating positive financial performance with a company’s commitment to make environmental sustainability, diversity and inclusion and sound corporate governance leading priorities. Sound ESG strategies start at the board level and permeate throughout the organization.
A recent Boston Consulting Group survey found that companies with strong ESG policies had valuation multiples 3 to 19 percent higher, and margins that were 12 percent higher, than median performers. The substantial economic benefits resulting from a proactive approach to ESG management have become increasingly obvious.
The studies show that companies with strong ESG records tend to have a more stable and loyal investor base, lower cost of capital and better access to financing.
Additionally, a clearly defined and communicated ESG strategy is important for recruiting and retaining talent because the issues addressed often matter significantly to employees throughout the organization, from the hourly production employees, to the managers, to the executive leadership team.
Getting ESG on Track
Getting ESG on track may be a matter of consolidating and interpreting data companies already are gathering.
Corporate environment, health and safety teams, facilities managers, legal departments, Human Resources, internal audit and risk managers, CFO’s, controllers and others likely are proactively addressing ESG issues. The next step would be to consolidate all that information to craft a thoughtful ESG strategy, and subsequent messaging, that’s cohesive, holistic and comprehensive.
Here are some suggested steps on how companies can enhance their ESG profile:
- Complete an inventory and analysis of environmentally sustainable policies, employee development, diversity and inclusion practices and sound corporate governance protocols to determine strengths and weaknesses. Identify potential gaps and deficiencies.
- Develop an enterprise-wide plan with the goal of integrating the company’s approach to ESG issues as a key component of its strategic planning, operations and risk management processes.
- Craft messages and strategies to raise the company’s ESG profile with all institutional investors, not just those focused on ESG as an investment hurdle.
- Make ESG a board-level priority to provide needed oversight and buy-in.
- Formalize external messaging to key audiences, including production of an online annual ESG report to shareholders and other key stakeholders.
- Design internal messaging to engage employees and activate them as ambassadors for the company’s commitment to corporate responsibility. Enhanced recruiting capabilities are a likely result.
- Proactively reach out to and educate various ESG ratings services e.g. ISS, MSCI, Sustainalytics, RepRisk that institutional investors routinely rely upon as resources. Control the message and the company’s public-facing image.
Making ESG a priority reaps long-term benefits and, increasingly, is an important step in creating value for shareholders.