Last week Helena Morrissey head of personal investing at Legal and General – which manages a staggering $1.2 trillion in funds – announced the firm was prepared to pull investment from companies that won’t act on climate change. They are the latest big money manager to flex its substantial financial clout on sustainable issues – following the precedent set by Blackrock’s Larry Fink. But why now?
Over the last few years there has been mounting interest in sustainable business, and a growing focus on corporate issues relating to ethics, society and governance (ESG) – especially when it comes to aspects such as credit, sustainable investing and shareholder communications on environmental issues.
But beyond reporting on a company’s carbon footprint, recent controversies are bringing the topic of ESG to even wider attention – especially when it comes to governance. More and more corporate leaders are being held to account over policies and action around gender diversity, executive pay and data privacy. For example, Facebook was recently downgraded on ESG scores by specialist ratings agencies Sustainalytics and Vigeo Eiris after news of the Cambridge Analytica scandal broke.
As a result, the term ESG is quickly expanding to encompass every aspect of the day-to-day running and management of a business or corporate entity. And for some firms it is becoming so ingrained in the business strategies that it is helping to define and shape their purpose, vision and overall ‘raison d’être’. We’re now seeing a growing number of governments, institutional investors, and corporations acknowledging the financial as well as physical threats posed by environment and social issues, such as the impact of climate change and a reliance on an ever depleting fossil fuel-based economy.
The facts clearly speak for themselves:
- Last year, 85% of S&P 500 Companies published a Sustainability Report, and a recent dive into recent earnings transcripts by Goldman Sachs revealed nearly half of all S&P 500 companies referenced ESG topics on their Q4 2017 earnings calls.
- About $22.9 trillion of investments under management globally are now oriented broadly toward ESG – about one-fifth of investments under professional management in the US.
- A study of institutional investors by ShareAction revealed 95% of those who responded plan to engage with the companies in which they invest about ESG issues
“The acceleration we’re seeing should help to make ESG more relevant to shareholders as companies articulate the ties to operational and financial performance”– Goldman Sachs
Millennials and ESG
The attention being given to ESG is also a reactionary measure to a more socially conscious and environmentally aware younger generation, who are typically more selective about the services they use, products they buy and even companies they work for. This is evidenced by a global survey conducted by the research firm Nielsen that showed that almost three-quarters of millennials are willing to pay more for sustainable products and services. And in fact millennials are twice as likely as other generations to invest in companies and funds that target specific social/environmental outcomes
Is ESG and shareholder value mutually exclusive?
For corporates, the focus of ESG efforts must be how they can make a genuine environmental and societal impact, while still protecting the bottom line, driving growth and returning value to stakeholders.
Beyond the socially conscious CEO ‘simply doing the right thing’ the numbers stack up to make to make a compelling case for focusing on the long term. A study by strategy consultants McKinsey showed that in the fourteen years from 2001–2014, companies focused on the long term had a higher amount of market capitalization growth and outperformed their competitor set by 47% on revenue growth and by over a third on earnings growth.
While, in general, firms that focus on sustainability and demonstrate its role in the organisation benefit from a lower cost of capital and higher credit ratings. And for those that put governance into action with a diverse make up of their boards and management teams typically are more risk-averse and experience less share price volatility.
How can firms effectively communicate on ESG issues?
The first thing to consider the wide universe of stakeholders who these issues matter to; whether it be employees, customers, regulatory bodies, policymakers, shareholders, institutional investors or non-exec board members. All of these parties share a vested interest in a company’s success, but equally have very different expectations about how and why they receive communications. Some corporates are taking the positive step of publishing a separate CSR report, alongside their annual reporting requirements or section on their website. This is a start, but proving sustainable business practices goes far beyond this, and must be an authentic principle instilled in every facet of a business.
To stand out from the crowd, corporates should spend time re-evaluating how their ESG commitments are shared internally, described in marketing materials, portrayed in branding, reflected corporate communications and communicated to investors – making sure this is aligned and digestible for the respective audience. For employees – and other internal stakeholders – especially, it’s crucial that business leaders invest in genuine engagement programmes. All of these areas can combine effectively and fluently to help build investor confidence, shape reputations, build brands and display real purpose to the world. But above all commitments need to be followed be action. And the CEO must become an activist leader and agent of change.
The discussion around ESG is an ever evolving issue, but with the biggest beasts in the financial jungle marking lines in the sand, corporates around the world must ensure they are not left on the side-lines – or worse singled out, and named and shamed.
Ludo Baynham-Herd, Corporate & Financial Communications
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November 20, 2023
November 15, 2023