This week, Blackrock sent out a warning shot to CEOs around the globe who have been slow to act on sustainability issues, announcing it will double the number of sustainability-focused exchange traded (ETF) funds it offers to 150 and has vowed to cut companies that derive a quarter or more of their revenues from thermal coal from its portfolios.
While Larry Fink’s annual letter to CEOs has become a staple in the pre-Davos calendar, this year it could well present a seismic shift in how corporates around the globe respond to ESG issues and the climate emergency. Managing $6.9trn of investor money around the globe, Blackrock is the biggest beast in the asset management jungle, and it is now going to throw its weight around and use its significant global shareholdings to push companies to address the climate and sustainability issues.
A new breed of activist investor
For years, corporate boards and management have faced the daunting challenge of responding to and fending off threats from shareholder activists. But now we’re seeing a new kind of activism on environment, social and governance concerns – and its not just the oil majors who need to sit up and take notice.
Last this year activist investor group Arjuna Capital announced it was targeting a dozen financial and technology firms, including Facebook, Alphabet and Bank of America, with a shareholder proposal to act on the extent of their gender pay gaps and $5 billion hedge fund Jana Impact Capital joined forces with the California State Teachers’ Retirement System (CalSTRS), to campaign on concerns on the impact of smartphones on childhood development and calling on Apple to implement new parental control measures on their devices.
As well as a moral responsibility, the financials make a very compelling case with evidence to suggest that socially responsible investing delivers higher returns and companies with better governance principles achieve a higher share price and a better credit rating. Vanguard recently noted in its stewardship report, “A consensus is growing that certain ESG matters can significantly affect a public company’s long-term financial value.” While last month, Mark Carney, the outgoing head of the Bank of England, warned of the commercial imperative with pension funds risk seeing their assets depreciate unless companies act on the climate crisis.
With this in mind, we are likely to see more and more investment companies follow Blackrock’s lead, and exert significant pressure on boardrooms around the globe.
Leading with impact
Alongside growing pressure from the financial community, the rise of movements such as Extinction Rebellion, widespread climate protests, and growing public concern about single-use plastics and irresponsible energy has meant environmental action is no longer table stakes – it is business critical.
Among consumers, genuine action is now expected. FleishmanHillard’s Authenticity Gap report, which studied 20 industries, 160 companies and 1,140 engaged UK consumers*, revealed three in five people (59%) now expect companies to stand up on climate and environmental issues, up from 39% in 2018,
Audiences are simply demanding more commitment from companies as they see first-hand the effect of environmental decline and global warming, and they expect genuine action. Nearly half of people (47%) responding to FleishmanHillard’s study said they want to hear more on how companies are creating solutions to reduce its climate impact
But how should corporates act and communicate effectively on ESG issues?
The first thing to consider the wide universe of stakeholders who these issues matter to; whether it be customers, employees, regulatory bodies, policymakers, shareholders, institutional investors or non-exec board members. All these parties share a vested interest, but equally have very different expectations about how, where and why they receive communications on progress.
Some corporates are taking the positive step of publishing a separate ESG or Sustainability report, alongside their annual reporting requirements. 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 corporation.
Three key steps every company can take:
- Improve disclosure and transparency around environmental and climate issues
- Establish a process for dealing with these issues, and create a genuine platform for driving change
- Provide data-driven proof of ESG commitments creating impact, and communicate regularly
To stand out from the crowd, corporates should spend time re-evaluating how their ESG commitments are shared internally, communicated externally, portrayed in branding, reflected corporate communications and updated to investors – making sure this is aligned and digestible for the respective audience. But above all commitments need to be followed be action, and the CEO must become an activist leader and agent of change.
In practice, this means companies must be far more robust in their ESG materiality assessments and use it to inform how they measure impact, how they implement new programmes or policies and how they communicate success – creating a working framework to engage with all stakeholders and investor audiences on an ongoing basis.
The discussion around ESG is an ever-evolving issue, but with some clear lines drawn in the sand, corporates around the world must ensure they are not left on the side-lines – or worse singled out, and publicly named and shamed.
Ludo Baynham-Herd, Corporate and Financial Services
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November 20, 2023
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