ESG is rapidly becoming a mainstream consideration for any company that requires capital, regardless of sector, size, length of operation, listed or not.
I’ve seen many significant developments during my 18 years advising some of the world’s leading companies on sustainability, but one of the most striking recently has been the ESG explosion. While the overall goal of using investment to hold businesses to account has the potential to be incredibly powerful, for many companies it’s currently both overwhelming and confusing.
ESG – the investor-led practice of ‘considering organisations environmental, social and governance performance alongside financial factors within the investment decision-making process’ – was introduced 15 years ago, but the last few years has seen a huge surge in interest and attention.
Whilst a small minority may still believe ESG is a fad, the investment figures tell a clear story with around 60% of assets managed for EU investors in 2018 incorporating sustainable investment strategies.
ESG is rapidly becoming a mainstream consideration for any company that requires capital, regardless of sector, size, length of operation, listed or not. But as with many changes that happen at speed, there is currently a lack of standardisation and common understanding. Companies are trying to respond to a process defined by the investors, but without a full understanding of what information is required and why. This has led to pressure to report but also a preoccupation with quantity rather than quality of data. Clarity and refinement will hopefully come, but as you consider where to start, or next steps on your ESG journey, you should consider the following:
Is the importance of ESG to your business proportional to its importance to your investors? By understanding what’s important to them, you can start to prioritise what information you need and how you communicate.
Communicating with your investors is important. Rather than assuming you have the right information, or responding to every seemingly irrelevant request, or taking a scatter gun approach, take the time to develop relationships with key investors. Being proactive in your relationships and communication takes the guess work out of ESG and taking control of the conversation will help everyone.
Don’t assume a lack of questions mean a lack of interest. Through a process of passive screening, investors are increasingly drawing their own conclusions from ESG ratings or publicly available information – namely websites and annual reports – without any consultation with the business. Therefore, an investment decision can be made without a single question being asked. So ‘head in the sand’ really isn’t an option.
More isn’t always better. Recent research found a third of companies thought their sustainability reporting would meet ESG requirements, but only 7% of investors agreed – so you need to ensure you are providing the right kind of information. Reporting on relevant (material) issues is important but also consider what the London Stock Exchange term as ‘information characteristics’ – the type of information that investors want to see, for example comparability and consistency, accuracy and balance.
ESG should be relevant to your whole business. Bringing together a number of different agendas, vocabularies and approaches (sustainability, business strategy, and investor relations) can lead to confusion and miscommunication, however ultimately ESG is about understanding the long-term value of the business. Some areas of the business bring the content, some bring the process, but common ground can be found if you bring the right people together to find it.
ESG shouldn’t stifle innovation or the potential of your wider sustainability activity. Instead ESG should be an aspect of your responsible business journey which adds rigour and relevance. There’s undoubtedly a lot to think about, but those companies getting it right are performing better and attracting and retaining long term investors, so ultimately the effort is worth it.
Victoria Hartley, Head of Sustainability at Thoburns, is a sustainability and corporate responsibility specialist who has advised a wide range of companies including Vodafone, BUPA, BMW, Diageo and Harlequin F.C.