Are Companies in Denial About the Growing Importance of ESG?
How to Demonstrate the Value of Sustainable Business to Investors
The growing interest in environmental, social and governance (ESG) factors amongst investors continues to gain momentum – a shift recently brought to life by Larry Fink, CEO of Blackrock, who called on S&P 500 CEOs to show how ESG factors contribute to long-term commercial success.
Investors are increasingly looking for high quality information on sustainability performance, realising that companies which manage ESG issues well do not only bring a reduced risk profile, but also tend to outperform their peers. Recent data confirms this trend with 75% of the investment community seeing improved revenue performance from sustainability as a strong reason to invest (BCG & MIT Sloan).
Despite the sustainability and investor agendas becoming more connected than ever before, there are still gaps in knowledge, communications and engagement between Investor Relations (IR) and Corporate Responsibility (CR)/ Sustainability teams. These gaps are preventing companies and investors from taking advantage of the opportunity for long-term value creation.
New research developed by Corporate Citizenship, in association with S&P Dow Jones Indices, reveals that long-term thinking is not the norm among many businesses:
- 26% of all companies assessed had no relevant mentions of long term value
- ESG communication remains challenging - for the 74% of companies that did mention long-term value, many struggle to articulate the importance of ESG factors for long-term business success
- Key performance indicators (KPIs) are often missing, and when companies mention long term value creation they rarely link it to KPIs
Why are companies missing out on this important opportunity? Corporate Citizenship’s research points out two areas of disconnect which need to be addressed:
- The internal disconnect between IR and CR teams means many companies find it difficult to define, measure and communicate ESG performance. This gap is not accidental, but rather a result of differences in strategy and priorities between the teams.
- The external disconnect between companies and shareholders. Due to lack of alignment on the material ESG factors between both parties’ there is very limited disclosure of these issues in traditional corporate communications to investors.
These misalignments are hindering both investor engagement with long-term value creation and the integration of sustainability issues into the corporate agenda. Businesses are missing out on attracting a growing number of investors that incorporate ESG information into their financial analysis.
So how can companies bridge this gap? The answer is through a closer alignment between CR and IR. To help companies up their game, Corporate Citizenship’s report identifies a framework for improvement, which has been designed to help companies overcome these two disconnects through a series of practical actions:
| STAGE 1 | ENABLER: | STAGE 2 | ENABLER: | STAGE 3 |
| SILOED | COLLABORATION | SIDE BY SIDE | CONTENT | SYSTEMIC |
| Little interaction between CR and IR teams: it is primarily to respond to ad-hoc investor queries on ESG factors. IR and CR are siloed due to an absence of shared objectives and a clear mandate from the CEO | CR and IR teams begin to speak the same language and jointly develop dedicated material on ESG risks and opportunities. | Regular interactions between CR and IR teams take place to proactively engage a selected group of investors on ESG factors. However, these factors are still considered as separate from business strategy and are not discussed with mainstream investors. | CR and IR teams begin to define a sub-set of financially material ESG issues and build a business case for improving ESG performance. | CR and IR teams proactively engage investors on the company's long term value creation strategy. The strategy is integrated and articulates the context, i.e. the key macro-economic drivers for the business. |
“In order to maximise long-term value creation, more businesses must communicate effectively on their vital social, environmental and governance issues. They must convince investors that, far from being a niche interest, these topics shape long-term commercial success.” said Peter Truesdale OBE, Director at Corporate Citizenship.
The full framework and other recommendations can be found in the report ‘Getting on the Right Track: How to Demonstrate the Value of Sustainable Business to Investors’. Click here to download.
The report forms part of the launch of The Long Term Value Project, a new initiative by Corporate Citizenship. We are calling on interested parties to work together to help us identify better ways for companies, and sustainability professionals within them, to find common ground with their investors.
