Once a minor consideration for many companies and worthy of only a couple of bullet points at the back of a corporate presentation, ESG is increasingly influencing investor behaviours and boardroom conversations.
This is a theme which is expected to continue as business leaders reflect on, and reassess, the impact of their operations and the suitability and strength of their ESG policies in a post-COVID world.
The direction of travel is clear. Not only do robust ESG policies safeguard the long-term sustainability of a company’s operations and provide a social licence to operate, but it can also have a hugely positive impact on the performance of that business and the stakeholder value it creates.
So, when the stakes are this high, how do some companies get it so wrong?
Exhibit A: Rio Tinto. A company of this size and status in the mining industry would surely have the most rigorous and watertight ESG policies, right?
The company is now trying hard to win back investors’ confidence after claiming that destruction of a 46,000 year old sacred heritage site in the Pilbara of Western Australia was a “misunderstanding”. The Church of England Pensions Board director of ethics and engagement Adam Matthews told Investors Chronicle in a statement Indigenous community rights were critical.
“There are serious and urgent questions to be answered,” he said. “It is right that investors are raising these questions with the company and also more widely and we will be engaging further on this with Rio Tinto.”
But glossing over ESG infringements, or selectively ignoring processes, is not a new phenomenon and cases of ‘greenwashing’ in particular have been around for decades. Since the 1980s, and Chevron’s “People Do” environmental sustainability campaign (which coincided with the much less publicised deliberate violation of US air and water pollution laws), many firms have cynically adopted an eco-friendly and highly managed green exterior whilst continually cutting corners or intentionally undermining ESG processes in the hope of better financial returns.
Over recent years, as ESG has moved from the fringe into the mainstream, investors are much better equipped to recognise green window-dressing from legitimate sustainability considerations and environmental safeguarding. Indeed, there are various ESG ratings agencies which look to distil a company’s ESG integrity and verify its sustainability credentials. However, investors have been warned to take such ratings with a healthy dose of scepticism due to the selection of different sets of categories, measurement divergence and weight divergence – meaning that ESG ratings can be misinterpreted or at worst, manipulated.
It is also true that many corporates fear falling, unintentionally, into the ‘greenwashing’ category. Some are trying to compete in an unwinnable balancing act – insufficient ESG reporting could be seen as lacking the necessary level of environmental stewardship and automatically switch investors off, too much and they could be branded as ‘greenwashers’.
Many institutional investors now insist on regular dialogue with the companies in which they invest to ensure that the highest standards of ESG processes are maintained (this is no doubt what Rio’s Jean-Sebastien Jacques is busy doing as we speak). But what can individual private investors do to push forward this important conversation? One option would be to develop a more standardised system of ESG reporting available to all investors – equipping shareholders to make informed decisions based on the criteria which is important to them.
But ultimately it will come down to individual companies to spearhead the ESG cause – and more importantly, to uphold the environmental considerations which so many investors now see as essential. It was recently reported that the number of sustainable fund launches in the UK jumped from 98 in 2009 to 396 in 2019 – a 304% increase within a decade. This surge clearly demonstrates the level of interest and commitment within the investment community to ESG compatible investment opportunities.
So for companies currently reviewing the impact of the global COVID pandemic on their businesses, or trying to plan how the long-term economic scarring that we may see in the years to come will affect their entire industry, please don’t underestimate the importance of the environmental, social and governance sphere. This is no longer just fluffy PR speak to mollify the hippies at the back of your AGM. And don’t think that short-term well publicised environmental PR tricks will work – investors will not have the wool pulled over their eyes. ESG will increasingly be a critical and independently measurable performance indicator and a crucial component of a company’s competence to create long-term stakeholder value.
If you would like to discuss your company’s corporate communications and how it may be viewed through an ESG lens, please contact me for a chat.