Wake Up Call for Corporate Leaders on ESG, Sustainability, and Engagement

Edelman’s 2019 “Trust Barometer” shows a strong swing toward ESG and sustainability from investors. We believe the first of their conclusions listed below is misleading. It cannot be emphasized too strongly that sustainability by its very definition is not a trade-off for returns; it is essential for returns, both present value and long-term, as the subsequent findings show.

We are going to keep saying this: ESG is simply an adjustment to risk assessment necessary because traditional financial measures and reporting requirements are outdated.

Investors agree that a multi-stakeholder commitment is essential. 84 percent of investor respondents agree that maximizing shareholder returns can no longer be the primary goal of the corporation, and that business leaders must commit to balancing the needs of shareholders with those of employees, local communities, customers, partners and suppliers.

Overemphasizing shareholder returns can lead to multi-stakeholder activism. 71 percent said that companies will make themselves responsible for employee or consumer activism if they overemphasize shareholder returns at the expense of other stakeholders. Three-quarters say that companies with employee activism are less attractive investments.

Investors are investing more in ESG-excelling companies. 61 percent have increased their investment allocation to companies that excel when it comes to ESG factors, and more than half of investors believe that ESG practices positively impact trust.

More than half of investment firms are hiring more staff for ESG. The growing primacy of non-financial priorities is having an impact on investment-industry hiring, with 56 percent of respondents saying their firms are adding staff to focus on ESG issues.

Cybersecurity, employee health and eco-efficiency are top priorities for investors. 99 percent of respondents expect the Board of Directors (of the companies in which they invest) to oversee at least one ESG topic. Data privacy and cybersecurity, employee health and safety, and eco-efficiency of the company’s operations are the top priorities among other ESG topics in respondents’ plans to engage with the Board in the next 6 months.

ESG has become a leading consideration in voting and engagement policies. 87 percent of respondents say their firms have changed their voting and/or engagement policies to be more attentive to ESG risks, and 86 percent would consider investing with a lower rate of return if it meant investing in a company that addresses sustainable or impact investing considerations.

Investors associate ESG with financial performance. 58 percent of investors recognize a correlation between a company’s operating performance and level of ESG disclosure, and more than half believe ESG initiatives favorably impact a company’s growth and the ability to manage risk.

C-suite compensation should be tied to ESG performance. 52 percent of investors say that linking executive compensation to progress in reaching ESG performance targets would improve their trust in a company.

In the face of activism, Board engagement is as important as management engagement. 86 percent of investors must trust a company’s Board of Directors before making or recommending an investment. The chief ways firms are taking an activist approach are by actively seeking an audience with the Board of Directors and more frequently asking to meet with company’s management.

Company and leadership social media content matters. 96 percent of investors use one or more social platforms on a weekly basis. When evaluating a current or prospective investment, 82 percent of investors consult the company’s social media channels and 79 percent of investors consult the social media channels of a company’s leaders.

via Wake Up Call for Corporate Leaders

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