Environmental, Social and Governance (ESG) issues should be a priority for Boards and management. The advantages of proactively tackling ESG issues are significant. A robust ESG program can open up access to large pools of capital, build a stronger corporate brand and promote sustainable long-term growth benefitting companies and investors. There was a time when a public stance on ESG issues was a public relations tactic. That’s no longer the case.
ESG Investors are in for the long haul.
ESG investors are values-based investors who are more interested in what happens during the next decade than the next quarter. Investors incorporating ESG into their mandate often work alongside a company to strengthen it, as they are more interested in building long-term value over a multi-year period than in flipping the stock.
Key to competitive success.
In today’s rapidly changing business climate, attention to ESG issues is becoming critical to long-term competitive success. Major institutional investors are making it clear that they expect the companies they hold to take a proactive approach to ESG policies and messaging. During the 2017 proxy season, State Street Global Advisors (SSGA) put this ethos into action by voting against the re-election of directors at 400 companies that SSGA said failed to make any significant effort to appoint women to their all-male boards.
ESG values will help you attract and retain the best talent.
Millennials care deeply that the companies they work for (and the businesses they support) embrace values that are aligned with their own. Employees who are passionate about the organization, who are loyal, and who feel valued, drive an intangible good will that strengthens the brand of the company and improves the overall productivity of the workforce.
ESG programs increase stock liquidity.
Sustainable/impact investing is actively growing at double-digit rates. According to the US SIF Foundation, total U.S.-domiciled investments using sustainable, responsible and impact (SRI) strategies, reached $8.72 trillion, an increase of 33 percent from 2014 and a 14-fold increase since 1995. That’s 1 of every 6 dollars under management.
Investment research and consulting firms like Sustainanalytics and MSCI have developed indices that measure and rank companies based upon ESG. The investment funds and ETFs that benchmark these indices are raising trillions of dollars to invest in companies that execute sound ESG policies; these are long-term oriented shareholders that can potentially fuel demand for your stock.
ESG initiatives can unlock competitive value.
ESG is a macro trend boards and management teams need to embrace to attract and retain customers and employees. Companies that recognize the importance of adapting to changing socio-economic and environmental conditions are better able to identify strategic opportunities and meet competitive challenges. Starbucks (Nasdaq: SBUX) learned this as they were trying to expand their market share in China. For years Starbucks struggled to gain momentum on expansion in China. They stumbled upon the answer when they offered healthcare to their employees’ parents. Once they did that, sales growth skyrocketed and now Starbucks has 2,000 stores in one of the fastest growing markets.
Addressing ESG issues proactively can keep activists at bay.
Activists have used governance weaknesses as a tool in proxy contests and campaigns for years.
Companies that proactively address ESG issues can set the bar for the entire industry and at the same time help immunize themselves against activist intervention. Wynn Resorts (Nasdaq: WYNN) recently embraced their commitment to gender diversity by increasing the number of women on their board from one to four. With a board that is 36% female, Wynn is now in the top 40 S&P 500 companies in terms of female board representation.
Best Practices to Realize the Full Benefit of embracing ESG:
- Identify the appropriate ESG criteria for your industry and your company.
- Companies should not try to be all things to all people. Rather, identify three to five measurable ESG criteria that are material to your businesses, your constituencies, and are aligned with your corporate strategies. For example, an oil and gas company that is fracking could measure clean water and waste management impacts on natural resources. A service company such as Starbucks should focus on the “S” in ESG, i.e. training to prevent racial bias to make consumers feel welcome and strengthen their brand.
- An effective way to benchmark your company’s ESG framework relative to your peers is to research industry rankings within a major sustainability ranking index. Here are a few organizations that identify and rank corporate ESG programs:
Global Reporting Initiative (GRI)Sustainability Accounting Standards Board (SASB)Global Initiative for Sustainability Rankings (GISR)
These organizations, analyze a broad range of criteria for each industry, only some of which include: climate change impacts, natural resource scarcity, supply chain management, and labor practices. Pursue inclusion with your relevant ESG index.
- Once your company has identified the elements of its ESG framework, have your general counsel or IR leader contact three or four ESG funds or ETFs to research their criteria for inclusion (and exclusion). From there, identify which of these indexes map most closely to your corporate strategy and to the priorities of the shareholder base that you believe represent your best long-term holders.
- Tell your story and stay true to it. Once your company has determined the appropriate criteria for its ESG framework, the next steps are to establish metrics, measure them on a regular basis, and share progress publicly; otherwise, you will be accused of “greenwashing.”
Experience shows that companies that are truly committed to executing their ESG policies make them a “senior management priority” of the CEO or general counsel, (and tie compensation to ESG metrics.) They voluntarily report ESG goals, and progress towards meeting them, to all stakeholders via the annual CEO letter, in the proxy, annual reports, internal corporate communications, and/or annual sustainability reports on the corporate website.
Your company likely has a good story to tell. It’s just a matter of organizing and creating an ESG program. It will pay off!