Evaluation of companies according to sustainability criteria has become more and more mainstream amongst investors. Socially responsible investors are departing from classic negative screening entailing the mere exclusion of certain companies or industrial sectors and moving towards a more organic integration of environmental, social and governance (ESG) criteria in investment decisions. There is an increasing belief amongst investors that companies with good ESG management can better identify risks and are more prepared for future challenges. Data also suggest that companies excelling at ESG tend to have better financial returns, although it is not clear if other factors are at play.
Since there is no universally accepted standard for measuring ESG performance, investors use different criteria to apply ESG factors in their investment decisions, depending on their investment strategies and ESG priorities. Investors also retain third party advisors which rank or screen companies’ ESG performance according to proprietary and not publicly disclosed methodologies. Many commenters also observe that there is a degree of subjectivity in evaluating ESG performance which would be unthinkable when assessing financial performance. This leads to contradictive and at times questionable ESG ratings, which can result in the same company being rated as a “best in class” and included in a sustainability index while at the same time being blacklisted by other socially responsible investors for not conducting business responsibly.
How to effectively meet investors’ expectations on ESG issues and improve your company’s ESG profile
While it is certainly a challenge for companies to prioritize and communicate their ESG work in a way that satisfies the expectations of socially responsible investors, it is possible to adopt certain strategies to increase the effectiveness and relevance of ESG work for the socially responsible investment community:
- Know your investors, i.e. map your bigger current investors as well as potential investors which may one day scrutinize your sustainability/ESG work
- Continuously and proactively engage and communicate with investors on ESG matters. This can be done through investor relations officers and communication and sustainability managers which can effectively mediate relevant ESG information
- Use your dialogue as a way to prioritize sustainability/ESG issues for your sustainability report and your sustainability work
- Make sure you know what ESG data providers and advisers your investors use in order to disclose information in a way that effectively meets the ranking/screening criteria
- Be prepared and have a routine to engage investors and analysts seeking ESG-related information timely and effectively
TomorrowToday can support you with investor ESG dialogue, sustainability reporting and ESG disclosure, leveraging on several years of experience within ESG and sustainability reporting. We can help your company create better relations with your investors, including complying with relevant ESG metrics and assist you in creating proactive ESG strategies to effectively engage with investors.
Contact Davide Maneschi to learn more.
0722 01 35 68