There can’t be many of them, but for those organisations wondering why environmental, social and governance (ESG) needs to be a priority, the quest for investment is rising up the list of benefits.
During recent market downturns, sustainable organisations have proven particularly resilient – and research from Blackrock has correlated sustainability with more traditional factors, such as quality and low volatility. This makes ESG-focused organisations attractive prospects for investment.
“By expressing a clear link to ESG principles, an organisation can demonstrate transparency about its impact on society and the environment,” says PA Consulting Global Lead, Sustainable Supply and Value Chain, Jason Smith. “For investors, that is a positive signal of longer-term growth.”
James Hilburn, UK ESG M&A Lead at Deloitte, adds: “The first question a business must answer internally about the process of adapting itself to ESG principles is, why does it matter to their stakeholders?”
From an access to finance perspective, he points out, investors are looking for that strong link between a credible ESG story and the ability to deliver sustainable value creation: “A large quantum of capital is looking for businesses that align to the investor’s sustainable targets or objectives.”
What should your story say?
Hilburn cites key levers in the workings of a business that would form useful components of an ESG story. Operationally, for example, a company could achieve a lower cost of debt if it is able to access sustainability-linked loans or green bonds. MSCI data shows that top-quintile ESG performers have a cost of debt up to 10% lower than bottom quintile companies.
On the commercial side, reputation looms large: “Your customers are going to care about your sustainability profile, and purchase accordingly,” he says. “And that doesn’t just mean individual consumers, but your corporate clients, too.”
Crucially, Hilburn notes, this cuts both ways. “After Microsoft set some sustainability targets, it said to its suppliers: ‘Here are our objectives – if you want to continue to supply us, you must also align with them.’ So those sorts of messages cascade up and down entire supply chains.”
A third lever is people. Deloitte analysis found that 78% of all employees prefer to work for purpose-driven companies. “If you can deliver that, you will have better productivity and retention, plus lower costs around acquisition and training – important points to consider when assessing a business’s stability,” Hilburn says. “So we have a range of value levers, of which investors are keenly aware, and are looking to evaluate companies in terms of how their senior teams are managing those levers.”
Katerina Joannou is Manager, Capital Markets Policy at ICAEW and collaborated with Hilburn and a broader Deloitte team on last year’s joint report ESG in Deals and Investment. An ESG programme and its accompanying story must be part of your overall business strategy, she says.
“Therefore, to decide on what you’re going to report, and what your story is going to look like, work out which risks present the most significant opportunities and threats. They are fundamental points that your stakeholders will want to know. Then you can set out how you are monitoring and controlling those risks, and mitigating them to seize the opportunities.”
But telling a good ESG story also requires quality data, and the standards of rigour that stakeholders expect around financial reporting are what companies should aspire to in a non-financial context. For example, she says: “Is your data reliable? Do you know the systems it’s coming from? Is it comparable – either from period to period or, if you are benchmarking against a peer, that you’re comparing like with like? And above all, ensure it’s verifiable – because that’s how you avoid greenwashing.”
What makes your story credible and persuasive?
A balance between detail and focus is essential for creating a convincing narrative, Hilburn explains: “As recently as three or four years ago, investors had a checklist that went something like: Does the company have a modern slavery policy? Does it have a responsible sourcing network? Does it have a net-zero target? But now, there’s a level of sophistication that goes far beyond that, analysing the strategic integration of ESG.”
This means the order of the day is transparency. “Transitioning the world economy to net zero is one of the most difficult things that human beings will ever have to do,” Hilburn says. “But many companies are still glib about targets. Climate charity CDP, which provides a voluntary carbon disclosure route, said that fewer than 1% of the 18,000-plus companies that disclose climate information have credible plans to deliver net zero. So being transparent not just about what you know, but what you don’t know, will bring investors along with you.”
Making firm delivery pledges with no plans attached will only spawn scepticism among investors, Hilburn warns: “Alternatively, if you are really honest and say that there are steps in the journey that you don’t yet know how to do, but you’re working with advisers and suppliers and adopting relevant best practices, that will bring you a huge amount of buy-in.”
PA Consulting’s Jason Smith agrees: “A story of what is to be enables investors to get behind your ambition and provides real meaning, rather than simply reporting data against targets. You will set more store by authenticity in a narrative that invites readers to join you on the journey.”
However, a commitment to transparency should not lead to a sprawling, unwieldy account. “There are hundreds of ESG metrics,” Hilburn notes. “So part of the challenge for compiling your story is whittling down to the five or 10 that really matter to your business model and have potential to move the needle.”
How to present your ESG story
Presenting an ESG story would appear to warrant a more imaginative touch than an annual PDF and press release. For Joannou, though, once risks and opportunities have been identified, the relevant channel(s) should be dictated by the audience a company is trying to reach – to whom it is accountable: “What do the investors and other stakeholders in your network tend to look for? Talk to them about how they like to see ESG credentials presented. Which formats do they find particularly useful?”
The main priority is to ensure that the material doesn’t feel like it’s been plucked out of thin air, she says: “It must be systematic and aligned with information used for key business reporting: ‘Here’s an update on what we’ve achieved during a specific period.’ Or, ‘Here’s what progress we’ve made on a particular challenge.’ And importantly, stress that each update is part of a continuous, iterative process. There are no full-stops.”
For Hilburn, the channels you use play second fiddle to the consistency of messaging across those platforms: “Is your CEO saying the same thing in your investor and analysis reports as appears on your ESG-related website content and sustainability report? For me, the format is less important than the quality of the information.”
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