Corporate Social Responsibility (CSR) and Environmental, Social, Governance (ESG) both emerge frequently in corporate discourse, and both relate to the social responsibilities of businesses.  

    While CSR holds organisations accountable for their social commitments in a qualitative and quantitative manner, ESG provides measurement and quantifies such social efforts. 

    It’s no longer an option for the C-suite to bury their heads in the sand when it comes to CSR, ESG and a long-term commitment to sustainability. 

    Investors are turning into activists and holding the decision makers at their portfolio companies accountable. Shareholders and pressure groups are forcing companies to adapt to the new reality. It’s all about risk mitigation – companies that are not thinking about long term sustainability will likely end up on the investors ‘sell’ shelf.   

    Transparency on climate change policies is now seen as vital: witness Sarasin & Partners' recent decision to vote against the audit committee chair of the Irish building supplies company CRH for its failure to disclose how its financials could be impacted by the global transition onto the 1.5C pathway.   

    Net zero accounting is now front and centre of the CFO’s financial accounting strategy. Investors sit ready to challenge those in the firing line for any hint of lack of disclosure, obscuration and laxness when it comes to transitioning to a low carbon economy and adopting a socially responsible business model.  

    So protecting portfolios against ESG risks has become a full-time job. Companies are increasingly obliged to provide clear-cut and candid views on the impact of sustainability, climate change and demographics on their business models.   

    The higher the green revenue exposure, the higher the appeal to investors. The more socially responsible, the less risk of harmful reputational damage. The shift in attitudes is becoming hard to ignore as investors put their money into businesses that align with their own values and have greater immunity to public scrutiny.   

    Investors want to understand whether a company stands up – can it respond to climate change risks? Is it able to demonstrate future viability and resilience? Can it achieve cost savings through increased efficiencies? Identify opportunities in low carbon revenues? 

    How investors use ESG information is changing 

    According to the 2020 Global Sustainable Investment Alliance (GSIA) report at the start of 2020, global sustainable investment reached USD35.3 trillion in five major markets, a 15% increase in the past two years (2018-2020).  

    The most common sustainable investment strategy is ESG integration, followed by negative screening, corporate engagement and shareholder action, norms-based screening and sustainability-themed investment. 

    The need for organisations to respond to this demand for information is clear. By disclosing the information that investors want, organisations can provide reassurance that they are effectively managing business risks and identifying opportunities. 

    There is growing evidence that organisations that publish high-quality information on the far-reaching implications of ESG performance for their business are more likely to attract and retain long-term investors. Having a clear view on a socially responsible strategy and ESG issues, positions businesses at the forefront of opportunities presented by the unfolding sustainable and low carbon economy. 

    Having said that, in a recent study, over a third of companies believed they were able to quantify the business value of sustainability initiatives accurately, yet only 7% of investors agreed. 

    To be able to assess a business, investors need to analyse key sources of investment risks and realise opportunities. The former includes regulatory – standards, taxes and carbon pricing; market – reduced demand for high carbon goods, products and services and decreased capital availability; increased demand for low-carbon goods, products and services and increased capital availability.   

    Pressure groups such as Extinction Rebellion, Just Stop Oil and the LGBT Foundation – together with investors – can create significant disruption to a company’s modus operandi, reputation and ultimately bottom line, so it’s important for the business to manage their external profile by establishing their ESG strategy and ensuring that this is delivered and communicated to both customers and investors alike. 

    Start the discussion

    Add a comment