Sallie Pilot

ESG: It's here to stay

It looks like businesses around the world are slowly learning to report better but not everyone seems to understand how ESG principles could enhance their own business processes.

Gone are the days when people would ask what ESG is, now people are asking how well it is considered in various businesses. Investors are talking about it, boards are talking about it, and as a stakeholder communication’s agency that works with all these diverse groups, we have a good idea of what they are all saying. Overall, the sentiment is indeed positive, but the genuine understanding of how to apply ESG principles seems to be trailing behind this sentiment.

There’s been a distinct struggle for companies to respond to the increased attention placed on the concept by government, the public and quite importantly, investors. A survey by the RBC found that there was “little satisfaction with the quantity and quality of information from companies on issues such as sustainability and governance.” Despite this, 77% of institutional investors surveyed were “somewhat or to a significant degree” using ESG principles in their investment approach.

This focus will only be intensified for companies and investors with The Financial Reporting Council (FRC) consulting on a new Stewardship Code that sets substantially higher expectations for investor stewardship policy and practice. The Code will focus on how effective stewardship delivers sustainable value for beneficiaries, the economy and society and will require fund managers to take ESG factors far more seriously. “Signatories are expected to take into account material ESG factors, including climate change, when fulfilling their stewardship responsibilities.”

At our FTSE 100 corporate reporting research launch last year, Senior Portfolio Manager at RBC Global Equity - Jeremy Richardson - mirrored this; “When considering a long term view, remember that computers can extrapolate, but they can’t forecast.” The human element required in building a picture of long-term value creation requires consideration of intangible, “things like culture, innovation, decision making and elasticity of thinking. These are things that will influence the longer term trajectory of a company,” confirms Jeremy.

So what needs to change? Internal understanding of its importance to long-term value creation and in turn, how business reports on it. Better quality data comes from looking for the right things and measuring them properly. It’s clear that high-quality ESG disclosure will allow for better comparisons and improved understanding for all stakeholders. Corporates are definitely on the right path, but we need to see more authentic effort and a prioritisation of quality to enhance board decision-making and company performance in the long-term.

This year, following a review by the IR Society’s Best Practice Committee, Black Sun are pleased to see reinforced commitment to a award for ‘Most effective integration of ESG’, reflecting the evolving environment in investor engagement on environmental, social and governmental issues, as businesses are expected to adopt a more thoughtful and pro-active approach to a wider societal purpose.

For more information on integrating ESG, please get in touch here