ESG is to the corporate world what the internet is to the people. Corporate governance alludes to how companies interact with external stakeholders, including suppliers, competitors, governments, and shareholders. Amidst soaring investor numbers, investor stewardship—investors engaging with companies to encourage them to enhance their governance—has become a buzzword among ESG report preparers and sustainability experts.
ESG is used in corporate governance through shareholders, who are responsible for ensuring companies exhibit good ethical practices and maintain a sound management structure. Meanwhile, unfavorable policies have dented ESG goals. For instance, in November 2024, Walmart tweaked diversity, equity, and inclusion (DEI) programs, which were supposed to boost ethnic and racial representation at workplaces. In addition, six leading U.S. companies, including JPMorgan altered their DEI policies in 2023.
Unfazed by the cacophony, ESG reporting has witnessed an uptick. According to Governance & Accountability Institute, Inc.’s 2023 Sustainability Reporting, a staggering 98% of S&P 500 Companies published ESG reports in 2022. Besides, SASB was the most prevalently used sustainability standards among the Russell 1000. Meanwhile, In November 2023, a Bloomberg Intelligence survey, which canvassed opinions from 250 global investors and 250 C-suite executives, revealed that 85% of investors are expected to augment their investments in ESG over the next five years.
Forging Ahead with Values-based Investing
Thinking and acting on ESG has become compelling as investors navigate financial returns with philanthropic impact. The values-based investing puts investors in the driver’s seat, reflecting an investor’s values and comprising ESG investing, socially responsible investing (SRI) and impact investing. SRI refers to financial returns from investments and their impact on social, environmental or ethical change while evaluating companies. It also considers investing in companies that have positive social impacts. Meanwhile, impact investing is attaining social or environmental goals alongside financial returns on investment.
To put things in perspective, investors may exclude companies involved in manufacturing products that are detrimental to society, including tobacco, alcohol, gambling, and weapons of mass destruction. Professional investors may also want to divest from fossil fuels, and they will pick and choose investments that align with their values. Besides, impact investors would strive to inject funds into companies that are investing in sustainable agriculture, clean energy, and healthcare, among others.
Investors may ponder upon these questions before committing to a values-based investment strategy:
- What would be the impact of values-based investment on market performance?
- What are the risky portfolios and the strategies to negate their impact?
- How are the business ethics followed?
- What initiatives is the company undertaking to minimize its carbon footprint?
ESG Reporting—Tenets for Corporate Disclosure
ESG has captured attention in boardrooms, with organizations grappling to gain investor confidence, align with a net-zero economy, mitigate risks and underpin innovation. ESG disclosure is the gateway to transparency and sustainable business models. It is a type of public reporting or a communication tool that exhibits a company’s efforts toward ESG issues in relation to its business operations. Moreover, it throws light on how an organization’s initiatives compare with industry benchmarks. Evidently, stakeholders are pushing companies to disclose more information about ESG strategies.
The following questions delineate the significance of ESG disclosure for investors:
- Does the company know what type of ESG disclosure its stakeholders seek?
- Is ESG the responsibility of the full board or a specific committee?
- How does the company assess ESG-related risks and opportunities affecting its strategy?
ESG reporting can do a world of good to boost the public image of a company. Meanwhile, misleading ESG disclosure may be regarded as greenwashing. There is a slew of frameworks and standards, including GRI, SASB, CSRD and SFDR, among others, to provide a holistic view of the ESG initiatives undertaken and ensure that data is standardized, consistent and comparable across industries.
So much so that globally accepted ESG standards have been a good omen for companies and investors to enhance the quality of disclosures. For instance, companies subject to the Corporate Sustainability Reporting Directive (CSRD) are required to report in line with European Sustainability Reporting Standards (ESRS). Besides, IFRS Sustainability Disclosure Standards—S1 and S2—are poised to become globally accepted sustainability standards. The IFRS S1 requires an organization to disclose information about sustainability-related risks and opportunities.
Elevating Brand Value
Robust ESG performance and goals help businesses unlock new markets and expand their penetration in the existing ones. In March 2024, Wharton cited research claiming that when companies discuss material ESG factors in their earnings calls, the company’s value rises by 1.4% for every 10% increase in emphasis (on material ESG concerns).
ESG provides a fillip to corporate trust—companies investing in ESG are envisaged as forward-thinking. Brand value, an intangible asset, gains from sustainability initiatives as the latter differentiates leaders from laggards. Strong ESG commitment can create a loyal customer base; consumers are more likely to buy products or services from brands that align with their values. Additionally, customers are willing to pay a premium for products/services that are ethically sourced, sustainable or contribute to society. This trend underlines consumers’ awareness of a sustainable future and the company’s view on ESG not as an option but necessity.
The ESG Pitch, the Roadmap
As companies mull over infusing funds into ESG initiatives, they can expect mitigation of notorious poor governance, lack of disclosures and environmental damage. Businesses with high ESG scores will give them a competitive edge and help create long-term wealth. Investors will continue to evaluate companies based on ESG metrics. Those who can keep abreast of the ESG trend and understand sustainability risks and opportunities can take their sustainability strategies the furthest and create long-term value for all stakeholders.
