Evaluating ESG Commitments In 2021: Board Member and Investor Perspectives
This Insights article is based on two recent Kindred Assembly events, where we spoke with board members and experts about how they are evaluating ESG commitments in 2021. To learn more about the Kindred experience and member benefits, apply here.
- As boards of directors and investors are evaluating ESG commitments, company leaders need to understand how to meet their expectations around impact and accountability.
- ESG factors are increasingly being incorporated into the traditional valuation model, with investors and board directors agreeing that the focus must be integrated across the company.
- Transparency around ESG commitments makes it easy for investors to evaluate company efforts and establishes authenticity in times of crisis.
Environmental, social and corporate governance (ESG) has grown as a key area of focus for businesses looking to not only reach conscious consumers but ensure long-term growth. As boards of directors and investors are evaluating ESG commitments and stakeholders demand accountability, leaders have the responsibility of integrating these efforts across every aspect of the business.
According to a 2018 FTSE Russell global survey, more than half of global asset owners are implementing or evaluating ESG considerations in their investment strategies.
For today’s leaders, understanding how to meet the expectations of boards and investors will help navigate challenges that still exist around communicating social and organizational impact, measuring progress and demonstrating accountability, and tying initiatives to brand purpose.
Kindred recently hosted two Assembly events that provided an in-depth look at how boards of directors and investors are approaching ESG as well as challenges and opportunities for brands.
Presented in partnership with Extraordinary Women on Boards, “The Boardroom’s Perspective on ESG” featured panelists Amy Butte, former CFO of the NYSE; Henna Inam, author and former Global Head of e-Innovation at Novartis and Chief Marketing and Innovation Officer at CIBA Vision; Coretha Rushing, former CHRO of Equifax and SVP of Global Human Resources at Coca-Cola; and Eugenia Ulasewicz, former CEO of Burberry Americas.
Speakers at “The Investor’s Perspective on ESG” included Amelia Pan, Partner, London at the Brunswick Group and Maria Figueroa Kupcu, Partner, New York at the Brunswick Group. The key insights from both events are below.
Trends Driving Investor Valuations
At “The Investor’s Perspective on ESG” panel, Amelia Pan and Maria Figueroa Kupcu of the Brunswick Group noted that ESG factors are increasingly being incorporated into the traditional valuation model. For instance, investors may consider negative screens, firm-wide policies (such as Nasdaq’s new listing rules on board diversity and disclosure), or business performance when evaluating companies.
In the past year, COVID-19 has accelerated expectations for businesses as a force for good as it shone a spotlight on the systemic effects of a widespread health event and climate risk. As a result, Pan noted that climate change has become a top priority for investors who require climate disclosures and are keenly attuned to how company leadership (boards and senior management) are prepared to address, and their capability to address, the evolving risks.
Beyond a climate commitment, investors are also looking for companies to deliver for all stakeholders, particularly on issues of inequality and social justice, and a governance structure that allows for transparency, the openness of thought, and opinion.
[ESG] is really about a holistic view of enterprise value creation. You can’t have one of these things and expect your business to thrive, you need all three of them working together and creating value and helping you generate growth.Amelia Pan
The Opportunity Lens
Despite the pressure from investors to show progress on ESG efforts and the response by many businesses, there are still instances where the business case for an ESG focus needs to be made. The panelists on “The Boardroom’s Perspective on ESG” Assembly noted that ESG is a broad topic, so when trying to narrow down a focus, companies should tie these efforts to the brand purpose and brand story for authenticity.
Panelists recommended looking at this as an opportunity to consistently hone the message around the brand’s story, purpose, and company culture versus viewing an investment in ESG as a risk to be managed. Often, an active and diverse board will help bring in a range of perspectives that can help provide structure around efforts, but the executive buy-in is essential for moving ESG efforts forward and making the business case for the focus. “If your CEO’s not on board with it, that makes it very difficult. I think it also now really has to be embedded in your strategy, and then everyone gets involved,” Eugenia Ulasewicz said.
Metrics and Accountability
Reporting, disclosure, and metrics have seen some advancement in recent years as regulatory frameworks are developed. Despite this, there is still a lack of harmonization of standards, which can make the reporting landscape difficult to navigate and limit efforts to demonstrate accountability.
To meet investor expectations around disclosures, Pan suggested aligning disclosures to recommendations from SASB, which focuses on issues relevant to financial performance, and TCFD, which focuses on calculating the impact of climate change on financial statements. Specifically, the SASB materiality map enables companies to break down ESG expectations and reporting requirements within their sectors. In addition, companies can reach out to investors for best practices around information that may be relevant or missing from their reports.
From a corporate governance perspective, board directors recommend that companies focus on metrics that are important to their specific businesses, industries, and approach to business. Drawing on principles from the Long Term Stock Exchange, company leaders can answer the following questions in order to provide needed insight into their approach and progress in communications to stakeholders:
- What stakeholder groups does the company consider critical to long-term success?
- What is the company’s impact on the environment and its community?
- What is the company’s approach to diversity and inclusion?
- What is the company’s approach to investing in employees?
- How does the company reward employees and other stakeholders for contributing to long-term success?
Because many companies are still early in the process of figuring out measurement, Henna Inam noted that the metrics will continue to change as challenges companies face evolve. “Don’t give up on it because it’s messy,” she advised.
In the investor landscape, two key themes are shaping how they are evaluating ESG performance: the emergence of ESG investors and the use of AI to find information on companies. Increasingly, asset management firms have stewardship or impact investment teams responsible for evaluating a company’s ESG impact.
The data provided by this team informs decisions made by traditional fundamental investors. Investment firms also rely on AI and natural language processing to scrub various forms of data — from self-reported information to geolocation data — to provide a better picture of a company’s initiatives, impact, and progress.
These developments emphasize the need for transparency and accessibility when it comes to communicating a company’s ESG efforts. “Investors cover many, many different companies, so you can’t expect them to hunt around for something they don’t even know is there. Make it easy for them. Similarly, if there is a lot of data scrubbing going on through AI, natural language processing [and] they can’t find it, they’re not going to be able to use it,” Amelia Pan said.
Beyond the investor focus, board directors also recommend consistent communication around ESG efforts to avoid questions about authenticity in times of crisis. “When you try to begin to then at that point communicate the good things that you have done and are doing, it sounds to some people suspect and then they dig apart what you’ve been working on. It’s better to put forth what efforts you’re making, even if you haven’t gotten successful yet,” Coretha Rushing advised.
As pressure to respond to concerns continues, leaders must remember that ESG has moved to a company-wide responsibility and establishing trust between CEOs and board members can help direct the company’s focus. Issues that fall under this umbrella such as sustainability should be firmly integrated into a business strategy. In addition, companies should prioritize strong governance and a culture of accountability, such as tying executive remuneration to progress and performance on ESG goals.
Kindred Members have full access to the exclusive content linked out below. Not a member? No worries, submit your application form here and someone from the team will reach back out to you.
- The Boardroom’s Perspective on ESG
- The Investor’s Perspective on ESG
- ESG Disclosure and Reporting Frameworks
Author: Urey Onuoha, Content Marketing Manager at Kindred