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ESG: The Opportunities to Tell Your Corporate Story

November 2020
 by Digitalis

ESG: The Opportunities to Tell Your Corporate Story

November 2020
 By Digitalis

In the midst of the current crisis, companies are also reshaping themselves for the new ESG agenda. For investors, a company’s score on ESG metrics is now one of the determinants that helps mould their decisions. ESG measurement seeks to score a company by the positive impact that businesses make on society – a broader concept of accountability than merely to shareholders. The demands of climate change are part of this, but broader social and political demands on business add to the mix. Investors – private equity, institutional and individuals – are now seen as one of the key actors in catalysing this change.

However laudable the motives, it all adds to the agenda items that boards now need to deal with. In one sense, none of it is new. Most corporate reputational crises in the past- and many on which Digitalis has advised – have emerged through perceived shortcomings in a company’s environmental, social or governance standards. For companies, building reputational resilience is often about getting the basics right – marrying what you say with what you do and ensuring that the behaviour of the company in terms of its environmental impact, its social values and the quality of its governance meets the standard the board requires of it. Boards need to feel that they can get behind the box-ticking and really assess a company’s performance.

This is not as easy as it sounds. Many companies have responded by trying to get the communications right first (lofty ambitions, stirring prose) before they are sure of their strategies. Allowing this gap to exist creates long term reputational risk. Corporate crises have often been about the gap between what a company says and what it does – on supply chains or environmental challenges (E), on policy or action on gender, on employment contracts, on race (S), or failings in board oversight, political connections, leadership, or remuneration (G). 

For investors, knowing about a company’s policies in these areas is the easy part. Knowing more about how companies behave and speak about these issues in the real world, and how wider stakeholder groups (employees, communities, activists) regard them needs to be an essential component of an investment decision. A good reputation is largely based on perceptions that these issues are being well managed. 

None of this is easy. In this new world, there is no consensus on what investors are looking for, nor on the relative weights being given to these multiple goals. Investors use language that is unclear about what they want – and the S in ESG is particularly ill-defined. ESG measurements (what works and makes impact) is notoriously difficult to define. There are big variances across markets. And there remains an abiding sense in the activist community that investors still see ESG as a bit of a marketing wheeze. 

In reality, many of these issues, particularly on climate, are matters of legal compliance and as we approach 2030 the reach of the government to legislate changes is only going to increase. For many businesses, particularly in the heavy industrial and power sectors, the demands for new investment and innovation to help toward a carbon neutral world will be extensive. Under the S and G headings, public pressure for companies to be managing their people well, understanding their community responsibilities and governing their businesses fairly and ethically will only increase. A company that falls short on its ESG requirements or exposes a gap between what it says online and what it does, runs the risk of longer-term reputational damage and a destruction of value. For investors, it matters how the company communicates its policies and actions, and what the wider world thinks about them. It is not an area where investors can afford to be surprised.

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