May 22, 2019
While many management teams and boards understand the world is changing, there are still some leaders who say that investors “aren’t asking” about ESG (environment, social and governance) topics, so why should ESG communications be a priority?
The reality is that ESG has gone mainstream in the investment community. Even though it may not be the main topic in your one-on-one investor meetings, the governance folks are interested, research teams are doing their due diligence and the ESG raters are gaining influence.
As ESG continues to gain momentum, it’s almost inevitable that every organization will face heightened scrutiny. Don’t wait for a shareholder proposal or unexpected proxy result. Prepare now and determine areas where your company can be more proactive with your ESG communications.
Here are five reasons your company should consider making ESG communications a priority.
- ESG disclosure is impacting investment decisions.
Large investment firms such as BlackRock and Vanguard have been at the forefront in urging public companies to be proactive in their ESG communications, including explaining their “social purpose” and how they benefit all their stakeholders. A 2018 study published in Financial Analysts Journal found that 75% of U.S. investors surveyed incorporate ESG information in their investment decisions. In November 2018, BlackRock CEO Larry Fink predicted that all investors will be using ESG metrics within five years. - The correlation between ESG communications and stock performance is becoming more apparent.
Between 2005 and 2017, companies in the S&P 500 Index with above-average ESG ratings by Thomson Reuters outperformed companies with below-average ratings by as much as three percentage points per year, according to a 2018 study by Bank of America Merrill Lynch. The ebbs and flows of ESG ratings have a direct “causal” impact on a company’s stock price, according to a 2018 report from MCSI, one of the leading ESG ratings organizations. In that report, MSCI concluded that ESG ratings are a “descriptor of risk.” - ESG is a hot topic for shareholder activists.
According to Institutional Shareholder Services, environmental and social resolution filings surpassed the number of governance proposal filings for the first time in 2017 and this trend has continued. While activists rarely win the vote, they can certainly be a distraction. - It’s not just about being “green.”
ESG encompasses how the businesses operate across the full environmental, social and governance spectrum. Depending on your industry and situation, it can include board diversity and refreshment, risk management, conduct and ethics, cybersecurity, safety and health, talent development and more – so ESG is still relevant even if environmental topics are not material for your company. - The peer pressure is on.
According to a Governance and Accountability Institute report released in May 2019, 86% of S&P 500 Index® companies published sustainability/responsibility reports in 2018. This compares to just 20% of the same group of companies in 2011!
Stay tuned to the Dix & Eaton blog for additional posts on the growing importance of ESG, where investor relations and sustainability are converging.
Want to work with us to figure out where you are on your ESG journey and how to take the next steps? Contact me to hear about our complimentary ESG assessment.
