On 9 June 2022, we held our 30th Anniversary Forum at Farmers & Fletchers Hall in London. The Forum included a panel session about why ESG brings a positive benefit to companies. It featured James Ashton, Financial Journalist as Chair and panellists: Mark Manning, Technical Specialist, Sustainable Finance and Stewardship, Financial Conduct Authority (FCA), Karoline Herms, Global Investment Stewardship Manager, Legal & General Investment Management and Will Pomroy, Head of Impact Engagement – Equities, Federated Hermes Limited.
The conversation started with an exploration of ESG Ratings and the Task Force on Climate Related Financial Disclosures (TCFD). Panellists looked into the role ESG plays as an important driver of good corporate governance; the greater societal interest on ESG and sustainable investments and the Government’s commitment to Net Zero by 2050.
Looking at the wider developments of ESG
In the last couple of years there has been a significant forward movement in terms of the quantity and quality of information being disclosed to the market. Companies have been supported through the flexibility of TCFD - which is based on a comply-or-explain basis - and which has been particularly helpful to companies making their first disclosures.
The drive towards developing corporate reporting standards will ultimately put sustainability-related reporting on the same level as financial reporting and it will then be essential for the corporate sector to get on board as this could bring incredibly strong benefits to all companies.
Going forward, building & increasing transparency will be necessary to allow information to flow along investment chains so that investors who are increasingly interested in how the companies are approaching the climate challenge have the information needed to make their decisions
Due to the significant scepticism around greenwashing and concerns that green and sustainability-related claims are being exaggerated at the corporate level, there may also be a need for regulatory foundations to be introduced to build back some trust in how sustainability-related matters are being approached along the investment chain.
The benefits of ESG on Companies
There are benefits both in terms of executive reward and general performance. Education is important and a push towards better practice is needed in the market; ESG can be translated into a financial material factor to take into consideration for a company’s long-term performance.
The two areas which are relevant to every business are ESG metrics and ESG considerations in relation to paying employees.
- ESG metrics are relative to the size and industry of the company, but how metrics should be measurable, material and in line with the company’s strategy.
- ESG considerations, include the importance of pay equality, eradicating any forms of inequality, and also the importance of having a living wage as there is too much in-work poverty. This is also a financially material factor as it affects the overall productivity of the company's workforce.
How can companies meet investors’ ESG expectations?
Companies know their business and the non-financial issues which are important to them. They need to tell their own story, quantifying their impact and initiatives, explaining how and why it is good for the financials and how ESG contributes to the overall business strategy. Communication is key and efforts need to be made to quantify how products and services have a social and/or environmental impact and the efforts made to mitigate negative impact. Companies should therefore focus on the handful of things that are important to them and those will be the things for which they will be held accountable.
The majority of the public wants to know more about what the company is doing to have a positive impact on society and the environment, and companies should consistently present their stories throughout all possible communication channels, not just in their annual report.
For small and mid-sized quoted companies, proportionate regulation and reporting is consistently a concern; in relation to ESG, the question remains how a single set of standards will affect this community and whether these companies will be held to the same standards as larger companies.
The solution may be through TCFD’s introduction of standards which are on a comply-or-explain basis and so, the level of details for disclosures will inherently be proportionate to the size and nature of the business and the degree to which the company is exposed to climate-related risks and opportunities. What will be yet to see is how investors respond to the disclosures provided in the long term.