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Utilizing ESG data as part of a corporate strategy is now an imperative rather than a choice. Asset managers, banks, insurers, and other institutions are adopting a more systematic and thorough approach to analyzing organizations' nonfinancial performance. However, progress is hampered by issuers' limited disclosure of environmental, social, and governance concerns, which is further impacted by contradicting ESG taxonomies, inconsistent ESG ratings, and the multitude of disparate ESG standards being adopted. 

The Importance of ESG Data for Investors 

Investors increased emphasis on firms' ESG goals and activities have shifted the focus of reporting. Currently, investors are analyzing organizations' sustainability reports and developing investment screening methodology based on metrics ranging from carbon emissions to human rights and boardroom diversity.  

The crosscurrents strength is reflected in the new PwC study published in September 2021. PwC contacted 325 investors worldwide, the bulk of whom defined themselves as long-term active asset managers. These investors demonstrated their commitment to ESG objectives in several ways, including by prioritizing them in their investments and portfolios. Simultaneously, the majority (81)% of respondents acknowledged unwillingness to endure a 1% point cost to their returns in order to pursue ESG objectives. Many also expressed substantial worries about the quality of information accessible to them when considering ESG goals, particularly information on their assets' carbon footprint. Investors are increasingly concerned with the ESG risks and missed opportunities confronting the firms they invest in and are prepared to act. Over 80% said that ESG was a significant influence in their investment decisions; nearly 70% believed that ESG should be included in CEO remuneration objectives, and approximately 50% indicated a propensity to withdraw from businesses and investments that did not take appropriate ESG action.  

In the same vein, Diligent recently conducted a survey with OCEG to ascertain the current state of ESG planning and operation. Less than half of respondents reported having a formal, documented ESG program in place, and less than 10% were "highly confident" that their organization possessed mature well-documented ESG capabilities. 

Transparency – the crucial component of any ESG strategy 

Investors value transparency in business activities, the reporting they conduct, and the rewards they anticipate. Leaders may respond to the bell in the following manner. For executives maneuvering these polarities, the dilemma is how to simultaneously achieve the business change required in this evolving environment and the rewards investors want in performing their fiduciary duty. Most importantly, investors' primary concern with ESG reporting is the relevance to the business model and how the reporting meets the goals of material and comparable metrics in the industry they serve. At all stages, a business must continue to inquire as to whether the ESG disclosure and data being tracked is of sufficient quality. Furthermore, another key evaluation point is asking whether the reporting assists investors in gaining a better understanding of the company's ESG journey toward fulfilling ESG objectives. 

Before investors make a move and invest their money, they must learn more. Improved reporting enables investors to more fully grasp how a sustainable business model contributes to long-term viability It provides tools to evaluate how an ESG approach contributes to value creation and ascertains whether a company's initiatives present the opportunity for growth or the risk of harming the people or environment they operate in.  

Bottom Line 

Investors will back firms that adopt the appropriate ESG activities and they want to be included in the journey, no matter how challenging. That requires being candid about your prospects for long-term value creation and the methods through which you intend to manage ESG risks, even those that are unanticipated. When you communicate to investors and other stakeholders how you intend to reset your strategy, rethink your reporting, reinvent your operations, and push toward new results, you establish trust while generating long-term value. 

Bryan M.
Post by Bryan M.
May 10, 2022