Edison Group, the leading international investor relations consultancy, has published an in-depth discussion paper, ‘ESG, moving beyond the box tick’, assessing the current state of the ESG sector and its future. The paper’s author, Edison’s Director of ESG, James D’ath, believes that the rapidly evolving industry is entering a new phase, beyond just paying lip service to ESG concepts, which has characterised much of its development so far, and is set to significantly increase its importance as a driver of value for companies.
With the maturing of ESG, its key considerations are becoming critical value drivers for businesses, with the application of standards and frameworks swiftly moving beyond a ‘box ticking’ exercise purely to satisfy activist shareholders and regulatory requirements. The report outlines the implications of not including ESG frameworks and considerations as part of organisations’ commercial strategies, which can include restricted top line growth, increased waste and associated efficiency costs, regulatory and legal implications, reputational damage, and reduced asset optimisation.
Current calculations value ESG assets at ~$35 trillion, estimated to reach ~£50 trillion by 2025, representing one-third of all projected total assets under management (AUM) globally. ESG has become of such importance to capital markets that by 2020, 88% of publicly listed companies, 79% of venture and private equity-backed companies, and 67% of privately-owned companies had already put initiatives in place.
Whilst ESG engagement has been led by large companies, an increasing number of medium to small companies are engaging with ESG issues. Research from a recent survey of UK based mid and small-sized listed companies shows that more than three out of four (77%) now have a formal purpose statement related to ESG. Almost one in five (18.5%) are already referencing international ESG standards. These findings are significant, because smaller companies are typically ‘late market adopters’ of new business trends and unlike their bigger contemporaries, they do not face the same early phase regulatory imperative.
Perhaps all this should not come as such a surprise. Since the mid-1970s, over 2,000 studies have analysed the relationship between ESG and corporate performance. The majority of the studies reported positive findings, also discovering that positive ESG impact on corporate performance remains stable over time. Author John Elkington reached similar conclusions in 1994 when he published his Triple Bottom Line Theory, stating that companies could do well by doing good and equally prioritising their impact on people, planet, and profit. The evidence is clear, both theoretically and empirically, that effective ESG engagement has a direct, verifiable impact on enterprise value.
As ESG has gone mainstream, ratings have played an unjustifiably significant, and often, arguably detrimental role. As demand for greater ESG engagement has grown, so has the need for the relevant metrics and data needed to populate ratings. Yet, the ESG data disclosed by companies is largely unstandardized – often it is also unstructured, difficult to compare, and in need of more interpretation. So there does need to be a greater standardisation of ESG reporting to benchmark performance.
The paper forecasts evolution to ESG 2.0. As the ESG ecosystem changes, greater engagement and resources from organisations will in turn be reflected in more bespoke and relevant metrics, coupled with a greater uniformity in frameworks, standards, and mandatory reporting. Generic ratings that aren’t enforced and yield little benefit will become less prominent, and box ticking will no longer be an acceptable norm.
As the pressure from investors, partners, employees, customers, regulators and governments intensifies, firms will be increasingly compelled to approach ESG holistically throughout their entire structure. This will continue until the reversal of the most destructive effects of our economic activity – fossil-fuel burning, unsustainable land use, overfishing and deforestation – show signs of slowing down or reversing.
James d’Ath, Director of ESG, Edison Group said: “Engaging with ESG considerations should no longer be seen as tick-box exercises to satisfy regulators, investors or indeed potential customers, but rather as a business-critical and integral framework built into an organisation from the foundations upwards. The negative societal and environmental impacts of inaction are only too real to ignore, but so too the long-term financial performance of not doing right by stakeholders beyond the traditional shareholder prioritisation. Ultimately companies must now ask if the world is better off because of their business and not just focus solely on the bottom line.”
Neil Shah, Executive Director, Content & Strategy, Edison Group, added: “ESG has undeniably become a major priority for businesses across the spectrum. The overwhelming majority of our clients are now acutely aware of the significance of building the rapidly maturing and increasingly codified ESG frameworks and considerations into their long-term strategies. It is quite clear that purpose is no longer at the expense of profit, and that strong ESG engagement correlates positively with performance across almost all metrics.”