WHY ENVIRONMENTAL, SOCIAL AND GOVERNANCE DISCLOSURE IS INFLUENCING STAKEHOLDER BEHAVIOUR

This blog was originally published by Andrew Laxton for Mixology Communications.

FireWorks Director Kathy Lane contributed to this blog, speaking on how ESG is impacting us here in Australia. 

Like a Grandparent recounting a fable to a young child, the World Economic Forum has been warning corporations for many years about the recurring risk of pandemics and climate change. Then COVID-19 struck and went one step further – it changed the world as we knew it and rubber stamped the importance of corporate resilience and risk planning forever.

Stakeholder behaviour is quickly changing too. Demands for improved Environmental, Social and Governance (ESG) performance from business is rising with investors and consumers driving the trend for greater disclosure.

As socially conscious investors now turn their attention to using a company’s ESG standards to screen potential investments, how are countries around the world adapting to this cultural shift?

We spoke to Mixology’s partners across the globe to get their views on how ESG is impacting their own markets. Contributing editors include: Laura Taylor, President & CEO, Silverline Communications (US); Ruxandra Mateescu, Managing Director, Action Global (Romania); Kathy Lane, Director, Fireworks PR (Australia); and Andrew Laxton, CEO, Mixology Communications (UK).

(US) The COVID-19 pandemic and the social unrest arising from noxious inequality have had impacts on businesses that ESG analysts have understood for many years. Many of the risk evaluations that arise from ESG considerations are currently playing out in real time, and investors are taking notice. They are coming to understand that ESG factors are essential in modern risk and opportunity analysis. Incorporating ESG planning into all investments is no longer an afterthought, it is a fore thought. While ESG planning used to primarily focus on environmental factors, the social and governance elements are rapidly evolving to meet the needs of shareholders around transparency and commitment. (US) The COVID-19 pandemic and the social unrest arising from noxious inequality have had impacts on businesses that ESG analysts have understood for many years. Many of the risk evaluations that arise from ESG considerations are currently playing out in real time, and investors are taking notice. They are coming to understand that ESG factors are essential in modern risk and opportunity analysis. Incorporating ESG planning into all investments is no longer an afterthought, it is a fore thought. While ESG planning used to primarily focus on environmental factors, the social and governance elements are rapidly evolving to meet the needs of shareholders around transparency and commitment.

(ROM) International investment is an important source of economic growth. As global investors consider ESG criteria in their analysis and investment decisions, local companies must adjust and become accountable by integrating ESG in their business strategies, reporting their practices accordingly and communicating proactively with all involved stakeholders. This trend is reinforced by this year’s launch of Romania’s first investment fund with a focus on ESG principles.

(AUS) The appetite for ESG performance is rising in Australia. ESG Research, a collaboration of superannuation funds, fund managers and asset consultants, aims to increase the quality of research in Australia that assesses ESG issues. Founded in 2000, they have established an awards programme to recognise good institutional research that builds investor confidence. There is also a concerted drive towards Ethical Business evidenced by the rise of BCorp registrations, a directory of businesses who are balancing purpose with profit.

(UK) The growing emergence of a values-based society comes with an expectation for businesses to act with more integrity, honesty and a much stronger degree of purpose. We live in a demand generation that expects immediate action; compound that with the devastating economic impact of Covid-19 and brands have had to self-evaluate and reinvent themselves to become more relevant and meaningful to today’s stakeholder audience. ESG is very much about continuous risk assessment and long-term planning coming together to not just address the fiscal and structural sustainability of a business but how it continues to make a positive contribution to society. Investors not only want but expect total visibility into a company’s operation and how ESG standards are being applied now and into the future. The foundations to good governance have been there for some time with structured frameworks built from the Basel Accords and IFRS. The UK’s corporate governance regulator, the Financial Reporting Council is even reviewing a UK version of the famous US Sarbanes-Oxley Act, which would further raise governance standards and improve risk management and accountability.

Aside from investor demand, what other stakeholder groups in your market do you see favouring a wider implementation of ESG within business – consumers, regulators, retailers, the supply chain?

(US) We do see increasing demand from consumers, retailers, and supply chain stakeholders for broader corporate attention to ESG issues. On the regulatory side, it is a mixed bag. There is a pitched battle now between those who wish to see an expansion of ESG integration in fund managers’ purviews and those who believe ESG considerations run afoul of fiduciary duty. That debate is likely to move from the regulatory arena to the judiciary over the next year.

(ROM) European regulations require businesses with more than 500 employees to provide annual non-financial reporting and a growing number of Romanian companies, irrespective of their size, have started to report voluntarily. This applies to subsidiaries or brands operating in our country and following internal sustainability guidelines steered by their international parent companies as well as local businesses with strong roots in and impact on the communities they operate in. A very competitive employment market in recent years has forced business leaders to rethink putting more emphasis on employer branding of which ESG related activities are important components. Employees – especially high potentials – base their decisions to join or stay with a company on their (future) employers’ business conduct, contributions to local societies and concrete actions towards sustainable development.

(AUS) The consumer awareness around the importance of ethical business and, in turn, strong ESG credentials is on the rise generally. Consumer demand will directly affect retailers and supply chain decision makers. Climate change and sustainability particularly are huge issues in this country and concern is forming the basis of much decision making across all stakeholders. The rise of the Circular Economy movement has been a driver, with Government taking a lead role. However, with the government slow to move on renewables, an impetus from consumers and private investors to take the lead has emerged, which means investment businesses like Ethical Australia are well positioned.

(UK) There is definitely an active interest in ESG from the entire supply chain, not just investors but regulators, retailers, corporates and end users. As ESG influence grows, which it will, everyone will become a stakeholder. Companies will embrace it; employees will insist on it and consumers will buy from it. ESG is so much more than business best practice, it will become a way of life.

What business sectors / industries in your market have been early adopters of ESG and what, if any, positive impact has this had on their brand positioning and reputation?

(US) This market has not seen entire sectors adopt ESG proactively. Rather, individual companies in a variety of sectors have positioned themselves ahead of their peers. While this has helped to stoke the brand positioning and reputation of some companies, particularly in consumer-facing industries, many have also suffered brand damage when they failed to deliver evidence to support the messaging they had put forward.

(ROM) International brands have led the way in demonstrating ESG principles over time. The industries of beverages, telecom, retail, and energy have been most active in embedding sustainability in their businesses and communicating their efforts consistently. Their long-term initiatives to create lasting impact in communities yielded in increased general awareness and positioning as a good employer. Romanian companies are swiftly following.

(AUS) As expected, it is easier to find ASX listed company information and there has definitely been a drive for ESG credentials in this space to satisfy shareholder and potential investor demand and build brand and reputation. The beauty, cosmetics and skincare industries have been building their ESG credentials well, forming an important part of their brand positioning and reputation for good. In food, the rise of the Ethical and Organic farming logos on packaging, the understanding of free-range and the importance of cruelty-free production all point to a consumer demand to know and understand the provenance of their food choices. We also found significant investment in the agricultural space, embracing technology to mitigate the threat of climate change at its core and build ESG creds. And whilst slow to the party, the SA Government and Wine Australia have just announced a tech research project and a keynote speech at an industry technical conference that will address improving processes and efficiencies through automation. Smart technology is coming, and the news is good for ESG. I’m not convinced that all businesses exercising ESG are really utilising the good news to build their brand position and reputation which provides an opportunity.

(UK) Other than appealing to socially conscious investors, employees, and buyers, it’s too early to say what immediate impact ESG has had on brand reputation but it will definitely benefit the early adopters in the long run. Housing Associations have taken tremendous strides in communicating their ESG credentials and as a result UK social housing has become appealing to investors who now compare it with other asset classes. If you look at the UK’s top supermarket brands all will be reviewing ESG from a field to folk perspective covering everything from food production and food provenance to food safety and food security. The manufacturing industry is already moving towards a Circular Economy business model where waste reduction and recycling are prioritized. On the back of the Volkswagen ‘dieselgate’ emissions scandal, the UK’s automotive industry has seen firsthand how ESG concerns from stakeholders and car owners have rapidly moved up the business agenda.

Do you think full disclosure of ESG reporting and compliance will become a mandatory audit requirement in your market and would this help to rebuild stakeholder trust and strengthen brand reputation?

(US) This is the million-dollar question. Here again, there is a battle underway between those who support expanded ESG reporting and compliance and those who consider it not just irrelevant but an impediment to economic growth. No matter how that plays out, however, better disclosure and compliance is improving stakeholder trust and strengthening brand reputation, as long as it is backed up by proof of implementation.

(ROM) In Romania, ESG reporting is still not a common practice with a robust, standardized approach, but increasing numbers of voluntary initiatives give evidence that companies are taking steps towards more stakeholder transparency and a stronger focus on sustainability. The Covid-19 pandemic has inevitably brought up the issue of sustainability in aspects of managing a business. Taking a positive stance, it has contributed to fast-tracking the integration of good practices to sustain health, guarantee business continuity and utilize growth opportunities.

(AUS) Absolutely! The interest in this area is on the rise and with it will come the demand for transparency. This good news, if communicated effectively, is that it can only help to build stakeholder trust and strengthen brand reputation. Some industry bodies have adopted a formal position to drive this with their members, including CPA Australia – the professional accounting body leading the charge.

(UK) There are sceptics who question the relevance of ESG and criticize it for stifling innovation and impeding growth. However, the demand for greater ESG compliance and disclosure will continue to grow because society wants it and there is no doubt it will play a critically important role in restoring stakeholder trust and strengthening brand reputation. The London Stock Exchange Group has published guidelines on best practice recommendations for ESG reporting in response to demand from investors. The guide has already been sent to 2,700 companies with a combined market capitalisation of more than £5 trillion. ESG reporting is here to stay, which in my mind is a very good thing.