Of the many and varied impacts experienced as a result of the COVID-19 pandemic, one of the most noteworthy and potentially beneficial is a renewed focus on the environmental, social, and governance (ESG) agenda by leaders of large organizations.
Having the ability to report accurately and transparently on financial and non-financial performance indicators relating to how companies are addressing factors such as carbon emissions, the circular economy, supply chain governance, work/life balance, plus diversity and inclusion, will be a key priority in the years ahead, along with showing a responsible attitude to regulatory compliance.
Not only are investors increasingly viewing such factors as indicators of potential value creation and financial returns, but employees—especially from younger generations—are likely to seek opportunities with organizations that are able to demonstrate progress in these areas.
With Microsoft reporting as many as 40 percent of global employees will look to change employers in the year ahead, and markets tightening for hard-to-find professionals, the ESG agenda is no longer a ‘nice-to-have’ as much as a strategic priority.
What Does ESG Encompass and How Has the Focus of Corporates Changed?
ESG refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. Media commentators have already started to highlight the importance of ESG in financial reporting. This includes those in the FT, where Morgan Stanley analyst Jessica Alsford is reported as writing: “In a typical recession, dividends are protected as much as possible, with operating costs and capital investment cut to improve cash flow. However, there is a new emphasis on ensuring employees, customers, and society as a whole are prioritized first.”
At the time of writing (June 2020), more than 2,300 investors had signed up to the UN’s Principles for Responsible Investment (PRI). This means that more money is now managed by people who will judge companies’ cash distributions and executive pay in “a context broader than shareholder primacy.”
According to the KPMG CEO Outlook Pulse it is a trend that is here to stay and there will be a continued focus on social issues along with broader ESG themes. “Over the past year we have seen a marked increase in CEOs taking active positions on long standing social issues that came into sharp relief during pandemic tensions,” says KPMG. “Business leaders want to preserve and build upon their organizations’ sustainability and ESG accomplishments during the crisis.”
Findings from KPMG’s research with 500 CEOs across the world found that:
- 89 percent of CEOs want to ‘lock in’ their sustainability and climate change gains.
- 96 percent say their response to the pandemic has shifted their focus to the social component of ESG, an increase from 63 percent.
- 83 percent state that they re-evaluated their purpose as a result of COVID-19 to better address stakeholder needs, up from 79 percent.
- 99 percent of CEOs say they have a stronger emotional connection to company purpose since the crisis began, up from 79 percent.
In a study of how and where corporations are discussing ESG issues, along with the number of public documents (including filings and ESG reports) published, Deutsche Bank concluded that corporations’ ESG priorities have indeed changed in response to the pandemic.
It found that the top five ESG topics are now: employee wellness, accounting practices, climate change, corporate supply chains, and social inclusion.
The Need for Transparency
It is not just paying more attention to ESG issues that will be the priority for corporates, but also the important matter of how progress is reported. The era of ‘green-washing,’ where corporates pay lip service to sustainability while taking actions diametrically opposed to progress in this area, may well be over.
As research firm Verdantix points out, the accelerating embrace of ESG metrics by the financial community is “radically changing the way CEOs at listed firms need to think about sustainability.”
“Passive sustainability strategies which focus on voluntary disclosures, glossy brochures, and self-selected material issues are no longer fit for purpose,” it says. “Whether it is the energy transition for firms in the fossil fuel value chain, the circular economy for product manufacturers, or global governance issues for services firms, CEOs need to adopt a more active approach to sustainability management.”
Commissioner Allison Herren Lee of the US Securities and Exchange Commission (SEC) makes the additional valuable point that ESG investing is no longer just a matter of personal choice. “Asset managers responsible for trillions in investments, issuers, lenders, credit rating agencies, analysts, index providers, stock exchanges—nearly all types of market participants—use ESG as a significant driver in decision-making, capital allocation, pricing, and value assessments,” she says.
Building a Digital Reporting Platform
Digital strategies will be a key ingredient of active sustainability strategies, Verdantix adds. This means that there will be significant and growing demand for “systems of record for environment, health and safety; governance, risk and compliance; product stewardship; and supply chain transparency.”
Financial institutions, including Bank of America, can provide helpful guidance and checklists to guide corporations through the new and emerging world of ESG reporting. London Stock Exchange Group (LSEG) has also developed its ‘Guide to ESG Reporting,’ which goes into the minutiae of KPIs (key performance indicators) that need to be communicated to investors and other stakeholders under UN PRI principles. These include familiar factors such as carbon emissions and water recycling, along with elements such as political donations, the number of female directors in post, social community investment, employee training days, and staff turnover rates.
LSEG further advises that firms should provide data that is “accurate, timely, aligned with their fiscal year and business ownership model, and based on consistent global standards to facilitate comparability.” Without an integrated digital platform to support reporting and disclosure, organizations will clearly struggle to achieve those aims, particularly as the requirements for ESG-related information continue to morph and change in the next few years.
It is also clear that it will be difficult, if not impossible, to put the ESG reporting genie back in its box as the business world recovers from the pandemic. This will be driven by stakeholder pressure as well as regulation, so the time is right to implement a platform that supports this more complex situation.
“Over the long run, COVID-19 could prove to be a major turning point for ESG investing, or strategies that consider a company’s environmental, social and governance performance alongside traditional financial metrics,” conclude Jean-Xavier Hecker and Hugo Dubourg, Co-Heads of ESG & Sustainability at JP Morgan EMEA Equity Research.
At insightsoftware, we provide a digital platform that integrates with your current systems to streamline ESG reporting. Give us a call to find out more about Certent Disclosure Management from insightsoftware or to book a free demo.