How can organisations tackle the ever-increasing importance of ESG?
The role of digitalisation in improving governance.
Over the last decade, Environmental, Social, and Governance (ESG) topics have become a key concern for corporates and shareholders alike. Companies can no longer focus on operational performance alone. In order to strengthen investor relations and the consumer-facing brand, they must also pledge to adhere to the high ESG standards that shareholders, regulators and the general public have come to expect.
ESG is nothing short of a critical factor in capital markets transactions and shareholder engagement. The absence of a clearly defined and comprehensive ESG framework can have a significantly negative impact on investor partnerships. Negative ESG perception can also impact on consumer and employee sentiment which, in turn, will hit operational performance and the bottom line.
ESG strategy therefore, can have a direct effect on a company’s valuation, growth prospects or ability to raise new capital and should be front of mind at every stage of a company’s expansion or capital development cycle.
In this article, we are going to delve further into the issues of ESG - particularly issues of governance which are often mistakenly overlooked - as well as exploring how organisations can manage investor partnerships in light of this.
Environmental Shareholder Activism
The so-called “Greta effect” has put environmental issues at the forefront of people’s minds for years now and the Coronavirus pandemic has only increased the pressure on many companies. In 2020, Industrials was the most popular market for shareholder activism, with activists targeting a number of businesses across Europe in order to shift environmental corporate practices.
Social Shareholder Activism
Social factors such as supply chain, labour relations and health and safety issues have also historically been well considered as well as being recently amplified by COVID-19. Alongside a steady focus on this, the objectives of investors have further been impacted by the diversity and inclusion issues raised by the Black Lives Matter and MeToo movements. From January to April this year, over 20 US-based companies have faced shareholder activism over diversity issues; the same is only likely to follow in Europe.
Objectives of Investors: G For Governance
This focus on environmental and social issues has often meant that governance, which accounts for a significant part of ESG reporting (44% according to a recent 2019 NASDAQ study), has seemingly drawn less public attention. This however, does not negate from the importance of the issue, particularly in the eyes of institutional investors who have increased their scrutiny and observations on this.
A lack of corporate governance can lead to profit loss, corruption, corporate scandals, fraud and a permanently damaged company image. This is highlighted by recent large-scale European accounting shareholder activism scandals such as Wirecard and Steinhoff.
Governance can also be tested to its limits when corporates undertake transactions that expose them to rules and regulations that they are not familiar with, in particular in the capital markets. The need to onboard bankers, advisors, lawyers are all testimony to the risks that an M&A deal or capital raising represents for any company. When identifying investors, exchanging private or proprietary data or deciding on the allocation of shares, all stakeholders are exposed to scrutiny by their relevant regulator, controlling entity or law enforcement agency.
The Importance of ESG Strategy
Best-in-class ESG leaders will reap the benefits. Not only will they avoid potential reputational risks and negative attention from shareholder activists, but their recruiting and consumer marketing efforts will accelerate. According to the Nielsen Global Survey of Corporate Social Responsibility, more than half of consumers surveyed were willing to pay more for products and services provided by companies committed to positive social and environmental impact, with two-thirds of respondents saying they would work for such a company.
In terms of investment, ESG strategy can have a direct effect on a company’s valuation and growth prospects as well as its ability to raise new capital at every stage of its expansion or capital development cycle.
Conversely, with the advent of ESG ratings agencies and data providers, non-compliance on ESG topics can immediately impact valuations and affect a company’s capacity and ability to meet ongoing financial commitments. By quantifying what was once a ‘soft’ or qualitative topic, ratings agencies are optimising the ESG risk-return characteristics in the mainstream investment process, and in turn paving the path for companies to adhere to more sustainable long-term growth. A recent 2020 McKinsey & Company study found that 83% of C-suite managers and other investment professionals expect that ESG programmes will be a key driver of increased shareholder value in the next five years.
In today's business environment, it should be obvious that good corporate governance is a particular priority for investors. Corporate governance requires companies to be more accountable and transparent in investor relations and gives them the ability to respond to legitimate investor concerns. With Covid-19 placing additional scrutiny on governance considerations such as dividend pay-outs and management compensation, now is not the time for companies to overlook the importance of Governance in their ESG strategies.
Alongside market regulators, investors who are keenly focused on corporate governance risk mitigation, have been driving forward change in this area through voting rights at AGMs and engaging with company management. Frequent communication with investors, companies and Proxy Advisors (who analyse Corporate proxy documents and advise their Investor clients on how to vote) is essential. Governance topics necessitate a greater level of data collection, assessment and communication of results with investors; fragmented and inconsistent governance data only increases the difficulty faced by investors when evaluating a company's governance performance. A standard, quantitative tool to digitise corporate governance evaluation and make the process more transparent is key. Use of an augmented CRM tool for investor relations can offer a standard system to present governance related information in a more clear, transparent, and quantitative way and could largely facilitate the work of investors.
ESG Strategy impact on new investment
Private companies, especially small and mid-sized companies that lack the resources to navigate the complex world of ESG disclosure and opaque terminology, may struggle to clearly communicate their ESG strategy to investors. This puts them at a disadvantage when it comes to raising new capital.
Likewise, listed companies who lack a coherent or compliant ESG strategy may experience muted interest in their shares or even a sell-off following buy-side portfolio rebalancing. Investors are increasingly applying ESG metrics to existing portfolios and new investments, with the understanding that ESG investments don’t directly drive portfolio outperformance, but are seen more as a risk mitigation measure. In fact, 34% of investors surveyed in a recent Natixis report cited ESG investing as a key risk mitigation tool.
ESG Strategy Solutions
Praexo’s solutions are data-centric, digitalised, and enable a direct communication channel between investors and corporates. Our augmented CRM tool for investor relations positions data at the heart of investor relations, and offers a transparent way for investors to evaluate and provide feedback and comments including specific ESG items. Ascertaining the objectives and requirements of investors therefore becomes much less of an issue.
ESG issues can be laid out in both qualitative and quantitative data in an immediate exchange of information. Private companies raising capital, or listed companies using our software for investor relations are empowered by our digital solution which facilitates the immediate exchange of information.
At Praexo, governance is in our DNA. By enabling this digital link between a company and its investors, Praexo contributes to an improvement in governance both for new capital raisings and ongoing investor relations. We firmly believe that the highest standards of ESG leadership can only be achieved when companies are able to track and provide the data that supports their claims and engagements.