ESG – a groundswell that’s here to stay

ESG has been in the public consciousness for a few years now – but it’s fair to say that 2020 and 2021 have seen a huge uptick in awareness, writes Dr Kaushik Sridhar.

Ten years ago, ESG was a grassroots initiative. Today, it is top-down. Ten years ago, issues of corporate social responsibility (CSR) – such as measuring carbon footprints, socially responsive company policies, or ethical supply chains – might have been championed by activist employees or customers, but they were not a business objective for most organisations. What a difference a decade has made.

Social change, advances in technology, and the ability to prove ROI have elevated environmental, social, and governance (ESG) issues. These are now hot topics in the boardroom and increasingly a requirement for investors, employees, and customers.

ESG has been in the public consciousness for a few years now – but it’s fair to say that 2020 and 2021 have seen a huge uptick in awareness. The COVID-19 pandemic might have been a trigger – as countries systematically “locked down”, we saw unexpected improvements in the environment. But more than that: this year, communities around the world have also engaged in serious debates around gender and racial inequality. The younger generation is engaged in this conversation; and besides protesting and voting, they’re now using their investment dollars to do their talking. Can we finally state that, far from being a passing interest, ESG is here to stay?

Earning a social licence

The pandemic has amplified the growing need for companies to not just have the legal ability to go about their business, but also to earn their social licence to operate. By that we mean companies gaining broad approval for their actions from all stakeholders, not just a narrow band of shareholders. These stakeholders can include a company’s workforce, its customers and the communities and societies in which it operates. Prioritising shareholder value and short-term profits over long-term sustainability were already becoming deeply problematic pre-COVID-19. We expect this trend to gather more steam from here as some companies welcome the opportunity to change for the better.

Sustainable investing now counts for one in four dollars

Almost 25 per cent of investment in the United States now goes into ESG companies. In Australia, the Responsible Investment Benchmark Report 2021 reveals that responsible investments now make up 40 per cent of the total market, up from 31 per cent in 2019. Responsible investment assets are growing at 15 times the rate of the overall professionally managed investment market.

The path forward

Many companies have failed to recognise that the functional role of ESG data has changed over time. Initially such data was used to judge a company’s willingness to avoid harm and do good. As a result, it was primarily an input to help form policies that signalled a firm’s commitment to achieving positive outcomes for the environment and society.

However, investors are increasingly asking a different question: not whether a company has good intentions but whether it has the strategic vision and capabilities to achieve and maintain strong ESG performance. That means companies need to start measuring and reporting the results of their initiatives. Instead of communicating their policies for improving data privacy, water management, climate change mitigation, diversity, and other issues, they must communicate outcome metrics such as the number of customer accounts hacked, litres of water consumed per unit of product produced, carbon emissions saved, and percentage of women and people of colour promoted internally to management positions.

Moving from intention to results is the next evolution that investors are looking for. The only way to outperform in this new era will be for companies to make material ESG issues central to their strategy and operations, to go above and beyond their competitors, and then to measure and communicate their superior performance. Global society faces enormous challenges. But if companies are bold and strategic with their ESG activities, they will be rewarded.

We all, I suspect, will become ESG investors in the end.