In the past year or so, investors have become more demanding as regards what they expect from companies in terms of their purpose; their culture; their governance; their approach to ensuring they are sustainable; their efforts to mitigate ESG risks; and their progress in engaging meaningfully with their stakeholders.. Covid-19 has only accelerated this momentum.
To assist them in their decision-making around evaluating ESG performance, investors are building up their in-house ESG teams and creating their own framework and metrics. Investors have also grouped together to create organisations such as IIGCC (Institutional Investor Group on Climate Change) and initiatives such as Climate Action 100+. At the same time, rating agencies and other data organisations are number-crunching publicly-available data and producing ESG scores on companies. Consequently, many companies are now facing awkward conversations with investors (and other stakeholders) who are asking them questions - such as what is your net zero strategy, are you conducting materiality assessments, how are you embedding ESG within your business, how are you measuring stakeholder engagement etc - to which most don’t yet have the answers. It is understandable that companies are currently preoccupied with operational matters as they navigate choppy waters due to COVID-19; however superficial responses and explanations around ESG will not wash with investors.
Companies do not need to have all the answers, but they do need to explain their thinking and their actions around ESG and communicate the journey they are on. The time of simply reporting on an annual basis has passed. Companies need to embed ESG in their business, reflect this in their narrative, demonstrate progress and be proactive, rather than reactive, in their approach. By doing this, companies will be in a stronger position to take back control of their ESG agenda.
2021 will be an important year for companies to act and report on ESG. With numerous aspects of ESG likely to become mandatory and COP26 being held in November next year, interest will only increase.