The link between ESG and value creation is at risk of being lost

ESG Review 2023/24 Edition

Our third research report tracks the continuing shift in how ESG is being perceived from the Boardroom perspective of small- and mid-cap companies across the UK and Ireland.

Many Boards believe that the capital markets are failing to link corporate ESG efforts to performance and value, created by a sense that there is an overreliance on “tick-box” data. Too often there is demand for ESG data for data’s sake, rather than for relevant data; or that questions are being raised on ESG purely to satisfy regulatory demands. Few Boards feel that there is any proactive analysis to identify or differentiate how successfully ESG is being embedded as a value driver within corporate strategy and operations.

There is no doubt that the cynicism from Board members towards ESG is in part linked to the current macroeconomic environment creating a more short-term approach for corporates and investors alike. While Boards recognise that the long-term influence of ESG will return more strongly with a bull-market, this does not detract from the immediate challenges being posed by ever greater demands for more disclosure and reporting, balanced against the resulting resource constraints that many companies face. This concern increases with impending regulations and guidelines such as CSRD, ISSB, and TPT, with many Board members having the sense that they have been created for the benefit of large companies with little consideration for the impact on the small- and mid-cap market.

Despite this frustration, this year’s research shows that Boards and the executive management are ‘getting on with it’. ESG is firmly on the Board agenda and companies are continuing to embed ESG within their businesses, with the understanding that it does and will have an impact on business performance, resilience, and valuation over the long-term. This is in part because Boards are looking to do what is right for the business, but also because stakeholder influence is changing.

When we published our first research report in early 2021, the capital markets were the dominant stakeholder group driving the implementation of ESG programmes within organisations. Today, it is customers and employees, as companies strive to remain competitive in terms of their commercial decision-making and in attracting and retaining talent. As a result, while many companies may have initially delved into the world of ESG as an extension to their corporate responsibility or public relations, they are now continuing their efforts in recognition that it is right for their business, commercial performance, wider stakeholders, and the planet.

So, what does this all mean? It is clear that ESG and how it is approached needs to evolve. Our report sets out in detail the findings and how we think the small- and mid-cap market needs to respond.

Overall, there is a need for corporates, as well as regulators, the capital markets and other industry practitioners, to enact change. We believe the small- and mid-cap companies have the opportunity to lead on this and to demonstrate what sustainable business truly is.

As one of our interviewees noted: “We had an ‘ah-ha moment’ where the business said, ‘we are not implementing a sustainability strategy, we are implementing a sustainable business strategy’; it’s a small change in emphasis but meaningful nonetheless.”

We couldn’t agree more.

This approach will be critical or companies going forward. Too often, ESG is seen as a factor of cost and resource, when it can be implemented and measured as a return on investment.

Last but not least, we would like to thank all the Board members who participated in this research project for their invaluable time and input. With ESG as a concept being at a crossroads, it is vital that we share resources and ideas for the way forward. We hope that this report will provide a useful insight into the Boardrooms of the small- and mid-cap market.

Please do not hesitate to contact us to discuss the findings, implications, and potential solutions.

To download the full report, click here.