How to leverage your ESG efforts to communicate value
While it’s come under fire in recent days, the ESG movement has already succeeded in one respect: It’s changed the game in how companies communicate their values, forcing them to replace platitudes with hard facts and figures. As a result, marketers and communicators — and the organizations they serve — will have to step up their game or face being left behind.
What is ESG? ESG stands for Environmental, Social and Governance. It’s a set of non-accounting factors that investors and asset managers use to evaluate a company’s performance. Environmental includes reviewing emissions and other green and sustainability factors. Social may look at a company’s record on labor and social issues or how its products contribute positively or negatively to society. Governance looks at the makeup of a company’s board of directors in terms of representation and quality. Currently, there are no official ESG standards in the United States — asset managers develop their own sets of investment criteria. Evaluations may look at just the company under scrutiny, or its whole supply chain.
Asset managers have created ESG funds that include companies with strong ESG “scores” and exclude those without high marks. The idea is that companies ahead of the ESG curve are likely to be better long-term investments because they’re better at adapting to climate change or other large societal issues. While so-called “sustainable investing” dates back to the 1970s, growth in ESG funds has accelerated over the past decade, especially over the past few years. Advanced technology is helping spur future growth. Big data provides the ability to measure ESG efforts in real time. This metrics-based approach to sustainable investing provides real data, pushing companies to take measurable action or risk losing investment dollars (https://www.blackrock.com/us/financial-professionals/insights/decoding-the-markets-esg-x-big-data).
So, what’s the problem? ESG’s reputation has taken a beating in 2022, garnering more negative headlines than positive. “R.I.P. ESG” is one of the more popular. Recent headwinds for the movement include:
- A run-up in the price of oil during the first half of the year. Energy companies banked record profits and returned much of it to investors in the form of dividends, attracting more investment dollars in return. As a result, those ESG funds that avoided these stocks underperformed in the marketplace.
- Conservative politicians have taken up the anti-ESG cause as a new front in the war against “corporate wokeness.” States like West Virginia, Texas and Florida are banning state pension funds from working with ESG asset managers or using ESG principles for investing.
- A lack of transparency and consistency in how funds score their self-developed ESG criteria has raised questions about the integrity of the system. S&P drew criticism when it dropped Tesla from its sustainability index while keeping Exxon in it. This spring, Deutsche Bank was raided as part of an investigation into fraudulent sustainability credentials of certain investments.
The last point is probably the greatest concern for ESG investors. The market has become too big and the unregulated criteria too general, creating an atmosphere that’s both ripe for manipulation and absent of meaning.
What’s next? ESG won’t go away but it will evolve. A clear set of ESG standards would strengthen its future. A break-up of ESG into three separate efforts is one way the movement may adapt in order to maintain investor trust and relevancy. In any case, corporate communicators can’t afford to sit on the sidelines.
Can you take control? Yes, but it requires a little digging. A November 3 Wall Street Journal article, Why Do ESG Ratings Vary So Widely, (https://www.wsj.com/articles/esg-ratings-investing-data-raters-11667229384?page=1) provides a roadmap. Author Dr. Florian Berg, a research associate at the MIT Sloan School of Management, found vast differences when he analyzed and compared ESG criteria used by six financial firms that rate ESG scores of the companies they follow. We suggest that your communications team dig into the methodologies used by each firm that rates your ESG performance. You can then tell investors why your organization was rated higher by one firm and lower by another. (Dr. Berg can be reached at email@example.com.)
You can also look internally for data-backed results. Manufacturers who have made ESG a priority are capturing data from the factory floor and their suppliers to get a true gauge of their combined environmental footprint and impact. If your company is one of them, you have an opportunity to connect hard data with shareholder value in your communications.
Knowing your investors and customers is key. Whoever they are, you can be sure they’re scrutinizing the brands they support. You can respond to the pressure by identifying opportunities to tell your story using ESG metrics. But be sure your numbers are accurate. Millennial and Gen Z investors are onto greenwashing and efforts to call it out will go viral. To win them over, you need to talk about company values with honesty and specificity, providing concrete ESG action and the proof to back it up. And that means more legwork — engaging corporate ESG stakeholders to get the facts and challenging them when needed. As mentioned above, it’s also critical to understand the methodology of those who are creating your company’s ESG scores and be prepared to translate variances among their ratings.
The good news is ESG discussions offer a springboard for clearly communicating your company’s values and the good work your stakeholders are doing. The demand for metrics-based information will increase, as will backing from the C-suite. You’ll have more data to report, concrete actions to share and success stories to tell. And, you’ll have the whole organization behind you, because your company’s reputation, and share price, will be at stake.