While companies are ramping up initiatives to win interest from an investor population that’s growing ever-more focused on sustainability, it may be a race to keep pace.
Among the 47% of 189 investment professionals surveyed by strategic communications firm Clermont Partners who said they take environmental, social, and governance (ESG) factors into account when making investment decisions, 75% said such factors have become more important to them over just the past two years.
Only 2% of such respondents said ESG criteria have become less meaningful for them during that period.
Investopedia defines ESG as “a set of standards for a company’s operations that socially conscious investors use to screen potential investments.”
Environmental criteria, says Investopedia, “look at how a company performs as a steward of the natural environment.” Social criteria “examine how a company manages relationships with its employees, suppliers, customers, and the communities where it operates.” And governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
ESG is frequently considered synonymous or closely related to socially responsible investing, or SRI, but the two are quite different, Clermont notes.
The former focuses on the value that the above-defined criteria bring to investors. SRI, on the other hand, favors the stocks of companies that “do good” or that don’t “do bad.” For example, “a pure SRI investor may not hold liquor or firearms stocks, but an ESG investor might, depending on how well a company addresses ESG-related issues,” says Clermont.
Among the surveyed investment professionals, 60% identified “changing client preferences” as a key driver for the increasing importance of ESG factors in their investment strategies
But an even greater proportion of respondents — 66% — said a key driver is that ESG provides an additional way to evaluate risk. For example, engaging in business activities that have a negative impact on the physical environment can deal a heavy blow to a company’s reputation.
The same can apply to companies that maintain poor relationships with stakeholders or excessively reward executives.
A majority (56%) of survey respondents said they obtain ESG information from companies’ annual reports. Other sources included direct questions in meetings (46%), sustainability reports (44%), quarterly earnings reports (36%), and conference presentation materials (29%).
Clermont offers the following advice for proactively communicating ESG metrics:
What categories of information do investors want more of in order to better evaluate companies’ environmental, social, and governance profiles? See the chart below.