By Nikos Avlonas
Bravo to companies’ incorporating sustainability. The effort is noble and daunting. Often executives address first the environment, social and governance (ESG) issues most important to them. Other times, they delegate sustainability to a manager. An executive might be highly motivated to engage the community. A former HSE manager, now in charge of sustainability, might emphasize safety. Both are noble pursuits, but are they relevant to investors?
According to the 2018 Edelman Trust Barometer Special Report: Institutional Investors, 66 % of U.S. investors altered their behavior to incorporate ESG risks just in 2017. Investors rely on ratings agencies which look at those ESG aspects of a company with financial relevance, i.e., most material. If a company is putting resources into issues material to the company but not to investors, this can become an enormous waste of time – and resources.
ESG factors relevant to market performance vary from industry to industry. An airline is going to consider fuel efficiency both for financial reasons and to limit its carbon footprint, more so than an accounting agency. If the airline reduces fuel consumption, its financial performance, ESG rating and hence share price benefits. The accounting firm can reduce energy consumption by the same percentage and little will change in the market.
Whether you get your performance advice from Morning Star, Edelman, Bloomberg, Harvard (with research showing, “material issues are the most promising signal” informing investment decisions based on ESG criteria), or hundreds of other resources, you can no longer questions the value of ESG material issues to your bottom line. This begs the question, what is material? The answer sits with your most influential stakeholders, not just your shareholders or your C-suite, though these are important voices.
Only a materiality assessment, based on guidelines such as the GRI and industry benchmarking surveying stakeholders which have been carefully identified as having the most influence on company decision making, can provide a weighted list of those issues most material to your company and hence your bottom line.
The stronger the balance sheet, the stronger the rating. The lower the material risks, the stronger the rating. The more transparent the company in its reporting, the stronger the rating.
POSSIBLE ENDING – DO NOT USE BOTH
One of the best actions a company can take is training on sustainability issues, how to identify and assess stakeholders then prioritize material issues. The training is the first step in an iterative process. Check out CSE’s free first module of the Online Certificate on ESG Performance for Professionals and Investors, or in response to COVID-19, the Certified Sustainability (CSR) Practitioner Program, Advanced Edition 2020, October 2-5 and 6, DIGITAL VERSION.