And when colleagues and I looked at data for more than 3,000 firms between late February and late March 2020-when global financial markets were collapsing-we found that the ones the public perceived as behaving more responsibly had less-negative stock returns than their competitors. Indeed, in the opening weeks of global bear markets following the spread of Covid-19, most ESG funds outperformed their benchmarks. That’s because companies are likely to be more resilient in the face of unexpected shocks and hardships if they are managed for the long term and in line with societal megatrends, such as inclusion and climate change. It’s an open question whether ESG issues will remain as salient to investors during a global pandemic and the associated economic downturn-but my bet is that they will.
And some use the data as activists, investing and then urging companies to clean up their acts. Some seek out high ESG performers, expecting exemplary ESG behaviors to drive superior financial results, or wishing, for ethical reasons, to invest only in “green funds.” Other investors incorporate ESG data into fundamental analysis. Some screen out poor ESG performers, assuming that the factors that cause companies to receive low ESG ratings will result in weak financial results. Today the data is widely used by investors. Until the mid-2010s few investors paid attention to environmental, social, and governance (ESG) data-information about companies’ carbon footprints, labor policies, board makeup, and so forth. Management should take five steps: Adopt strategic ESG practices create accountability structures for ESG integration identify a corporate purpose and build a culture around it make operational changes to ensure that the ESG strategy is successfully executed and commit to transparency and relationship building with investors.
To gain a competitive advantage, firms should instead focus on the ESG issues that are financially material for them and pursue those in distinctive ways. Yet their firms aren’t being rewarded by capital markets.įollowing the crowd on ESG activities is not the answer.
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MacMahon also discusses why certain companies’ ratings have improved or worsened and how to put your best foot forward. The process involves identifying the risks a company faces, assessing how well it’s managing them, and engaging in follow-up dialogue to ensure accurate analysis. In this article the head of ESG research at Sustainalytics, which gathers information on tens of thousands of companies worldwide, explains why this data matters and how his firm arrives at its performance ratings. Over the past decade, more and more institutional investors have taken an interest in companies’ records on environmental sustainability, social responsibility, and governance. That’s the contention of the authors, who offer a research-based framework called SCORE to guide boards’ actions: Simplify-define and communicate your purpose clearly Connect-link your purpose to strategy and capital allocation decisions Own-ensure that all employees embrace the firm’s mission and have the means to deliver on it Reward-tie executive compensation to metrics that include ESG performance Exemplify-use data and narrative accounts to show stakeholders how you’re achieving your purpose and improving sustainability. To build long-term profitability, boards of directors must pay more attention to ESG concerns-and a compelling corporate purpose should underpin their efforts. He makes five recommendations: Identify the material issues in your industry and develop initiatives that set your firm apart from rivals create accountability mechanisms to ensure the board’s commitment infuse the whole organization with a sense of purpose and enthusiasm for sustainability and good governance decentralize ESG activities throughout your operations and communicate regularly and transparently with investors about ESG matters. What they need to do, says Harvard Business School’s George Serafeim, is integrate ESG efforts into strategy and operations. Companies don’t win over investors just by issuing sustainability reports and engaging in other standard ESG practices.
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