- New York
Values are valuable
The economist Milton Friedman once argued that the only social responsibility of a company was to its shareholders, suggesting that profit maximization should come ahead of any consideration of environmental, social and governance factors (ESG).
This assertion now appears largely defunct, with the opposite seemingly true, that value can be derived from values. Investors increasingly acknowledge that sustainable and responsible business practices are crucial when considering long-term profits.
The consideration of ESG factors by investors has risen dramatically in recent years. In fact, 2019 was described as ‘the year of ESG’; with sustainable funds seeing inflows of USD 20.6 billion. Assets in the space hit a record high of USD 960 billion by the end of the year.
The trend is only set to increase. The 2020 Global ETF Investor Survey found that over 70% of global investors plan to increase their allocation to ESG exchange-traded funds (ETFs) over the next year, with nearly a fifth of respondents believing they will have up to half of their portfolio in ESG ETFs in the next five years.
And what of Covid-19? Has it dampened the enthusiasm of investors, in favour of the single- minded pursuit of returns? In fact, the market shock triggered by coronavirus has made investors aware of the huge material risk of failing to pose wider questions around public health,
the environment and corporate governance, and the necessity of looking more closely at the sustainability of global business models.
Although Covid-19 set a general tone of risk aversion on markets in the first quarter of 2020, with USD 384.7 billion of outflows for the overall fund universe, ESG funds were more resilient, suffering fewer drawdowns in relative terms and seeing USD 45.6 billion of inflows.
With interest in ESG on the rise, and a corresponding increase in the volume and availability of ESG products on the market, the importance of adequate disclosure and reporting is evident, not least among asset managers and other financial-services companies.
Investors need access to robust and substantive ESG information in order to make informed decisions, while companies and asset managers will increasingly face regulatory pressures to disclose.
What does a good ESG report look like?
In many parts of the world, annual ESG reporting by big companies of all stripes is mandatory, and investment houses are frequently at the vanguard of that. Though often not obliged to do so, smaller companies also increasingly produce official ESG reports because they believe it’s the right thing to do.
All recognise that strong ESG credentials are a way of attracting customers and building loyalty. And for investment firms, whose own products are often explicitly marketed as being underpinned by ESG principles, ESG reporting is a crucial element of building up and sustaining their credentials.
Whether you’re creating an obligatory ESG report or your own non-mandatory version, it’s important to truthfully reflect your company’s current status. Some companies are already committed to a fully green and ethical business model, while others are beginning their journey.
Your ESG report will help your company define what progress it has made and what progress it can prioritise next. It also creates goals and a message that can be shared across the company.
The act of collating information and creating the report will often galvanise action in inspiring and unexpected ways.
According to our white paper, here are our steps for making a standout report:
1. Be clear about your opportunities
2. Be open about challenges
3. Measure, analyse, compare and set targets
4. Express long-term goals