Mobilizing Environmental, Social and Governance (ESG) in Corporate Communications and Investor Relations
ESG factors have merged into the business communications scene, with institutional investors amplifying their use of ESG screening, and ESG investing taking the number one growth position in investment products. ESG metrics, once referred to as ‘non-financial indicators’, are now understood to be ‘pre-financial and leading indicators’ by those who are in the know. That’s because, with 15 years of data since the idea was introduced to the markets, there’s now a litany of evidence proving the link between ESG and financial performance. Here’s a skim on significant movements and headlines in the ESG field.
Global Markets Warm Up to ESG … Avoid Global Financial Meltdown
In December 2016, a Task Force on Climate-related Financial Disclosures (TCFD), released eye-popping recommendations for G20 financial markets. Why do we care? Well, the TCFD is a group of global heavy-hitters led by Michael Bloomberg. They were tasked by the Financial Stability Board (i.e. Federal Reserve, Bank of England, German Federal Bank, Bank of Canada, and their G20 peers), to figure out how to avoid a global financial meltdown caused by climate risk. The taskforce said climate disclosures should be expected from not just the individual companies, but also from the institutional funds and parties that invest in these companies. Expect to see this roll out in a real way over the next year, with massive pools of investments, labor and endowment funds reporting on climate exposures and asking their investees (i.e. companies in retirement funds) for their own data to roll-up to their own reports.
Across the Pond: ESG now Defacto in EU
December 2016 was also the deadline for all EU countries to have written into their country laws, their rules mandating companies with more than 500 employees to include environmental, social, diversity and anti-corruption matters in their annual filings (applies also to subsidiaries of non-EU firms too). These requirements are to be in force for the 2017 reporting year. Since the EU directive was passed in 2014, around 6,000 companies in the EU (there are 18.5 thousand US companies with more than 500 staff) have been preparing to report on key pre-financial metrics. North American companies not directly impacted by this directive should benchmark against their EU peers to monitor impact on the competitive landscape (e.g. cost reductions, risk management, innovation, brand reputation, workforce loyalty).
Meanwhile, Back in North America…See You in Court?
Even though we won’t see more US regulation anytime soon, that won’t slow demand for ESG discipline, as there are already plenty of rules and frameworks to guide ESG disclosure. The legal definition of investor materiality is set out by the Supreme Court and this means material climate and other environmental and social risks should be disclosed in financial filings. (Here’s the Supreme Court definition, in case you don’t have it etched in memory yet.) Then there’s SASB, the Sustainable Accounting Standards Board, which sets out all ESG material topics for all 79 Industries of the entire US economy, using the Supreme Court definition as the benchmark for materiality. For these reasons, the pundits on this side of the pond see the ESG disclosure debate being worked out by investors in proxy voting, and in the courts.