Environmental, social, and governance (ESG) topics are prominent areas of focus for C-suite leaders this year. Why is this?
- Changing Social Demographics: Companies face societal pressures to adopt more environmentally friendly and culturally inclusive business practices.
- Capital Allocation: Tremendous growth in ESG investment activity. Over the last 10 years assets in sustainable mutual funds have grown from roughly $110 billion to roughly $1.6 trillion.
- Government Regulation: Governments have stepped up their focus on ESG issues through a combination of global policy adjustments and international cooperation.
The ESG Universe is massive—consisting of both risks and opportunities—spanning topics as broad as carbon emissions, employee empowerment, and business ethics. Firms on the forefront of sustainability unlock considerable upside as they respond to customer and investor preferences more quickly than their peers. They have opportunities to attract more long-term investors and deliver outperforming stock returns. They are more attractive places to work and have lower costs of capital. Sustainable products can charge higher prices and appeal to growing, valuable sets of Gen Z consumers. Ultimately, reported data is meant to be valuable not just to external stakeholders, but to company management as well. Reporting on material issues means those issues have important financial impacts and should be monitored.
Defining which ESG topics are material to the business is the first step a firm should take on its ESG journey. The process includes interviewing key internal and external stakeholders, benchmarking against competitors, and reviewing industry-specific guidance from international NGOs such as the Global Reporting Initiative and the Value Reporting Foundation.
Key indicators of topic materiality include:
- Direct Financial Costs
- Regulatory and Policy Drivers
- Industry Norms and Best Practices
- Social Trends and Stakeholder Perception
- Opportunities for Innovation
Public and private investors are increasingly demanding sustainability information from companies. Why? Research consistently shows a positive relationship between sustainability performance and financial performance. Major hedge funds like BlackRock and State Street have requested companies to disclose risks associated with ESG topics. In 2019, Blackrock released guidance to companies to publish a disclosure in line with Sustainable Accounting Standards Board (SASB) standards and to disclose climate-related risks as specified by the Task Force on Climate-related Financial Disclosures (TCFD). According to the CAQ, 95% of S&P 500 firms are already producing annual sustainability reports.
It is not just investors driving demand. Countries like Australia, India, Japan, South Africa, and the UK have instituted policies requiring corporate sustainability disclosure. Similarly, the European Commission has delivered a directive to EU members outlining requirements for disclosure. Global financial and industry associations have also requested this information from companies.
MorganFranklin consultants understand the complex international ecosystem of sustainability frameworks and standards and can assist company leaders in selecting the appropriate path forward based on their specific operations and growth trajectory.
ESG Due Diligence
Leading investors today are incorporating ESG factors into their decision-making processes. The Principles for Responsible Investment (PRI) organization now boasts 4,375 signatories, representing US$121tn of AUM. To access this capital, GPs must demonstrate how they assess potential investments.
How MorganFranklin help
MorganFranklin and our certified subject matter experts provide our clients with a launching point to define an ESG strategy, select the material topics, and establish appropriate governance for program accountability. Learn more about our ESG advisory services or speak with our experts by filling out the form below.