ESG is back (and not just the E in ESG!)

Jul 07, 2020

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The world has changed in a few short months – some areas of life are almost unrecognizable from how they were at the start of 2020 – and just about everyone on the planet has been impacted in one way or another by the pandemic. That impact has very often been tragic in nature, affecting the health, lives and well-being of families and friends, and severely challenging the economic models upon which we all rely. Regardless of the condition of global economies, nothing could have prepared us for the speed and scale of the shock.

Even in the midst of the crisis, however, there were both positive and hopeful signs all around us. An improvement in community spirit in many places, an increased focus on the more vulnerable members of society and an appreciation for the frontline health and care workers who we had perhaps taken for granted until they so visibly risked their own lives in saving others.

The return of ESG

Perhaps most of all, though, the crisis has served as a reminder that there is another issue that also impacts everyone in the world: the state of our environment. Last year was undoubtedly the year the climate-change debate became mainstream but in 2020 it has taken a back seat while Covid-19 was front and center on virtually all channels for news and debate. In the background, however, we have also been made aware of sudden improvements in a variety of environmental measures, emanating particularly from reduced travel, transport and industrial activity.

Furthermore, there is strong evidence that both the asset management community and retail investors see ESG as a positive response to the crisis – as a means perhaps by which we can drive change for good. For instance, according to a recent report from Morningstar1, global market share of responsible investing actually increased in the first quarter of 2020, with inflows far outpacing the outflows seen in non-sustainable areas.

The sleeping giant awakes

So what must corporations do to ensure they are positioned optimally to capitalize on the growth in this critical area? Well, each area of ESG presents its own challenges to this question so the role of IR professionals is to ensure their company responds thoroughly on every ESG theme as it relates to their business.

Environmental – Arguably, this is the area that has received the most attention in recent years as awareness of environmental impacts has become more heightened. In practical terms, corporations must be prepared to reflect climate-related risks in their financial statements and, more importantly, how they are planning to mitigate against those risks.  IR Magazine has reported on research that shows a surge in UK FTSE 100 companies that have mentioned the Task Force on Climate-related Financial Disclosures in their reports2, for example.

There is also a strong likelihood that future environmental reporting, particularly as it relates to corporate risk, will become a focus area for auditors when examining company statements.

Social – This subject has received most attention during the early part of 2020, not least regarding how corporations have treated customers, employees and suppliers during the crisis, but also because it has coincided with responses globally to the Black Lives Matter movement. A number of key questions are raised by the social theme that demand a response from companies:

  • How is the company treating its employees, and the people in its supply chain, post-pandemic? Increasingly, companies need to demonstrate they are supporting their employees, and even those of their suppliers, fairly and empathetically, to the best of their ability. They also need to show they have accounted for the emotional impact of actions like furloughing staff and rapidly introducing flexible working; they must demonstrate that they are enabling support across a range of functions and, of course, helping staff plan to return to places of work
  • Where the pandemic has accelerated corporate transformation initiatives, how is the company managing the impact on its employees? Focusing on business efficiencies and driving shareholder value could result in lower attention to the emotional needs of employees; that might not only affect that company’s social responsibility goals but may also reduce the effectiveness of those programs if employees are not fully on board with initiatives
  • What has the pandemic revealed about the culture of the organization? Companies need to develop an appreciation of what the pandemic has revealed about culture, among management, employees and the communities they serve. Positive responses to issues around worker exploitation, gender equality, racial diversity, LGBT+ rights and accessibility can be used as a foundation for positive associations with external stakeholder groups. Likewise, any movement to support the economic needs of communities will result in long-term PR benefits both inside and outside the organization.

Governance – Key to this theme is demonstrating that the company has reacted as positively as possible to the crisis, limiting the damage to performance, acting responsibly toward all stakeholders, identifying opportunities to reduce the impact on the company and perhaps even grow the business. This raises again the issue of risk, not just in terms of the response to the crisis but also, given that we were previously unprepared, how the company has changed to embrace the possibility of something like this happening again.

Additionally, now that we have entered a ‘new normal’, companies must be prepared to answer questions about why they conducted business the way they did previously, as well as on how the situation can be a catalyst for improvement. Specifically, the use of proxy voting rights as a disruptor will become more prevalent as activists seek to engage with management to influence leadership and drive real, long-term change. Companies should be prepared to embrace these groups and accept that they hold the pulse on opinion across multiple stakeholder audiences.

The ask for IR professionals

All this evolving expectation means reporting is going to become steadily more complex and involve an increasing number of moving parts across lines of business. This complexity, combined with downward pressure on budgets in the wake of the crisis, means IR departments more than ever will need to be as effective as possible in communication and as efficient as they are able in their processes.

Sharing the load by outsourcing content functions is one way to overcome the challenge – and this is where a partner like SDL can help. SDL offers an end-to-end annual reporting service that covers local and international jurisdictions, translation in up to 180 languages and a full-service design and typesetting capability for all formats, content types and channels. Globally, SDL delivers hundreds of annual reports each year, including a large proportion that involve ESG statements.

SDL has the subject matter expertise and the global scale to streamline the entire report-issuing process. Find out more about SDL here.

 

Notes:

  1. https://www.morningstar.co.uk/uk/news/202274/investors-back-esg-in-the-crisis.aspx
  2. https://www.irmagazine.com/esg/two-thirds-ftse-100-mention-tcfd-reporting-finds-research

 

This content is provided by SDL and did not involve IR Magazine journalists. For further information on SDL solutions for Investor Relations please click here.

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