These are exciting times, in which investors are not only affecting the market cap of traded companies, but also influencing corporate behaviour and even having a hand in determining which companies will continue to exist at all
Finance is the fundamental resource without which no business can survive. Businesses have long recognized the importance of keeping their investors happy, and that doing so requires more than delivering a healthy financial return.
In a world where being investor friendly is critical to a company’s success, the rise of sustainable investing around the developed financial world represents a call on businesses to step up their ESG game.
Institutional investors are taking more of an active interest in their holdings, increasingly prioritizing social values in deciding where to invest their funds. In a recent study entitled Shareholder value(s): Index fund activism and the new millennial corporate governance, the commitment of giant index mutual funds in the US to the social values of millennials is taken as a predictor of increased influence of the investor community as a whole on corporate behavior. Since financial markets are so closely linked, it would be safe to expect that this trend will cross the globe.
More than just a set of measurable parameters, ESG is in fact a brilliant investment tool that reflects a whole new attitude in business. This is the future, as global wealth management firm UBS states in its latest Investor watch on the year ahead: ‘Environmental disruption will likely continue, and sustainable investing will be mainstream.’ Those who fail to acknowledge this new reality risk alienating investors, failing to attract the funds they need to operate and grow, and ultimately being left by the wayside.
Not only must businesses talk the current language of the investors, they must adjust themselves in real terms to meeting investor demands regarding implementation of and compliance with ESG standards. Investors want to know that at the heart of the business strategy of their target companies lie core social values and a desire to make the world a better place for its inhabitants, today and into the future.
We can think of ESG parameters as a kind of ‘health check’ of a corporate target. Just as a blood test enables a doctor to evaluate how a patient’s organs are working, as an indicator of overall wellness and potential risk factors, ESG enables investors to view an organization from the inside out – and not just from the bottom line shown in the P&L statement - identifying risks to which the target is exposed as a result of specific strategies and policies.
It is in this way that ESG principles represent a revolution in the global economy, in which the financial community dictates how companies should act, which of them will enjoy the levels of financing that enable them to flourish, and ultimately, because finance is the raw material that sustains them, which will continue to exist.
This is an evolving process that we are beginning to witness as it unfolds; it is in the hands of IROs, as facilitators of two-way communication between their managers and investors, that it will gather momentum. We can all look forward to these two ‘communities’ working together towards an optimized business culture that brings prosperity to all company stakeholders, and eventually to society as a whole.
Iris Lubitch is founder of SmartTeam, an IR and strategic consulting firm
