By Eric Vermeiren, lead adviser at Nasdaq ESG Advisory Program
Over the past 18 months, a series of crises has shaken the status quo for businesses, bringing ESG issues to the fore, particularly amid the advancement of stakeholder capitalism. We’ve witnessed the devastating toll of the ongoing pandemic and the reawakening of the fight for racial justice and socio-economic equity following the murder of George Floyd and countless others.
The societal reckoning has been coupled with catastrophic environmental challenges, from record-breaking temperatures to wildfires, floods and other climate change-related disasters. Given these circumstances, it’s clear, now more than ever, that in order for companies to profit over the long term, they need to consider the needs of all their stakeholders – investors, employees, customers, communities, suppliers and the environment – and build a robust ESG program.
IR typically plays a major role in strategically assessing stakeholder priorities, executing those strategic initiatives and engaging key external stakeholders to manage risk effectively and capture the full spectrum of ESG opportunities. With asset managers and asset owners viewed as some of the largest engines for ESG progress, IR teams must take notice of what is required to build an investment-grade ESG program.
Implementing and executing your ESG strategy Forward-thinking companies do not view ESG in a silo but rather as initiatives that, when tied to corporate strategy, aligned with their vision and governed through the board and senior management, contribute to overall business success.
When building an ESG program, forward-thinking companies use a systematic approach to measure their own environmental and social impacts and assemble a clear baseline reading of their ESG reputation and performance – otherwise known as a current state analysis. By monitoring and measuring various environmental and social impact areas, such as carbon footprint or diversity metrics, companies can better manage their respective performance.
But business leaders know that performance does not exist in a static state: they recognize that it should be examined alongside the varying priorities of key stakeholders. Through a stakeholder engagement process called materiality, a company can identify its most crucial stakeholders – parties that can make or break a company’s revenues, profits and long-term plans.
Once stakeholder expectations are clearly understood and weighed appropriately, management can prioritize business activities to optimize ESG efforts.
Execution & implementation Once priority areas are identified, leading companies invest in a repeatable process to collect, manage and house their ESG data.
The data-collection process typically involves upwards of three dozen subject matter collaborators from the issuing company, ranging from traditional financial data to data on human capital, community involvement and environmental impact. Data credibility and access to historical information become crucial at this point.
The next step is to develop specific, measurable goals that map to the priority ESG areas identified through current state analysis and stakeholder materiality. The act of setting clear and ambitious goals helps to clarify a pathway forward so that resources, time and attention coalesce in a collectively reinforcing manner to maximize progress.
The last step is communicating progress on ESG targets and goals to stakeholders by publishing commitments and disclosing implementation plans and metrics, as well as discussing setbacks and headway. For stakeholder capitalism to work effectively, companies must foster trust and be held accountable for their actions. Leading companies are consistent in their communications and share vital ESG data and information through vehicles such as SEC filings, proxy statements, sustainability or ESG reports and quarterly earnings reports.
Capture ROI by engaging stakeholders While execution and implementation are pivotal, business leaders must understand that ESG is as much an opportunity as a risk. By investing in positive social and environmental impacts, companies can not only boost revenue growth but also increase productivity and attract new sources of capital. In addition, when managed strategically, ESG can be a valuable tool for stakeholder engagement, expansion and value creation.
Releasing an ESG report without a go-to-market plan to engage investors on an impactful story misses both a risk-mitigation plan and a value-creation opportunity.
IR teams at leading companies act as a go-to-market strategy for ESG programs. They integrate their ESG strategy into their existing investment story; these should not be different stories but one integrated approach to communicate long-term growth and impact.
Armed with that integrated investment story, leading IR teams use an updated IR deck (inclusive of their ESG story) to update investors via regular engagement, and run annual ESG roadshows using updated ESG communications as an opportunity to update the market and discuss the strategy with long-term investors. Forward-thinking companies also leverage their board during governance engagement with top holders to focus on key risks and opportunities ahead of proxy voting season.
Doing well by doing good Serving stakeholders is not just an ethical good – companies that seek to maximize their stakeholder impact by identifying and isolating their areas of greatest impact can make the greatest contributions by leveraging their competitive advantage. Companies that embrace a wider role and operate as part of our broader society will be poised for success in our uncertain future.