By Ari Frankel, managing director and head of ESG, Solebury Trout
After a decade of modest but steady growth in ESG-related strategies, the events and outcomes of 2020 have accelerated the ways and extent to which investors, asset managers, banks and businesses are collectively taking action on, and increasing the level of, disclosure on ESG-related topics.
Optimism notwithstanding, firms chasing higher ESG scores as an end rather than a means are increasingly at risk of greenwashing and over-disclosure while missing out on important opportunities to improve risk management, remain competitive and create additional long-term value for shareholders and other key stakeholders.
In the US, 75 percent of ‘sustainable’ equity funds outperformed their peers in 2020, leading net inflows to exceed $50 bn, which represents 10-fold growth from 2018 levels.
Globally, sustainable fund assets have climbed to nearly $2 tn and asset managers are successfully launching sizable ESG funds seemingly daily.
In parallel, commitments around diversity, equity and inclusion as well as carbon neutrality are taking hold not just at companies, but also often through industry groups. These high-profile co-ordinated actions are creating extraordinary collaboration on – and near-instant adoption of –these important programs that will catalyze a new wave of unprecedented programs, innovation and investments to propel the climate transition and inclusive growth.
With so much growth and attention on ESG-related matters among investors, customers, regulators, media and a company’s own employees, there is much excitement and optimism around the immediate and longer-term future of the planet and its inhabitants.
At the same time, the ESG profession is at an inflection point. Companies of all types – big and small, public and private, ESG leaders and starters – are facing a world full of complex scoring, rating and survey frameworks that cannot be ignored, but managing scores as end-results can stifle progress at the expense of box-checking.
Without question, the frameworks of the past 20 years have played a critical role in getting ESG to the point it is at today, driving transparency, comparison and competition among companies. That said, and record flows into green funds notwithstanding, company leaders are right to question just how decision-useful ESG scores are for their organization and for investment analysts.
It is telling that active fund managers – which continue to subscribe to ESG research – are (thankfully) building up their own teams of human beings to analyze the information companies disclose, and to create their own analyses and scores that impact underwriting and investment decisions. Naturally, companies are assessing the ratings most commonly used by their investors and finding ways to improve their ESG scores, and this makes sense because trillions of investment dollars are screened to some extent using these criteria. Yet too often the strategy to increase scores is to report a raft of information that feels like throwing the kitchen sink in.
Too often, commitments and goals are too nebulous, too difficult to validate or too far into the future. This is increasing concerns that companies are greenwashing, and that company ‘progress’ on ESG may not deliver bottom-line impact to companies, nor create the kind of impacts that planet Earth, its 8 bn inhabitants and 1 tn different species truly need in order to survive and thrive. While transparency does typically lead to improvement, how well companies and investors can manage all the metrics they are measuring is questionable and, in turn, increasingly risky.
Net-zero carbon commitments tripled during 2020 from around 500 to 1,500. While this might seem encouraging, such goals are often over 20 to 30-year time horizons, and a recent survey finds that fewer than half of companies with net-zero targets had set interim targets to decarbonize over the nearer term.
Additionally, some companies with seemingly ambitious goals wind up not nearly capturing the full extent of their environmental impacts. As we lay out below, there are concrete steps companies should take to proactively manage the risk of greenwashing – real or perceived – while not letting it impede bold action.
On the investor side, the SEC recently issued new guidance warning against false ESG claims, while companies continue to come under the microscope – some fairly, some unfairly – when making ESG-related claims or announcing goals.
The SEC is also looking at potential reporting guidelines structured around SASB and TCFD recommendations, at the encouragement of investors and asset managers who understand that no action at the federal level opens the door for shareholder requests and company disclosures that are all over the map. This unstructured status quo both increases costs for companies and hinders investors’ ability to assess companies on the core issues they have determined to be financially material.
Many companies – particularly those that are new to the public markets or earlier in their ESG journey – understandably view the seemingly unrelenting and growing demands for information with trepidation.
With 90 percent of the S&P 500 and 65 percent of the Russell 1000 publishing sustainability reports, executives increasingly recognize that ESG disclosure is an imperative, but also understand that there are potential pitfalls to long stand-alone reports.
The irony today is that while investors are now truly interested in material ESG disclosures, reports tend to be increasingly siloed and disconnected from companies’ underlying growth strategy, risk management, financials and long-term value proposition. This trend is unfortunate given that ESG is supposed to help connect dots and knock down walls rather than create new ones.
With all this as backdrop, CFOs and IROs have an opportunity to beat back some of the forces and out-of-date practices highlighted above, and innovate their ESG reporting and investor communication programs to keep companies and their shareholders focused on what matters most: long-term financial performance.
At Solebury Trout, we believe the steps highlighted below are increasingly important and we are pleased to share them with IR Magazine’s audience. Our team brings a breadth and depth of sustainability and ESG experience, coupled with an established track record in supporting executives on investor relations and corporate communications that set us apart.
We have been practitioners as in-house sustainability leads for large and small companies, sustainability consultants and ESG investors. We don’t just focus on communicating what companies are doing now and helping them pick the low-hanging fruit; we have a bias for action, and the experience to help companies actually get their sustainability programs on track and implemented in a manner that is authentic, clearly adds value, manages risk and builds trust.
Solebury Trout is an IR, corporate communications and ESG strategy firm that provides senior-level advice and support to deliver strategic value to private and public management teams as they navigate the capital markets.
The company is wholly owned by PNC Bank and is integrated with our leading equity capital markets and IPO advisory business, Solebury Capital. Established in 1996, Solebury Trout currently advises more than 175 clients across a team of senior leaders who are deeply experienced across a wide range of industry verticals.
Over decades of buy-side investing, sell-side research, investment banking, sales and trading, ESG, agency and newsroom experience, we have gained the knowledge and judgment to provide our clients with counsel that matters. Through our network, we deliver access to capital markets and the media. Annually, we arrange more than 10,000 investor interactions as well as hundreds of media interviews and key opinion-leader meetings.
10,000 investor interactions as well as hundreds of media interviews and key opinion leader meetings.
