ESG Newsletter | Volume 01
Introducing August's ESG Newsletter
For the first time in nearly 40 years, in 2019 the Business Roundtable issued a new statement on the Purpose of a Corporation, rejecting the principle of shareholder primacy in favor of one in which a corporation exists for the benefit of all stakeholders: customers, employees, suppliers, communities, and, last but not least, shareholders. This holistic perspective dovetails with the objectives of ESG – shorthand for Environmental, Social, and Governance – a broadly-defined movement intended to direct investor dollars towards companies that successfully pursue environmental, social, and governance-related initiatives.
In recent years, ESG has created a whirlwind of challenges for, and debate among, corporate leaders who seek to balance stakeholders’ increasingly complex and often conflicting preferences. A central question in this debate is whether ESG considerations interfere with a company’s fiduciary duty to its shareholders or are an integral component in fulfilling that objective.
Raising the stakes in this debate is the entry of federal and state political leaders with their own agendas. To some on the right side of the aisle, ESG is being framed as a dangerous product of “woke capitalism” that unfairly subtracts from the returns shareholders would otherwise be due and wrongly cedes American business leadership to a group of global elites; and to some on the left, it doesn’t go far enough to hold big companies and the wealthy responsible for negative externalities created by the relentless pursuit of profit.
As pro- and anti-ESG pressure builds from investors, politicians, regulators, employees, consumers, and other stakeholders, companies across industries are grappling not only with how to incorporate ESG into their business models, but also with identifying effective measurement and disclosure methodologies.
With no standardized reporting criteria and intense focus on ESG initiatives from corporate stakeholders, companies are highly vulnerable to claims that they have failed to align their ESG initiatives with their brands. And if their efforts are perceived as inauthentic, they risk rejection by consumers. It is becoming clear that how corporations communicate about their ESG commitments can be a stronger determinant of corporate value and reputation than the ESG initiative itself. Today, stakeholders increasingly expect corporations to provide open, transparent, and ongoing communications about their ESG initiatives and commitments, just as investors demand “proof” that these same programs produce lasting and tangible value.
These concepts and conversations are what gave rise to this newsletter, in which we will spotlight some of the most important ESG-related developments and dissect what they mean for corporate leaders and their communications teams. We hope you enjoy and find value in it, and we welcome your feedback and the opportunity to discuss further.
The Impact of the Midterms
What The Midterms Mean for ESG Investing
E&E News | November 11, 2022
While Republicans pledged to ramp up their attacks on ESG investing after the midterms, some financial experts are saying that these efforts may result in more noise than legislation, as reported by Politico’s E&E News.
Given President Biden’s prioritization of climate-related financial risks, Republicans have “relatively few tools at their disposal to force the financial sector to ignore an issue that poses major economic threats — a reality both financiers and their regulators are obligated to consider.”
Our takeaway: While threats of legislation to thwart ESG investing efforts may not be fulfilled, the “noise” that the Republican party continues to generate will further politicize ESG, creating tension and reputational risks that will require thoughtful communications by companies and investment managers.
Read the full story here.
Managing State Level Tensions
ESG Regulatory Divide Poses Challenges for Asset Managers
Wall Street Journal | November 28, 2022
A recent Wall Street Journal piece highlights the growing political tension over ESG’s role in state pension funds, which may be exacerbated in the near-term by Republicans’ victories in the midterm elections and moves to restrict financial institutions’ public utility investments, as well as the Department of Labor’s new rule that allows consideration of ESG factors in retirement plans.
Asset managers with investment interests in both Democratic and Republican-controlled states will have to reconcile their strategies with this ideological divide, which may manifest in messaging that is vaguer or downplays ESG.
Our Takeaway: Asset managers whose investment strategies consider ESG initiatives and metrics must take extra care in communicating with their investors, who may have conflicting views on ESG’s value. In general, clearly articulating how ESG factors are weighted in investment decisions and correlate to increased returns may be an effective strategy to alleviate investor concerns. However, asset managers guiding more progressive funds will need to delve deeper into the ESG initiatives and outcomes of the corporations that comprise their basket of investments in order to satisfy investors.
Read the full story here.
The Importance of Action Before Words
ESG Commitments Before ESG Communications (Not the Other Way Around)
Forbes | November 9, 2022
Consumers are calling for greater accountability regarding ESG reporting and stronger condemnations for greenwashing – that is, when a company makes sweeping or misleading ESG commitments but doesn’t follow through with action. As such, pressure is mounting for companies to communicate their ESG initiatives accurately while messaging in a way that is still accessible and compelling.
In a recent Forbes piece, journalist and communications advisor Adrian Dearnell recommends that companies spotlight their actions and progress and be authentic as they craft their sustainability messages.
Dearnell adds that companies’ sustainability reports can be made memorable with creative collateral content, such as Patagonia’s “Our Footprint Stories,” a collection of essays that explore the company’s direct impact on the planet.
Our Takeaway: There is no single official methodology when it comes to ESG targets or messaging, which leaves content decisions largely up to companies. With creative license, it is essential that companies communicate both their commitment to and execution against ESG goals. To help in that process – as the headline of the article suggests – companies should first identify ESG commitments that are specific and measurable, thus giving the communications function a more straightforward path to reporting. If a company fails to align its commitments and communications, it creates unnecessary reputational risk.
Read the full story here.
The Case for Values in ESG
It's Time for ESG to Fight Back
Barron's | November 11, 2022
In a recent Barron’s piece, Boston University Law Professor David H. Webber states that while the anti-ESG movement is attempting to ban financial firms from ESG-focused investing – citing threats to the energy industry at large – those same detractors are effectively making investment choices guided by values, not finances (e.g., protecting energy jobs and promoting national security). Webber contends that proponents of ESG are missing an opportunity to use detractors’ own rationale to justify the importance of values-centric ESG strategies, in addition to financial ones.
Webber encourages ESG supporters to “break out of the intellectual trap that its social goals are just the most enlightened form of enhancing returns,” and recognize that fulfilling ethical obligations across environmental, social, and governance issues should themselves be considered worthwhile, full stop.
Our takeaway: Companies should incorporate narratives that reinforce their corporate values and not only rely financial metrics (e.g., return on investment) to justify their ESG initiatives. A values-centric approach will help to build credibility and further align the corporate mission with ESG investment strategies.
Read the full story here.
Applying the Financial Materiality Assessment Framework to ESG
The Benefits of an ESG Materiality Assessment
Forbes | November 1, 2022
In a recent Forbes piece, Chris McClure and Daniela Arias of the consulting firm Crowe LLP break down how companies can leverage materiality assessments – a tool traditionally used to evaluate an organization’s financial well-being – as a framework for developing a tailored and effective approach to ESG.
Companies should survey their key stakeholders regarding what ESG issues and risks they view as material to the business and carefully evaluate the results to craft a comprehensive ESG strategy.
Our Takeaway: Like many corporate initiatives and related communications, ESG materiality assessments put company stakeholders’ preferences front and center. This framework is emerging as a best practice to help companies focus on the issues that truly matter to their business and key constituents. With so many different ESG priorities to consider, a materiality assessment can serve as a valuable tool to determine which ESG initiatives make business sense and resonate most with core audiences.
Read the full story here.