Think environmental, social and governance (ESG) factors only matter to specialist investors? While ESG standards may have been the exclusive purview of sustainability investors a few decades ago, that is no longer the case. “Only two decades ago, concerns about climate change, water scarcity, exposure to corruption, working conditions in the supply chain and gender equality were barely on the agenda of company executives. They were considered externalities or were dealt with through philanthropic approaches with little or no impact on the bottom line,” noted Harvard Professor of Management Practices Dr. Robert Eccles, and former United Nations Global Compact Executive Director Georg Kell. But times have changed.
Just two years ago, the Organization for Economic Co-operation and Development (OECD) began promoting “responsible business conduct for institutional investors” in its Policy Framework for Investment. In it, the OECD encourages investors to engage with corporate leadership on ESG risk and contends that ESG issues represent part of a company’s fiduciary duty when evaluating long-term value. It’s an approach that more institutional investors are taking to heart. In an article on EthicalBoardroom.com, Michelle Edkins, a Managing Director and Global Head of Investment Stewardship at BlackRock writes, “An emphasis on investing for the long-term, changing client and societal expectations, and better data, reporting and research have all influenced a steady mainstreaming of ESG considerations by investors.”
Investors. Consumers. Employees. Suppliers. They all want—even expect—the companies they associate with to operate with transparency and trust. But lately, trust has been in short supply. In the U.S., for example, trust in institutions—government, business, media and NGOs—declined a record 23 points in the annual Edelman Trust Barometer survey, which covers 28 markets around the globe. Business alone saw a 10-point, year-over-year decline. Clearly, companies in America need to focus on rebuilding trust, but how?
Embrace Corporate Social Responsibility
Corporate Social Responsibility (CSR) and Environmental, Social and Governance (ESG) criteria can play a significant role in establishing or regaining trust. What do CSR and ESG entail? CSR involves implementing a business model that includes accountability—to stakeholders and consumers—on a range of societal and environmental issues. Similarly, ESG focuses on how companies tackle key issues such as climate change and human rights, which financiers increasingly consider alongside traditional financial factors when evaluating investment portfolios.