Dec 6, 2019 - Energy & Environment

A "wake-up call" to corporate executives

Man who looks like a corporate executive holding a small Earth-shaped ball and pointing to it.

Illustration: Sarah Grillo/Axios

A new report shows the skyrocketing importance of "ESG" issues — environmental, social and governance concerns — among institutional investors, who place big financial bets on companies.

Why it matters: Long considered a money-losing nicety, ESG is rapidly going mainstream. The Edelman poll of big investors found that 52% said they'd put more trust in a company that linked executive compensation to ESG goals — like data privacy and cybersecurity, diversity and inclusion, and fighting global warming.

  • "This is a wake-up-call" for corporate leaders, Lex Suvanto, global managing director of financial communications and capital markets at Edelman, told Axios.

By the numbers: Edelman's latest Trust Barometer — a subset of the larger survey that the giant P.R. company puts out each January — polled 600 institutional investors in six countries, who collectively manage more than $9 trillion.

  • 84% said that "maximizing shareholder returns can no longer be the primary goal of the corporation."
  • More than half said "ESG initiatives lead to a favorable impact on company growth."
  • 55% said board diversity "has a significantly positive impact on trust."
  • 61% have "increased their investment allocation to companies that excel when it comes to ESG factors."
  • According to Edelman, virtually all investors surveyed "expect the board of directors to oversee at least one ESG topic."

The lesson, Suvanto said, is that ESG priorities are "no longer optional" for companies as they seek to attract investors and employees — and to deflect protests.

  • "Investors are starting to draw straight lines" between corporate investments and societal values, he said.
  • As little as 18-24 months ago, the survey results around ESG would have looked quite different, according to Edelman.

The big picture: "ESG" is a bit of a squishy category, referring to anything from funds that shun tobacco or firearms firms to corporations that try to apply various political yardsticks.

  • Investors who put ever-increasing amounts of money into so-called ESG investments can't always be certain they're getting what they bargained for.
  • The United Nations adopted a broad set of "principles for responsible investing" over a decade ago, but there still aren't any specific definitions or standards for "ESG."
  • Marketing pitches for these supposedly halo-wearing investments often go overboard.

On the plus side, evidence is mounting that ESG investments can equal the returns — or even outperform — investments without socially conscious screens. And momentum seems to be building in favor of ESG:

  • The Business Roundtable said in August that companies must embrace social purpose even as they pursue profits.
  • MSCI, the huge research and index firm, just published ESG ratings for thousands of companies "in a push to improve transparency in the rapidly growing ESG industry," as the WSJ put it.
  • An Edelman report from 2018 found that "more and more people in the U.S. and worldwide believe brands should take a stand on societal issues."

Reality check: No, millennials aren't driving this. According to Suvanto of Edelman, concerns about ESG were "consistent across age cohorts."

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