ESG strategies are like opinions… everybody has one. That is almost as true as the implication that having one does not necessarily mean it is effective. The last two years have seen an accelerated recognition of the need for industry to moderate its environmental and societal impact. Efforts to that end have resulted in the greatest redeployment of capital and management time since the industrial revolution. Time will tell if this monumental collective effort has been successful, but at the corporate level progress needs to be measured in real time. To defer one of the most critical determinants of success to the 3rd party rating providers is no longer acceptable to many company boards who are fearful of being blind-sided by changes in the perception and behaviour of their investors. In the wake of its ESG White Paper, Investor Update has seen a significant spike in demand for fact-based insight and data-rich solutions to assess individual and peer group performance in ESG. Meanwhile, the majority of companies across all geographies are wondering “What is the right way to track and evaluate an ESG strategy?”
One of the most over-quoted sayings in investment is “What gets measured gets done”, primarily because it’s true. Start by know where you are, make and deploy a plan of action, monitor your progress and over time, you should get to where you wanted to go. The problem for many CEOs, CFOs and Investor Relations Teams is not knowing where they are starting from. In ESG terms this means not knowing what the current level of specialist, mandated ESG capital is deployed in their shareholder register. Knowing that information is valuable in its own right, but knowing how that compares to your peers is what tells you where you are – it puts the origin pin in the strategic map and it informs all your future decisions in respect to ESG. The research team at Investor Update provides this insight through its ’ESG Benchmarking’ – a unique approach which makes capital deployment the arbiter of effective ESG progress, communication and perception.
Specifically, the Benchmarking process determines whether a company is ‘underweight’ or ‘overweight’ ESG-focused investment vs its peers. That in turn identifies a set of funds (active and passive) for Investor Relations team to target. Success in soliciting incremental capital from those funds is material, often identifying billions of dollars of investment potential… but the associated capital from those leadership funds can be truly transformative. Capital is always recycling through the market in response to changes in perceived changes in risk and valuation – which is why it is essential to ensure that replenishment capital is at hand. Investor Update has seen huge demand from corporates for ESG Benchmarking, with projects across Germany, France, Russia, Austria, Switzerland, etc, and excellent feedback for this unique and insightful analysis.
Until recently management teams have had to rely exclusively on the 3rd party rating agencies to tell them how well they are doing. The experience of many companies and investors has been growing frustration at the lack of consistency, objectivity and comparability of the multiple ratings on the market. While more than 600 ratings exist globally, around 18 are considered ‘significant’ of which 6 or 7 truly dominate the space. Even with the consolidation we have seen, the range and disparity is huge and yet the correlation between the ratings handed down remains stubbornly low at 0.54 on average and can be as low as 0.38… They are largely backward looking and hence fail to reward the changes companies are making now and lag the real-world progress that is being made. Meanwhile, the power and influence of those same agencies continues to increase despite the value of what they provide being compromised.
A company rated highly by the rating agencies is likely to have attracted ESG-mandated capital but until this is measured this is only an assumption and increasingly an insecure one. The larger investment companies have been building proprietary ESG evaluation capabilities and as a result, the correlation between aggregate rating and capital deployment is starting to break down. This trend will accelerate with the bifurcation of ESG investment selection which is currently in hand. As industry mobilises its efforts, there is greater competition for new capital and relative investment levels are already moving to reflect this. This makes retaining a position of strength, or achieving one, increasingly challenging unless you regularly (for want of a better phrase) ‘Track and Trace’ your level of ESG investment commitment…
Now industry has a choice – ESG Benchmarking can provide near-real-time insight into the conviction and actions of the biggest ESG thought-leaders globally. The Benchmarking can also be applied retrospectively to give a picture of progress (or lack thereof) made to this point providing a basis for evaluation historical strategies. Success going forward is explicit and hence instructive in aiding the construction, evaluation and redirection of a company’s ESG strategy. Although early days, there is growing interest in this contributing to in the nascent area of tying C-suite compensation to ESG performance. Although early days, there is growing interest in how this can contribute to the nascent area of tying executive compensation to ESG performance.
For many companies this is a liberating start to a real-world and real-time relationship with a critical part of their investor base. Understandably Management Teams want to augment the analysis to identify capital flight risk within their shareholder base, to interrogate the data to yield activist activity and to engage with stakeholders of all kinds about Regulation, Disclosure and Policy development – all of which is made possible by the ESG Benchmarking process. This area is changing at a pace that industry, the media and regulators will struggle to keep up with – the opportunity for corporates everywhere is to discard the rear-view-mirror analysis, engage with forward-looking fact-based solutions and look to the future – because in the world of ESG Shareholder Intelligence it’s a bright and exciting one.
For more information please get in touch with our commercial team and/or go to www.investor-update.com/esg-benchmarking
Andrew Archer – Head of ESG Advisory