- Younger investors are entering the investment landscape with new priorities, and ESG (environmental, social and governance) issues are a major focus.
- Under increased scrutiny, brands must build robust ESG reporting frameworks to demonstrate their value in this new wave of conscious investing.
- You can do this by aligning your business with the right investors, using established reporting frameworks to guide you, and exploring beyond traditional reporting metrics.
For the last 41 years, the Business Roundtable has periodically issued a statement on the principles of corporate governance. Since 1997, the collective of CEOs and executives had upheld that "corporations exist principally to serve shareholders." That's no longer the case.
In August 2019, the group made a transformative change to its principles, broadening the focus of corporate social responsibility (CSR) to include not just moneyed shareholders, but all stakeholders – including employees, community members, customers and suppliers. Following the onset of the COVID-19 pandemic, this sentiment has only grown stronger, and we've seen companies across Canada roll up their sleeves to support their communities during this unprecedented event.
This shift in perspective at the leadership level has been particularly welcomed by millennial and other investors looking to support companies that align with their values while still generating a profitable return on investment – and that's not the paradox many think it is. In fact, companies that have a strong environmental, social and governance (ESG) position experience higher equity returns and a reduction in credit-related risk.
While businesses adjust the way they operate, we're also getting ready to see more than $15 trillion in generational wealth move from baby boomers to millennials as millennials become the new generation of business owners and leaders. As companies move forward into this new era, it will be important for them to actively attract this particular segment of investors.
How investor priorities are changing
This is hardly a new phenomenon. In 2019, investment giant BlackRock announced changes to its investment strategies, indicating a stronger interest in ESG initiatives. As BlackRock has significant holdings in most major companies, these statements are bound to have a ripple effect across several industries. Before the pandemic, ESG funds were also outperforming the market – an ongoing trend as businesses navigate volatile economies and the needs of their remote workforces.
People are increasingly looking to back brands that do good in the world. Assessing how consumers are engaging with brands during the pandemic, Edelman's 2020 special report found that 81% of consumers identify their trust in a brand to do the right thing as a major factor in their purchasing decisions. The current global crisis is further encouraging people to scrutinize the brands they buy from or invest in.
Recent research on Canadian consumers shows that 89% plan to continue the new habits and practices they've established during the pandemic. Companies that embrace this change will need to make strategic decisions that align with these expectations.
As the markets continue to recover, investors are likely to seek opportunities with companies that put ESG and CSR at the core of their operations – companies like Tentree, which plants 10 trees for every piece of apparel sold, and Plastic Bank, which collects and recycles plastic waste worldwide. These businesses are looking beyond profit and shareholder returns by employing a triple-bottom-line approach.
Modern investors will also likely be attracted to companies that deliver against the latest Business Roundtable statement by enhancing employee experiences and actively contributing to their communities. As such, it's important to transparently report on those efforts and their results.
The early stages of a stakeholder economy
Despite this avid interest from investors, we're still at the beginning of our journey toward a robust stakeholder economy. To date, only a handful of companies have truly put their various stakeholders on par with shareholders.
However, several initiatives are emerging to change that. For instance, businesses applying for B-corp status and those that are voluntarily rated on social and environmental performance, public transparency, and legal accountability are demonstrating a corporate focus on social value.
There are many reasons to believe the stakeholder economy is the way of the future, but that won't be certain until we see how investor priorities are shaped during periods of market instability – much like we’re seeing now. Will the focus remain on social good? Or will profitability become a top priority once more?
As we continue to explore the effects of the COVID-19 pandemic, early signs suggest that the interest in ESG and CSR will remain. This increased consumer demand for companies that are acting for the good of society is bound to have a positive impact on revenue. If businesses want to capitalize on this interest, they need to be as transparent as possible to their investors and report on standardized metrics tied to social good.
Retail investors are used to reviewing companies against financial standards such as those laid out by the IFRS Foundation. However, when it comes to ESG reporting, there are numerous standardized frameworks to follow. Since CSR covers such a wide array of efforts, compiling data around them and establishing what exactly to report on could be resource-intensive.
So where do you start? Based on what I've seen in my time heading the TSX Venture Exchange, here are three steps you can take to build an ESG reporting framework that makes the most sense for your business.
1. Align yourself with investors who believe in your cause.
Responsible investing doesn't come in just one flavor. Just as there are investors looking for environmentally conscious companies, there are those who will engage only with businesses that have a clean human rights track record. Other areas that brands are focusing on include the development of fair-trade products and positive community impact.
The first step in embedding ESG initiatives is to identify the areas where your organization can tangibly move the needle and then align yourself with the investors who believe in your cause. Start by exploring investor forums dedicated to the subject area you've identified, and engage with participants to get a sense of what they're looking for when it comes to self-reporting on this issue. Once you've built out your reporting methodology, these relationships may also be a fruitful avenue for expanding your investor base.
2. Leverage an existing framework.
By reporting on financially material sustainability topics, you'll be far more likely to earn investor confidence. For this, you can select and adopt an existing reporting framework, such as the one laid out by the Sustainability Accounting Standards Board. This approach will ensure that you're reporting on figures recognizable to your investors.
The right framework depends on what makes sense for your business and sector. Look to your industry peers who likely align with your initiatives to see what tools they use to report on their ESG and CSR activities. Beyond that, public markets like Nasdaq are developing resources for companies to leverage as they explore ways to report on their initiatives.
3. Deliver alternative reporting.
According to research from Russell Investments, less than a quarter of data points in "traditional" ESG scores were deemed material for two-thirds of all securities in the Russell Global Large Cap Index universe. Other funds tell a similar story. As a result, investors will look for other types of data to determine whether your company makes sense as an investment. By making that data readily available, you demonstrate transparency and a commitment to your company's larger cause, whatever it may be.
One option is to look at the metrics covered by solutions like Truvalue Labs, which uses data analytics and artificial intelligence to analyze unstructured data and help investment firms make informed decisions.
As companies work to deliver on the Business Roundtable mandate and prop up the stakeholder economy, tangible reporting will be a key driver. Now more than ever, people want to support companies that pair profitability with making a difference and doing the right thing. It's up to your business to communicate your efforts effectively so you can drive investor interest as you actively support the various stakeholders that rely on you.