- ESG investments are booming to the tune of $31 trillion
- 7 in 10 investors say ESG is part of their investment strategy
- SEC has proposed disclosure regulations for ESG reporting
- There are many misconceptions in ESG reporting
- BOTTOM LINE: Public companies should issue ESG reports to improve access to capital
ESG or Environmental, Social and Governance have become increasingly important to investors during the decision-making process. As investor interest has grown in ESG, products and services marketed as such have proliferated, according to Bloomberg Intelligence ESG assets are set to balloon to $50 trillion by 2025 from about $35 trillion.
Due to this increase in ESG investing, the Securities and Exchange Commission (SEC) has proposed not only the enhancement of disclosures by certain Investment Advisers and Investment Companies about ESG investment practices but also the enhancement and standardization of Climate-Related Disclosures for Investors.
“Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments. Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts. Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.”
Multinationals and larger publicly listed companies know that ESG reporting is a must these days. But when it comes to small caps, some executives discount the value of ESG entirely, others feel the pressure and urgency around ESG, but are unsure how to action affordable solutions. So, why is it important for small caps to invest in ESG reporting sooner rather than later?
The answer is simple… ESG drives long-term business value. One benefit is that enhanced ESG reporting attracts more investors.
- Seven in 10 investors who are employed full or part-time say they would definitely (13%) or probably (57%) include sustainable investing funds as part of their 401(k) if their employer’s plan were to offer them. (Gallup)
- The US SIF Foundation identified 836 registered investment companies with ESG assets in 2020, including 718 mutual funds and 94 ETFs are serving this growth in ESG demand. (USSIF)
- The asset-management industry earned $1.8 billion in fees last year from their sustainable funds, up from almost $1.1 billion in 2020 (Morningstar)
As a company, these stats illuminate some very evident trends:
-Investors factor ESG heavily in their investment decisions
-Institutional investors, especially, are interested in your ESG data for two reasons:
- They require disclosure data for their own reporting requirements
- Their investors are hungry for ESG investments
“BUT MY COMPANY ISN’T “GREEN”, WE DON’T NEED TO WASTE OUR TIME WITH THIS.”
With ESG being a relatively new concept, there are naturally many misconceptions.
● ESG is only for sustainable businesses and industries
● ESG perfection must be attained before reporting on it
● My investors don’t care
● ESG does not align with our core priorities
● ESG is expensive, difficult, and very time consuming
ESG is only for sustainable businesses and industries
This is the most common misconception. Companies believe because they aren’t a renewable energy stock, or a sustainable farming technology, that ESG doesn’t apply to them. This is simply not the case; all companies have ESG components, the real question is “is it being responsible in respect to the environment, focusing on sustainable practice, and practicing ethical governance?”
For example, an oil exploration company can still be a desired investment for ESG investors if it:
A. Offsets its carbon footprint
B. Uses responsible drilling techniques that account for the long-term environmental health of the drill site
C. Simply practices transparent governance, considers diversity when selecting a board of directors, etc.
There are many ways to be ‘ESG’ and it may not necessarily be as evident to the company, let alone its investors, making reporting on it that much more impactful.
“Perfection is the enemy of progress.”Winston Churchill
ESG perfection must be attained before reporting on it
Winston Churchill once opined “Perfection is the enemy of progress.” Companies mustn’t be completely carbon neutral or have the world’s most diverse board to start reporting on ESG. On the contrary, as Peter Drucker says “You can’t improve what you don’t measure.” Investors appreciate a company’s willingness to report and provide progress updates on its ESG efforts.
My investors don’t care
70% of investors care about ESG in their investments, so chances are many of your investors DO care. It is a company’s fiduciary responsibility to increase its value, doing so generally requires more investment, and with more investors becoming ESG conscious, a company’s ability to attract these investors is directly correlated to its ESG reporting.
ESG does not align with our core priorities
Does accounting align with your core priorities? What about reporting every material event? Probably not, but it’s something public companies must do. Put simply, ESG equates to ‘doing good business’.
ESG is a global priority, so if ESG is not a priority for your business, ask yourself why?
ESG is expensive, difficult, and very time consuming
This was a valid concern, with any disclosure there are a host of requirements that take away from the actual business of that company. However, a leading ESG solution for small and mid cap public companies, Socialsuite, has created a simple, affordable, easy to use solution for ESG reporting.
Socialsuite helps companies report on their progress against the World Economic Forum’s (WEF) Stakeholder Capitalism Metrics, a universal standard for ESG reporting. Developed in conjunction with Deloitte, EY, KPMG and PwC, it has 21 core and 34 expanded metrics.
This broad-based ESG framework is a comprehensive system of corporate ESG disclosures built for small caps. It serves as a solid starting point for your ESG journey and includes the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).
Socialsuite recently announced that over 70 Public companies, including those across the ASX, NZSE, NASDAQ, NYSE and OTC Markets exchanges, had adopted their ESG disclosure platform. Their President of ESG, Seth Forman, talks about the company’s continued success, “We’re delighted for our clients who are experiencing business value from their genuine ESG commitments, says Seth. “This includes Minerals exploration company, Latin Resources (ASX:LRS) who recently completed a A$35 million capital raise that included a A$15 million cornerstone investment from a Canadian ESG Fund.”
ESG is here to stay. Judging by the top 10 companies in the world, the market favors companies that embrace ESG, and thereby assist in changing our world for the better.