"I think ESG does make a difference. I just don't know how to capture it in the numbers."
I've had a number of conversations with investors in which a variation on this point is raised. It's not hard to see why this might be the case:
- Despite regulations like SFDR and the EU taxonomy (both now subject to review), it's still hard to nail a definition about what constitutes an ESG fund and those pursuing sub-strategies (i.e. climate or circularity) are still a fairly concentrated number of funds.
- A related point: ESG is a broad set of practices. As I've written elsewhere, it's pretty much your entire business. But not all issues matter in the same way for different types of companies.
- ESG scores are often unhelpful, conflating disparate indicators and burying them under opaque methodologies.
- Research that has been undertaken is, unsurprisingly, piecemeal and even research with powerful conclusions has trouble breaking through.
Building a compelling story around impact
However, it is possible to build up a compelling story around impact - and where corporates take the right steps, they can use this story to out-perform. Take a few examples:
There are a wide range of indicators that matter, right now. My friend and colleague Dr William Cox points to a few:
- Cyber-crime losses are estimated to have topped $1 trillion in 2022, which equates to 1 percent of global GDP.
- Meaningful training can deliver outsized ROI - An hour of operating a Boeing 777 can cost $28,500. Maintenance training typically costs $10,000 or less so the return on investment of maintenance training can easily reach thousands of percent within months.
- Waste reduction strategies matter - Most jurisdictions have differentiated costs for waste disposal. A concerted and actionable waste reduction and landfill diversion strategy can make a meaningful difference to the bottom line.
- Transparency and disclosure indicates a seriousness of commitment which studies have found impacts on corporate reputation, accessing a lower cost of capital and improves competitive advantage.
- The proliferation of data means that risk assessment and due diligence for investors will only continue to incorporate more non-financial elements.
The corporate imperative
For corporates, there is a clear corollary, where firms are looking to leverage their approach to sustainability from a fundraising perspective: tell your ESG story in a performance-linked manner.
Find the metrics that matter and identify the right prices. Build strategies that invest in areas with meaningful ROI and communicate this with stakeholders.