Meeting Investor Demand

"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 opportunity identification can now be driven by far more granular evidence than even a decade ago - turning ESG narrative into something boards and investors can actually price.

What investors actually want

Investors are not asking for more ESG scores. They are asking for the underlying data - decision-grade, comparable, auditable - that lets them model the financial consequences of sustainability for themselves. Companies that can deliver that data, with confidence in its provenance, will increasingly be rewarded with lower cost of capital and a stickier shareholder base.

The opportunity, in other words, is not to chase another rating. It is to own your numbers.