From Nasdaq’s unique position at the center of capital markets and technology, we have witnessed the rise of environmental, social and governance (ESG) — first in Europe and, more recently, in the U.S. — as retail and institutional investors increasingly incorporate ESG factors into their investment decisions. With ESG firmly in the mainstream of the capital markets, companies are looking to communicate their efforts on all three pillars of ESG and standardize the disclosure of ESG metrics.
At the recent ESG Leadership Forum 2022, a collection of speakers, including influential business leaders and top investors, discussed how they are working together on ESG and climate goals that affect the transition to a low-carbon economy. We explore how companies are navigating the energy transition and executing a climate strategy, as well as how boards of directors, sustainability professionals, and investor relations (IR) teams can elevate their companies’ ESG initiatives.
Executing a Climate Strategy
Over the past several years, scientists have warned about the dire consequences of not addressing climate change as climate-related disasters, including wildfires, hurricanes, droughts, flooding, and more, have become increasingly common. As a result, investors expect greater action from companies to become more sustainable, such as transitioning to cleaner energy sources and implementing technologies to reduce carbon emissions. During the forum, an esteemed group of experts and business leaders spoke about the energy transition, climate strategy and the carbon markets.
Five key takeaways include:
- The pressure to transition to cleaner energy is coming from multiple points, including businesses, geopolitics and the broader economy.
- Given the intensifying pressure on the energy transition, it is essential for companies to establish and execute their climate strategy and adjust to avoid greater risks.
- Governance of ESG and climate is essential for all companies.
- Corporates need to focus on reducing emissions and the technologies to remove emissions.
- As the carbon markets come to the fore, we must build and maintain trust as integration will be critical to ensure future adoption.
While companies have many aspects to consider when executing a climate strategy, Anne Simpson, Global Head of Sustainability at Franklin Templeton, perhaps put it best by directing all ESG professionals to “just get on with it” and begin their ESG journey.
Communicating the ESG Journey
As companies embark on their ESG journey, it is imperative that IR teams can communicate these efforts to investors through meaningful data disclosure and stewardship.
There is a continued need for quality disclosure on ESG topics from corporates, as correctly pricing climate risk has become a focus for many asset managers, and accurate, material information is required to do so.
“Investors have been loud and long on the topic of making sure we get climate risk information put forward into the market,” said Simpson.
Many investors would agree that currently, the markets still lack standardized, high-quality climate risk information. As such, for Sustainability and IR teams, an understanding of the various ESG and climate disclosure standards and frameworks, along with a commitment to consistently relay material information to their investors, can set their organization apart from others within their space.
It is also imperative that Sustainability and IR teams recognize that investors aren’t only evaluating ESG considerations as a risk management exercise. For some, ESG data and information provide a window into future opportunities. During the panel Executing a Climate Strategy: Getting to Zero, Deborah Ng, Head of ESG and Sustainability at GMO, highlighted that there is perhaps too much current focus on emissions and carbon footprinting. While these metrics are important to understanding climate risk, they don’t necessarily capture Climate and ESG-related opportunities, such as companies working on new technologies to reduce or eliminate emissions. This can make it harder for asset managers to make the right investment decisions. Though the focus should remain on what is material, corporates shouldn’t hesitate to provide a robust view of ESG-related information to highlight opportunities to investors.
Working with investors in a positive way
Stewardship should be seen as a long-term partnership, and companies should rely on their investor community to help strengthen their ESG programs and fill their knowledge gaps. Asset managers are facing increasing scrutiny over stewardship practices from clients who have been vocal about prioritizing ESG considerations.
“To me, at the moment, it doesn’t seem like investors are looking for absolute numbers; they’re looking for progress,” Stanley Bergman, CEO and Chairman of Henry Schein, said about working on ESG goals with investors.
For many corporates, ESG can be a daunting subject. The field's quickly evolving nature and a lack of in-house expertise can make it challenging for corporates to completely grasp what information the markets desire. During the panel Climate Strategy: Getting to Zero, Bergman credited collaboration with investors as what kept his organization in line with the ESG expectations of the market. According to Bergman, regular engagement with his top five investors helped Henry Schein determine what their ESG goals should be, how they should monitor them, and how they should report on them. Investors weren’t looking to judge based on what the company had done but instead were focused on the progress of the organization and helping them to improve.
Bergman’s insights from Henry Schein are indicative of a larger movement within the world of stewardship and engagement. Investors must now adhere to various stewardship codes globally, ensuring clients are satisfied and kept up to date with the nature of engagements being conducted. As Amy O’Brien, Global Head of Responsible Investing at Nuveen, noted, stewardship isn’t a “gotcha,” and long-oriented asset managers are looking at these relationships as partnerships.
Boards, Sustainability, and IR teams should look for ways to lean on the competencies of their investors to grow their own knowledge internally. For example, ESG roadshows, which have recently been growing in popularity, allow for prescriptive engagement with shareholders on ESG topics and, when done right, can provide just as much insight for corporates as they can for investors.
Ensuring the Board Is Engaged on ESG
While the work the Sustainability and IR teams do to advance a company’s ESG journey is vital, the board of directors also plays a critical role in providing oversight of a company’s ESG strategy. Based on our conversations with clients’ directors and directors, there are a couple of ways that boards can engage and elevate their ESG strategy:
- Future-focused, savvy and committed directors should continue educating themselves on environmental topics — specifically climate- given the current regulatory environment. They should also build board expertise by uncovering current directors who have experience in environmental and sustainability matters or refreshing board succession plans to add future directors with that experience and expertise. By continuing their education and building board expertise, directors are able to fulfill their duty of care and mitigate the risk of shareholder actions against them and the company.
- Boards who want to see their companies be sustainable, as well as good corporate and environmental citizens, should require strategic metrics on environmental matters and incorporate those elements into executive compensation plans for accountability. Both of these require baseline data and the ability to track progress toward objectives.
In a new report, Dissecting the ESG Landscape, we explore what recent ESG trends mean for boards, discover what directors across sectors are doing about ESG and uncover best practices that may be emerging.
As the ESG movement continues to mature, all companies should consider how they can elevate their ESG strategy by establishing data benchmarks and goals and leveraging the IR team to communicate and collaborate with investors. From our experience with clients and customers around the world, we recognize that ESG is no longer a nice-to-have — it’s a must-have.
To watch the full ESG Leadership Forum 2022, please click here.
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