Leading on ESG

This past Wednesday, at Nasdaq MarketSite in Times Square, we were honored to host the ESG Leadership Forum in partnership with Wall Street Journal. Panelists and moderators representing leading Dow Jones publications, major buy-side firms, law firms, data providers, think tanks and issuers gathered to engage an in-person audience along with over 1,000 virtually. Over the course of the afternoon, this group examined topics ranging from the future of environmental, social and governance (ESG) investing and raising capital with an ESG narrative to navigating the range of ESG topics, standards and stakeholders.

A full replay of the event is available HERE, and highlights tailored to directors and corporate executives are covered below.

Where are we?

Several factors have influenced our path. Those focused on “ESG” topics for the past few decades have demonstrated (strategically) looking beyond the bottom line generates success for business and alpha for investors. Stakeholders of all types (investors, customers, employees and beyond) incorporate these factors in their decision-making processes, often with limited information. The availability of new datasets, for example, monitoring customer sentiment via social media or employee engagement via sources like Glassdoor, played a pivotal role, as did a sharper focus on issues such as climate, racial and gender equality and COVID-19. To gauge issuer focus and progress to-date on these topics we asked breakout attendees to share a bit more about their ESG programs:

As one of our panelists highlighted, investing is becoming three-dimensional. Investors have always focused on returns. We’ve spent recent decades quantifying risks and considering risk-adjusted returns. Now, there is a third dimension that considers impact. Of course, all three are heavily interrelated, yet transparency and accountability on ESG factors lag behind the other dimensions. Some argue a lack of standardization, a generally accepted way of quantifying and comparing or the absence of regulation are reasons to de-prioritize or delay efforts in these areas.

Our event panels highlighted three key takeaways:

1. The risks and opportunities tied to ESG make it highly unlikely this trend will fade
2. Delaying or avoiding focus on these topics is not only bad for your ESG score but likely for your business as well
3. Superficial efforts could prove riskier in the near term than non-disclosure

Is this the end of free markets?

One of our panelists highlighted that his children view buying a combustion engine car in a similarly confused manner as he looked at his parents smoking cigarettes. The afternoon’s conversations repeatedly referenced several key trends that show no signs of slowing down and highlighted that it represents free markets adapting to shifting preferences rather than an end of free markets.

1. Generational transfer of wealth driving inflows to ESG oriented investing strategies
2. Top talent, particularly new graduates, prefer purpose driven-companies and those embracing transparency and accountability on these topics
3. Consumers, especially millennials and Gen Z, show buying preference and will often pay a premium for more sustainable products and services and from purpose-driven companies

Investors look at these trends as they consider how to develop investable products for the future and how to allocate capital today. To earn a spot in their portfolios means appealing to their investors, and showcasing your business strategy will attract and retain top talent as well as the customer of the future.

What can I do about it?

Start at the top – panelists throughout the sessions and breakouts highlighted that while there is a lot of discussion about disclosure, metrics, frameworks and ratings, it’s first about strategy. They suggested looking beyond the noise to consider the opportunities the underlying trends and concepts could mean for your business. One buy-side panelist noted the outsized focus on downside risks (carbon, fossil fuels) and encouraged companies, investors and raters to look to the upside opportunities, such as disruptive technologies, new ways of meeting customer needs and ways to motivate human capital. A natural output of this strategic work would be a set of initiatives, goals and KPIs the organization will measure itself against.

Show your homework – Investors and stakeholders broadly want to hear and understand your strategy. They want to understand the opportunities and risks you see and your plans to address them – just as they would any other significant risk or opportunity. Similarly, disclosure and transparency, especially if it's early days for your company, enable stakeholders to understand what you believe is important and signal that you are holding yourselves accountable.

Broaden Focus – Rarely do stakeholders consider a single KPI, a single rating, a single quarter of performance. Starting from the top and showing your homework position your organization to understand the meaning of these individual yardsticks and, importantly, enable you to add the critical context credibly for your stakeholders. For example, you may have unfavorable CO2 emissions, diversity statistics, governance practices or water usage compared to what’s considered best in class or your competitors. The panelists were clear that every company starts from a different place and while these comparisons play a role, so does a credible message about where you are headed and the initiatives you have in place.

Unique Considerations for Later-stage Private Companies

Need to Know:

• Companies can request rating reports from companies like Sustainalytics, MSCI, and ISS before they go public to see where they could disclose more.
• Sell-side research analysts along with dedicated ESG researchers, investors, raters and rankers will assess you regardless of whether you disclose data. Non-disclosure often results in a negative assessment.
• ESG assessments often follow industry standards that may not align perfectly with your firm. Many companies assess their own materiality to aid in creating their own narrative for stakeholders.

Where to Start?

Buy-in and leadership from the board and CEO is often the path to success. Establishing a working group inclusive of relevant SMEs (HR, procurement, etc.) with the IRO or lead Finance executive present will become a key part of the investor story. Not only does this approach ensure strategic alignment and share the successes among the team, but it also ensures the work is distributed.

• While you’re still private: At a minimum, understanding the landscape is critical. What are public (and private) peers doing, saying, disclosing? What do their reports look like, what frameworks do they follow? What are subject matter experts in your firm doing and thinking (HR, procurement, operations, etc.)? Some companies, a year or more prior to going public, will develop a narrative and consider how to track key metrics. Some investors may even look for a track record before they invest.
• Once you’re public: Assessing materiality, a living process with macroeconomic trends shifting influence (i.e., Covid-19) is critical. Early-stage companies with disruptive products and high growth potential may be spared excessive pressure from investors who may focus on growth and traditional metrics initially. Companies who have clear ESG impacts (positive or negative) will see increased interest in these material topics. Considerations around access to capital include interest in an IPO allocation, interest in a secondary or investing post lockup, index inclusion and, importantly, the ability to hold shares long-term. This is particularly the case for firms who seek European investors who are more likely to emphasize ESG metrics.
• Scale matters: The scope of revenue, employee base, supply chain and market capitalization all help determine how material issues are for you as well as an investors’ portfolio. As companies reach the $8-$10 billion range, they should expect increased questions about diversity goals and supply chain auditing among a myriad of material topics depending on industry and your specific business.

Additional Nasdaq Resources:

• Talk to Nasdaq experts to understand how our SaaS tools and consultative services can help advance your ESG efforts and get credit for your work.
• ESG Reporting Guide
• The Path to Strength and Resiliency: Why Human Capital Management Matters

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