Demonstrating the value of ESG
It is now well established that getting ESG-related communications right is a must for any well-rounded business; as a Capital Markets team we have long since been asked by clients how they should be thinking about ESG, and the ways in which they can demonstrate its value to shareholders in their communications.
Looking into 2021 and beyond, we see ESG becoming further embedded in corporate investment cases and media expectations. We hope our ESG Insights can provide a broad yet detailed overview of developments in the space, what to expect looking forward, as well as highlighting businesses which are executing particularly well with regards to ESG reporting.
||1. Use of ESG targets|
In line with the growing prominence of ESG matters more generally, ESG targets are increasingly being linked to executive pay. In March 2021, PwC published a joint report assessing the case for ESG-related pay within FTSE100 companies, providing a checklist for Boards and a framework for creating an effective and enduring ESG performance measure. It found that 45% of FTSE100 companies link ESG targets to pay; Social targets are the most prevalent in annual bonuses and Environmental targets in long-term incentive plans, with the prevalence of specific ESG targets varying between sectors. Despite this link between remuneration and ESG-related goals, ESG targets typically accounted for only 10-20% weighting of total bonus rewards for both FTSE100 and FTSE250 companies in 2020 (Willis Towers Watson). Nonetheless, there has been a clear shift in policies to incorporate wider sustainability and CSR issues, including diversity, communities, plastic reduction and decarbonisation. While reaching these targets is a step in the right direction to becoming more sustainable, it could be misleading if such targets are under-ambitious, and primarily set to greenwash and justify bonuses; expect shareholders to be scrutinising such developments very closely.
||2. Focus remains on the Social aspect of ESG|
Media focus on the importance of mental health, flexibility, work-life balance and both trusting and empowering employees has notably increased, with recent events demonstrating the impact of this development. In February, KPMG ex-UK Chair Bill Michael was forced to resign after telling staff to ‘stop moaning’ about the impact of the Covid-19 pandemic on pay and performance criteria. More recently, working conditions for investment banking analysts came into focus after a revolt by junior bankers at Goldman Sachs went viral on social media. Recent research has even gone so far as to suggest that almost a fifth of British companies are considering moving to a four-day week. Despite the difficulties of the past year, one silver lining could be the lasting positive impact in the form of an empowered, more flexible and more productive workforce.
When it comes to corporate disclosure, UK PLCs are lagging this trend. According to FTSE Russell, whilst 60-70% of large-midsized companies provide data on environmental items, only 5-15% disclose ‘social’ elements like staff retention, turnover and training. At the same time, the risk of misjudging the importance of such issues has become increasingly obvious.
For this to change, investors will have to move the dial. The headlines and subsequent performance of Deliveroo’s controversial IPO centred around the poor treatment of its delivery riders, with high profile investors shunning the deal for this reason. In truth, there were likely a variety of reasons why these investors didn’t want to invest, but nonetheless, such gig economy, high-valued ‘tech’ stocks may find themselves having to pay more attention to their social responsibilities if they want to succeed as public companies.
The City snubbing Deliveroo’s IPO is notably juxtaposed to Rishi Sunak’s plans to lure tech firms to list in London by loosening the listing rules, and is clear confirmation that investors are not willing to ignore ESG-related issues when looking to deploy capital. This trend has surely been impacted by Covid-19, but isn’t going to fade away as lockdown restrictions lift; the social impact a businesses has is – more than ever – closely scrutinised, and integral to shareholder value creation.
||3. Key theme to watch: Shareholder activism on ESG|
Perhaps a lasting legacy of 2020 and Covid-19, of which there are likely to be many, will be that of a year in which the trend of shareholder activism relating to ESG issues was significantly and likely irrevocably accelerated. Across the market, there are numerous recent examples whereby shareholders have put pressure on corporates in order to enact change, particularly where boards are seen to be failing stakeholders in their roles as stewards of responsibly run companies. Issues such as repayment of furlough monies and business rates relief, gender and racial diversity, remuneration and proper environmental disclosures have really come to the fore over the last 12 months.
It is not a new phenomenon for the most vocal institutions to extoll the virtues of companies that demonstrate good ESG credentials (think Larry Fink at BlackRock), but the volume of voices is becoming harder to ignore. The influence of shareholder activism on UK PLC is clearly growing; consider the difficulties faced by Tesco and Boohoo in recent months as investors took direct action regarding remuneration, disclosure on sales targets for healthy products, and supply chain concerns. Further shareholder revolts are expected as we head into the AGM season.
To note a couple of examples, recent data from Legal & General confirmed they have actively voted against 37.5% of remuneration polices last year, as well as against 57 directors sitting on remuneration committees, whilst Janus Henderson recently wrote to all investee companies noting that continued inaction on certain issues will lead to it voting against dividend payments and chairman re-elections, among other issues.
With such increased scrutiny, the window for companies to take a lacklustre approach to ESG is quickly closing, with investors, employees and other stakeholders favouring those with better ESG credentials.
- Make sure disclosures clarify how shareholder value is driven by your approach to ESG
- Disclosure of ESG factors should include reference to Social factors as well
- Include measurable targets on ESG to allow investors to track progress
- Ensure a consistent narrative runs throughout your owned channels; conflicting messaging speaks to a lack of overall direction on sustainability
- Make use of digital channels to create a constant drumbeat of ESG-related news
- Is ESG truly embedded in your company’s culture? If not, consider ways to amend the business’s purpose
Interesting developments over the quarter
- The Bank of England made environmental and climate goals an explicit part of monetary policy, primarily through changing its approach to buying corporate bonds
- Nikhil Rathi, CEO of the FCA, said the FCA is considering the requirement of diverse directors on company boards, following NASDAQs aim to mandate diverse boards on listed companies
- New research from Standard Life suggested ESG investing will to be the biggest influence on investment approach in 2021, with other research indicating half of recommended assets will be ESG within five years
- The FRC published a report on the future of corporate reporting, highlighting the importance for companies to focus on non-financial factors such as ESG
- The EU is introducing measures to prevent the growing concern of ESG greenwashing.
- Goldman Sachs joined the push to democratise climate data by becoming the first bank to be involved in the Open Source Climate initiative
- Bitcoin came under scrutiny for its negative environmental impact, with City A.M. publishing a two-part piece on how ESG will undermine Bitcoin’s eye-catching rise
Client in Focus
In each edition of ESG Insights, we will profile one of our clients who is leading the way in communicating its ESG credentials to stakeholders.
This month we are pleased to highlight Marshalls, the FTSE250 specialist Landscape Products group, who started its sustainability journey over 20 years ago and has since continued to integrate ESG within the core of its business – reflective of a Board that truly has ESG as part of its DNA.
Please click here to read more about Marshall’s’ recently published ESG update, which provides a detailed review on the company’s approach to sustainability and how it has been communicating its ESG credentials.
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MHP Capital Markets provides strategic financial communications advice to private and public companies across a range of sectors. We advise companies on all aspects of their engagement with the capital markets, from financial reporting, M&A, IPOs and fundraisings to corporate profile raising activity, ESG communications and reputation management. Please do get in touch at firstname.lastname@example.org