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The Future Value of ESG

“What do we need to say about ESG?”

That’s a question we have been asked repeatedly over the years in relation to our clients’ communications with the capital markets.

It’s a reasonable question, but the fact that so many companies have needed to ask it suggests that there is still a long way to go to embed ESG into the investment case for every listed business.

However, COVID-19 may just be the catalyst to change this, permanently. The events of this year have brought businesses and the communities they operate in closer than ever.

Many have accepted support from the state to weather the immediate crisis and to preserve jobs and cash during lockdown.

But we all know there’s no such thing as a free lunch (even from us PRs!), and so as businesses rebuild, there will be a greater expectation on them to demonstrate their wider contribution to society and the value they bring.

Expectations of customers, regulators, the media, shareholders and employees will be much higher, and as ever, actions speak louder than words.

Get this wrong and it could cause significant reputational damage and value destruction – just look at the impact on Boohoo following the Sunday Times’ exposure of its supply chain in Leicester recently.

So how should companies be thinking about ESG today and demonstrating its value to shareholders through their capital markets communications? 

Here’s a round-up of our top suggestions, focusing on the ‘S’ from across our team at MHP:

Make the case for how ESG drives shareholder value

Just as your investment case sets out your strategy for growth, your ESG strategy should be clear on the benefits of doing it better, and how this will create value. Acknowledge where you are falling short and set out your plans to address this.

We commonly see companies communicate how ESG activities protect their licence to operate. This defensive approach misses the opportunity to demonstrate how your ESG activities are creating value for shareholders. Find positive examples which bring this to life. For example:

A housebuilder might evidence how better community involvement and investment is enabling faster planning decisions with evidence to prove this over time

A professional services company could demonstrate how more flexible working practices are increasing productivity and reducing staff turnover.

A consumer facing brand could demonstrate an uptick in sales or job applications following certain environmental or other socially responsible campaigns.

A manufacturer might invest in cleaner, energy efficient technology to drive down costs as well as emissions.

Set measurable targets and report on your progress

Measuring ESG can be difficult and often subjective. While all listed companies set out financial and operational metrics from which the capital markets judge performance, few companies list any ESG related metrics. You should consider what metrics to use to report on the progress you are making and include these high up in your financial calendar communications and presentations to the City.

Make ESG a prominent feature in your reporting including within presentations to investors and analysts. ‘But they don’t care’ I hear you say. They do, but most importantly they want to know that you care.

If there is an aspect of your ESG where you outperform, in which you are a market leader, make a virtue out of it. Speak out in support of how others may also do it better.

Give ESG prominence on your corporate website including on the investor relations pages and use rich media such as videos and infographics to bring it to life. Investors (existing and prospective) will look here as well as in your regulatory announcements when taking a view on your business.

 

Embed ESG into the culture of your business

Consider linking the delivery of ESG performance to remuneration, not just for the Board and senior leadership team, but across your organisation. This demonstrates a real commitment and helps embed the importance of ESG within your organisation.

Make ESG a Board level issue, with a member of the Executive team given responsibility for owning it and pushing forward your commitments. This will show audiences that you take it seriously and ensure it remains firmly on the Board agenda.

Acknowledge the external support provided through COVID-19

Be transparent about the financial support you have received during the crisis and how this has supported your business. Consider setting out how much in £m you have saved from the Government’s job retention scheme. This is particularly important for companies with public sector clients.

Think carefully before you pay dividends. Those companies who have accepted Government support, whether via the CCFF or the Coronavirus Job Retention Scheme, but continue to pay a dividend, leave themselves open to criticism by the media and the state (unless they have explicitly stated their intention to pay it back). Companies may face similar criticism from staff who were forced to take a salary reduction or who were furloughed without their employer topping up their salary to 100%.

Contact us

Please get in touch if you want to discuss how MHP can help ensure that your business remains at the sharp end of the ongoing and increasingly important trend of good ESG practice:

esg@mhpc.com