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Global Survey: Injection of ESG Builds Corporate Value

Global Survey: Injection of ESG Builds Corporate Value

An FTI Consulting survey of global institutional investors managing more than a sum of US$8.4 trillion in assets confirms the rising value of corporate Environmental, Social and Governance principles in their investment strategies.

W

hen the concept of environmental, social and governance (ESG) first appeared as an element of corporate planning in 2005, the investment community was skeptical about its value. Given that ESG standards are subjective and can be difficult to measure, that’s not so surprising.

But that attitude is changing — especially so with the establishment of the Principles for Responsible Investment (PRI). Supported by the United Nations, the PRI consists of global investors who work to implement six ESG principles into their investment analysis and decision-making processes. In 2017, more than 1,700 signatories in 50 countries endorsed the UN-PRI; collectively, they represent approximately US$70 trillion in assets under management.

An extremely positive/high ESG rating is thought to add 22 percent of corporate value to a company.

An FTI Consulting survey of 130 global institutional investors conducted between May and July 2018 provides insight into how influential ESG principles have become. An overwhelming majority of the investors — whose firms manage a sum exceeding US$8.4 trillion in assets — said they attribute extra corporate value to a company with a high ESG rating.

As shown in the graph 1 below, an extremely positive/high ESG rating is thought to add an extra 22 percent of corporate value to a company. Two factors appear to drive this perception: 1) greater demand for company stock by the ESG-conscious investment community; and 2) the idea that these companies may be better positioned for the future (sustainability), and less likely to encounter regulatory issues (governance) and activist activities.

Graph 1: Companies With a High ESG Have Extra Value

What extra percentage of corporate value would you attribute to a company if they had an extremely positive/high ESG rating?

While ESG was once a “nice-to-have,” it’s now integral to a corporation’s planning in the eyes of institutional investors: A remarkable 87 percent of respondents say an extremely positive/high ESG rating adds value to a company worth.

Graph 2: Company Leaders in G20 Countries Also Attribute Extra Value to High-Rated ESG Companies*

What extra percentage of corporate value would you attribute to a company if they had an extremely  positive/high ESG rating?

Like the institutional investors, results released from FTI Consulting's Resilience Barometer report at WEF Davos 2019 with the leaders of 2,248 large companies from across the G20 countries acknowledged a similar impact of the value of ESG on company worth — amounting to a 27 percent extra value attributed to a company if it had an extremely positive/high ESG rating. The G20 collectively account for around 90 percent of the gross domestic product (GDP) and two-thirds of the world’s population; respondents represent a sum turnover of US$1.6 trillion — and directly employ 6.7 million people globally, a compelling voice for global business.

Graph 3: What Goes Into an ESG Rating, Anyway?

Do you actually know how the following ESG rating/report services compile their ratings/reports?

While there are many different metrics and scores used by ESG ratings and reporting services, 54 percent of institutional investors claim they don't know how those listed above are compiled.

Graph 4: Corporate Governance is Most Important

How would you generally rate listed companies for the following ESG aspects? / What weight of importance would you attribute to the following ESG aspects in relation to your investment decision-making?

Institutional investors ranked corporate governance as the most important ESG aspect to consider in relation to investment decision-making. However, with only 20 percent of respondents indicating listed companies perform extremely positively for reporting corporate governance, it is clear institutional investors are looking for significant improvement.

Graph 5: There’s Room for Improvement in Corporate Governance

Which of the following corporate governance aspects are particularly important to you?

Delving further into the specific aspects of corporate governance, institutional investors believe “ethics and integrity” (76 percent) is the most important area for listed companies to report on, followed by "anti-corruption" (69 percent), "board leadership" (65 percent) and "transparency of operations" (64 percent). Moreover, over half of institutional investors are looking for insight into “risk management” (61 percent) and “executive compensation and strategic advantage” (57 percent).

Graph 6: There’s Room for Improvement in Environmental Performance

Which of the following environmental aspects are particularly important for you?

Named as the third-most-important aspect of ESG by respondents — yet with only 7 percent of respondents saying performance is extremely positive — environmental performance has great room for improvement as well. Taking a closer look at the key areas of importance from an environmental perspective, institutional investors most want to see reporting on “water management” (66 percent), with over half claiming “environment management approach” (57 percent) and “air emissions” (55 percent) to be particularly important.

ESG Standards Becoming More Uniform

ESG reporting standards are expected to move towards greater uniformity in the next few years. Indeed, two major organizations — the Sustainability Accounting Standards Board and the Global Reporting Initiative — are working to align their standards in an effort sponsored by Bloomberg. Their objective is to ultimately conform to the standards of the Task Force on Climate-Related Financial Disclosures, which provides reporting on climate-related issues to investors.

Companies shouldn’t wait for new standards before reporting their ESG ratings, however, given the expectations of institutional investors and pressure from the public for greater corporate transparency. Not reporting — no matter where a company stands — can put its reputation at risk. Even companies within industries with less-than-favorable reputations among the public, like oil and gas exploration, are being scrutinized by investors on their ESG performance.

Developing a Smart Communications Strategy

Instituting a sound communications strategy for ESG reporting is key to improving ratings. Priorities include:

  • Treat materiality reports as living objects to be nurtured; they evolve over time.
  • Provide stakeholders with materiality reporting first and allow them to work through it at their own pace; this incentivizes growth and positive impact.
  • Set goals — no matter how modest — to show aspiration as opposed to complacency.
  • Learn how other organizations are being creative to achieve their goals.
  • Engage with ratings organizations to ensure materiality reporting is absorbed into their organization and published promptly.
  • Keep in mind the ROI of these actions can be a catalyst to help your organization better prepare for the future and increase your value.
  • Measure the impact of your materiality reporting to understand what stakeholders want.

As more institutional investors regard ESG ratings in their decision-making, the likelihood is that more businesses will prioritize them and that following standards will become more the norm. With these two parallel tracks, more investors are sure to follow.

Research Methodology

The research was conducted with n=130 global institutional investors, representing a sum total of over US$8.4 trillion assets under management. An online research methodology was undertaken where respondents participating between the dates of May 24 and July 15, 2018.

*Results released from FTI Consulting's Resilience Barometer report at WEF Davos 2019. This research was conducted online with n=2,248 leaders in large companies across the G20, between the dates of December 6 and 14, 2018. More information on the "Resilience Barometer" can be found here.

Further information on the results and methodology can be obtained by emailing .(JavaScript must be enabled to view this email address).

Note: As a consequence of rounding up percentage results, the answers to some questions might not always add up to 100 percent.

Published January 2019

© Copyright 2019. The views expressed herein are those of the author and do not necessarily represent the views of FTI Consulting, Inc. or its other professionals.

About The Author


Dan Healy
dan.healy@fticonsulting.com
Managing Director
Strategic Communications
FTI Consulting

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