By Nikos Avlonas
Bravo to companies’ incorporating sustainability. The effort is noble and daunting. Often executives address first the environment, social and governance (ESG) issues most important to them. Other times, they delegate sustainability to a manager. An executive might be highly motivated to engage the community. A former HSE manager, now in charge of sustainability, might emphasize safety. Both are noble pursuits, but are they relevant to investors?
According to the 2018 Edelman Trust Barometer Special Report: Institutional Investors, 66 % of U.S. investors altered their behavior to incorporate ESG risks just in 2017. Investors rely on ratings agencies which look at those ESG aspects of a company with financial relevance, i.e., most material. If a company is putting resources into issues material to the company but not to investors, this can become an enormous waste of time – and resources.
ESG factors relevant to market performance vary from industry to industry. An airline is going to consider fuel efficiency both for financial reasons and to limit its carbon footprint, more so than an accounting agency. If the airline reduces fuel consumption, its financial performance, ESG rating and hence share price benefits. The accounting firm can reduce energy consumption by the same percentage and little will change in the market.
Whether you get your performance advice from Morning Star, Edelman, Bloomberg, Harvard (with research showing, “material issues are the most promising signal” informing investment decisions based on ESG criteria), or hundreds of other resources, you can no longer questions the value of ESG material issues to your bottom line. This begs the question, what is material? The answer sits with your most influential stakeholders, not just your shareholders or your C-suite, though these are important voices.
Only a materiality assessment, based on guidelines such as the GRI and industry benchmarking surveying stakeholders which have been carefully identified as having the most influence on company decision making, can provide a weighted list of those issues most material to your company and hence your bottom line.
The stronger the balance sheet, the stronger the rating. The lower the material risks, the stronger the rating. The more transparent the company in its reporting, the stronger the rating.
A materiality assessment can be daunting. Often a company’s first round is led by expert consultants. CSE is proud to be a leading global provider of ESG Ratings and Sustainability Reporting Services. CSE offers a wide range of highly specialized ESG services to support organizations achieve their maximum ESG performance potential towards investors and to better align with all the latest non-financial (ESG) reporting guidelines (e.g. CDP, TCFD, SASB).