What boards should know about balancing ESG critics and key stakeholders
As companies come under greater pressure to provide ESG disclosures, the information they publish and the story they tell has, in some cases, been conflated by some to assume that those companies “have an agenda.” This has been an area of concern in some boardrooms.
It’s important that directors consider both sides of the ESG debate. Certain environmental, social and governance issues may impact a company’s ability to be successful in both the near and long term; others might not. For instance, product safety is paramount for consumer product companies, but is less important in business services. As such, there isn’t a singular approach to ESG that works for every company; which ESG issues are most important will vary by company size, industry, maturity and a multitude of other factors. Two key points may be getting lost in the debate:
At its core, ESG is about companies developing long-term strategic plans, identifying and mitigating material risks, recognizing emerging growth opportunities to their businesses and their boards’ oversight of all of it.
More robust ESG data, not less, could lead to companies making more informed decisions and to better public policy.
The value of ESG investing
A 2022 global PwC survey of the asset and wealth management industry showed an unprecedented acceleration towards ESG investments in markets around the world. Nearly eight in ten institutional investors responded that they plan to increase their allocations to ESG products over the next two years.
While ESG funds did experience periodic outflows in 2022, PwC estimates that, based on demand and beneficial economics for asset managers, ESG-aligned assets under management (AUM) will grow faster than the total asset management market, accounting for nearly one-fifth of all assets by 2026. In the US, AUM could hit $10.5 trillion in 2026, up from $4.5 trillion in 2021. We do not expect that this trajectory will change even if the criticism of ESG persists.
Investment strategies built on ESG factors
In a separate 2022 PwC Global Investor Survey, respondents said they want companies to focus on innovation and financial performance. They ranked those as their two highest priorities for business, with reduction in greenhouse gas emissions coming lower. Over the next five years, however, investors expect the threats stemming from climate change and cybersecurity to rise.
Time to focus on ESG reporting
To build trust, companies must collect, analyze and report robust, auditable ESG data. The company should present the data to tell a true story of how the company is mitigating risks and taking advantage of opportunities. These are management responsibilities. Boards should have in place appropriate processes to get the right information and exercise their oversight responsibilities. Boards need to be able to assess whether investments of time and money toward sustainability are accretive to long-term value. More simply, boards need to ask whether management is setting the right priorities, making the right promises to stakeholders and keeping those promises. Companies may not be able to mute all of their critics, but being proactive on ESG reporting can help them distinguish themselves from peers and potentially take advantage of the ESG asset flows.
…read more in the report.
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