Sustainable ESG investing has become a rallying cry that has grown increasingly loud across the global investment market over the past decade. For marketing and sales teams in asset managers, this poses a new challenge when it comes to clearly communicating how their investment strategy around ESG differs and the value it can provide to clients. We have noted an uptick in clients asking us these questions over the past 12 months – both from investors and public companies.
The groundswell behind stakeholders’ interest in Environmental, Social and Governance (ESG) stems from a convergence of factors. Chief among them are investors’ desires to financially support companies that aim to curb the effects of climate change, understand the value of a diverse and equitable workplace, and have business processes in place to succeed over the long term. Many long-term investors now hold the belief that those investments will be more resilient and sustainable in the long-term, providing better returns to their clients. In the U.S., public companies also recognize the need to get out ahead of what could very well be mandatory reporting regulatory requirements ahead for the future. Mandatory ESG reporting is already required in Europe.
There is plenty of data supporting explosive growth around both the appetite for sustainable investment products and the volume of companies now reporting on ESG performance. Since it launched in 2009, the Bloomberg ESG Data Service now tracks ESG communication data for more than 11,700 companies in 100+ countries. In addition, a recent report by Deloitte noted that ESG-mandated assets in the U.S. could grow almost three times as fast as non-ESG-mandated assets and comprise half of all professionally managed investments by 2025.
The increase in demand for ESG products among institutional investors means that marketers and heads of sales of companies across sectors need to create a messaging architecture around responsible investing that is clear, concise and consistent – and that also avoids potentially costly missteps.
Navigating ESG pitfalls
Companies are finding that the task of crafting communications around sustainable ESG investing is a process that’s fraught with obstacles. ESG is a complex topic that is rapidly changing and evolving. The depth and breadth of sustainability topics can easily seem overwhelming. At the same time, the industry is facing some growing pains that include challenges in defining ESG that lead to jargon that muddles the message around what exactly this style of investing is and how it affects a portfolio.
Pensions & Investments highlighted the industry confusion that exists around ESG definitions in a recent article on the Department of Labor’s final rule around ERISA plan fiduciaries investing in non-pecuniary vehicles. Initially, there was concern that the proposal would create barriers for considering ESG risks and lead to increased documentation costs. However, the DOL ended up walking back language on the final rule, choosing to focus on whether a factor is pecuniary, not whether it’s an ESG factor. An Employee Benefits Security Administration fact sheet further explained that, “the lack of a precise or generally accepted definition of ESG, either collectively or separately as ‘E, S and G,’ made ESG terminology not appropriate as a regulatory standard.”
Even members of the Securities and Exchange Commission have has questioned the materiality of ESG. Commissioner Hester Peirce has said that ESG has no enforceable or common meaning, arguing that, “while financial reporting benefits from uniform standards developed over centuries, many ESG factors rely on research that is far from settled.”
The investment community is also highly sensitive to ESG “greenwashing” – the practice of providing misleading information or too much of a positive marketing spin on sustainable performance. BlackRock CEO Larry Fink has been a vocal supporter of ESG, and yet his firm has still been a target of allegations from environmental activists that the company is not delivering on its promises. Critics have claimed that the world’s largest asset manager invests only a fraction of its more than $8 trillion in assets under management in sustainable vehicles, while at the same time continuing to maintain investments in fossil fuels.
Telling Your ESG Story
The evolution and expansion of sustainable ESG investing have spawned a proliferation of tools and resources that investors and financial advisors are using to evaluate investment products and companies, such as reporting frameworks, industry indexes and benchmarks, and a variety of reports from third-party data aggregators. Investors are looking at ESG ratings to see how a company compares to its peer set. At the same time, investors understand that ESG strategies are not one-size-fits all. They are digging into voluntary information companies are putting out in a variety of corporate communications, official documents and filings and sustainability reports.
Given the evolution of stakeholder sentiment about ESG, is important to develop clear, concise and consistent communications to tell your unique story. A company’s ESG story should have three basic elements:
- The overarching strategy, including specific goals, objectives or targets;
- Details about the implementation of that strategy, such as key initiatives, programs and partnerships;
- And underlying performance, results and achievements that demonstrate how your strategy is being implemented in practice.
All three legs of that stool also need to be in alignment. Companies need to recognize that this story is a work in progress. Investors want to know how far you’ve come, where you are at now, and where you plan to be tomorrow. Where are you falling short, and what are you doing about it?
Discussing ESG with stakeholders involves a lot more than just relaying information. Companies need to listen. What are the ESG issues that are important to investors, customers and employees? Communicating regularly with stakeholders helps to understand what ESG issues are more important to them, which in turn helps companies prioritize specific ESG efforts and initiatives. One of the biggest challenges associated with ESG is that it is a dynamic issue that is rapidly changing and evolving. Authenticity, honesty and clarity are all important guideposts as you continue to share that ESG story.