We have helped a number of companies respond to ESG trends and challenges by curating a robust and compelling ESG strategy roadmap, embedded in materiality, to better understand what matters most to stakeholders and therefore strengthening long-term value.
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2020 saw that ESG funds can outperform traditional investment funds and a boom in ESG investment products being built into portfolios was evident. Demand is rising dramatically. Just looking at the US market alone, flows into sustainable funds reached US$8.9 billion during the first six months of 2019, compared to US$5.5 billion during the whole of 2018. This boom sees no sign of slowing down as investors urge their asset managers to adopt ESG investment elements when constructing portfolios.
In response to this movement, we have outlined a number of ESG trends which we recommend corporates communicate in line with to ensure they have access to capital and can improve their TSR.
Climate change becomes reality
There is no single company whose business model won’t be profoundly affected by the transition to a net zero economy. Companies risk losing access to capital if they cannot disclose a plan for how their business model will be compatible with a net zero economy and how this plan is incorporated into their long-term strategy and reviewed and endorsed by the board of directors. When it comes to carbon emissions and avoiding trading at a discount, our view is, saying nothing is worse than saying something negative.
Biodiversity is next in line
A growing number of investors are now focusing on the threat of biodiversity loss: an impending natural catastrophe that could have enormous economic consequences. Particularly important given more than half of the world’s total gross domestic product is dependent on natural resources. Pollination, water quality and disease control are three examples of the services an ecosystem can provide. This is likely the next issue in line to be regulated from a disclosure and data point of view. Better biodiversity disclosures are in companies as well as investors’ best interests; we urge companies to move quickly to issue them rather than waiting for regulators to impose them.
The ESG data overflow
We hate to tell you, but data requirements from your stakeholders and regulators are going to get worse before they get better. As all stakeholders – from shareholders to employees to customers – become more ESG savvy, there is no doubt corporates will become increasingly confused about which data is of most importance to their sustainability narrative. Employing a formal materiality assessment is therefore critical in understanding which issues are of the utmost importance to a business’ ability to create long-term value and which data should be used to support this message.
Rating agencies grow
To fulfil investor needs for ESG guidance, hundreds of ratings and ranking platforms have sprung up to measure and benchmark a company’s ESG performance. But while the ratings are designed to distil various sustainability achievements into easy-to-understand scores, critics say they can further muddle our understanding of social responsibility and even impede meaningful progress. They tend to have a large business bias and are notoriously hard to engage with, meaning strong authentic disclosure on how a business engages with its stakeholders is more important than ever.
Solving social inequality
Investors are beginning to turn to the UN Sustainable Development Goals to understand how their portfolios align. A particular focus is on addressing social inequalities that businesses can cause as well as help remedy. With the negative impacts of the pandemic taking hold, we have seen a dramatic increase in social bond offerings. Early signs reveal investors’ growing appetite for these instruments. Companies should move to demonstrate how they are combating inequality within their spheres of influence, to reduce the systemic risks of large-scale social instability.
BlackRock and Vanguard Group Inc. have said they will push companies to address racial and gender diversity in 2021. Furthermore, other investors have filed shareholder resolutions asking companies to carry out civil rights audits to assess how their full operational model can impact minorities and contribute to systemic racism. Diversity is no longer just a number; companies must provide narrative around how they have truly invested time and effort into their diversity programmes to ensure they become the leaders of the pack.
How can we help?
At Design Portfolio, we have helped a number of companies respond to the many ESG trends and challenges. Most of which can be achieved by curating a robust and compelling ESG strategy roadmap, which is embedded in materiality, to better understand what matters most to stakeholders and therefore strengthening long-term value.
To find out how to integrate decision‑useful ESG disclosures into your reporting framework, and prepare for the future regulations on climate reporting and more, get in touch at: