What is TSI and how can it impact your TSR?
Top performers in certain ESG issues had margins that were up to 12.4%, all else being equal, than those of the median performers in those topics.
I know what you’re thinking, not another acronym to remember! But I can assure you, this is one worth knowing.
In the past, companies have focused their strategies primarily on achieving Total Shareholder Return (TSR). However, with increasing pressure from both stakeholders and shareholders, companies are beginning to add a new lens to their strategy which considers, what the Boston Consulting Group(BCG) has coined, Total Societal Impact (TSI).A clear example of this is Shell, who recently faced a push back from shareholders insisting that the company adopt more ambitious goals for tackling climate change.
What is TSI?
Although companies have already found various ways to measure their environmental and social impact, it is much harder for them to measure the wider effects of their initiatives on society as a whole. TSI encompasses a number of measures and assessments and looks at the result of explicit company decisions made to adjust core business operations to create positive societal benefits. Activities related to TSI often have a material impact on TSR.
What is the business case?
BCG examined multiple companies across five different industries, looking at the link between performance in specific Environmental Social Governance (ESG) issues (such as ensuring a responsible environmental footprint or promoting equal opportunity) and market valuation multiples and margins - both large contributors to TSR. Interestingly, the study had the following key findings:
- Non-financial performance was statistically significant in predicting the valuation multiples of companies in all industries analysed.
- In each industry, investors rewarded the top performers in specific ESG issues with valuation multiples that were 3% to 19% higher, all else being equal, than those of the median performers in those topics.
- Top performers in certain ESG issues had margins that were up to 12.4%, all else being equal, than those of the median performers in those topics.
The study demonstrates an undeniable link between performance in specific ESG issues and financial performance, thus guiding business leaders towards opportunities to enhance both TSI and TSR.Ultimately, it is not enough for companies to simply pursue societal issues as a side activity. Instead, they must use their core business – and the scale advantages it offers – to create both positive societal impact and business benefits. The result can be a more reliable growth path, a reduced risk of negative, even cataclysmic events, and most likely, increased longevity.
The business benefits
Other than effectively mapping the ESG issues which can cause damage to a company’s TSR, adding a TSI lens to your strategy can provide further opportunities such as opening new markets, spurring innovation, reducing cost and risk in supply chains, strengthening the brand and supporting premium pricing, gaining advantage in attracting and retaining clients, and becoming an integral part of the economic and social fabric by strengthening relationships with governments, regulators, and other influential parties.
How does reporting come into this?
With stakeholders calling on companies to demonstrate that they have the right policies in place and that they are taking the necessary steps to deliver value to society, there is an opportunity for corporates to use communication channels, such as the annual report and corporate website, to address matters that are material to their stakeholders.
The annual report is a key publication which can be used to address how a company plans to create long-term, sustainable value for stakeholders, whilst the board establishes and maintains an appropriate culture and dialogue with shareholders and employees.
The corporate website is a great platform to disclose information regarding ESG matters, which tend to be built on a company’s purpose and strategy, and can go beyond material issues to give a greater insight into the company’s culture. Including videos, case studies and interviews can provide an engaging way to communicate with the audience and get the corporate message across.