ESG from a CEO/boards perspective

The FT reported in Almost half of FTSE 100 companies have linked executive pay to environment, social or governance (ESG) targets as investors step up demands for companies to adopt these non-financial goals.

A recent Marsh and McLennan study found that top employers, as measured by employee satisfaction and attractiveness to talent, have significantly higher ESG scores than their peers. This pattern is partly due to these employers’ relatively strong environmental performance, though the trend is also evident across specific social and governance issues. This finding suggests that ESG performance can help companies both improve employee satisfaction and attract prospective employees.

This is significant because prior research shows that satisfied employees work harder, stay longer with their employers, and seek to produce better results for the organization. Equally important, enthusiastic prospective employees strengthen a company’s talent pipeline and ensure the availability of crucial human capital.

In addition to human capital happiness several large asset managers will now no longer invest in firms that do not have Environmental or Social Goals at the heart of their business. According to Investment Week SG funds are set to hold more assets under management than their non-ESG counterparts by 2025, according to a PwC report sustainable and responsible investment funds are expected to manage €7.6trn across Europe over the next five years. ESG funds' market share may rise to 57% in 2025, compared with the current 15%. 

 This means big movements in share prices and market cap values with the winners being those who put ESG at the core of the business with the biggest losers those who ignore it.

 For CEOs, CFOs and COOs this is a major change programme because culturally for the last 20 years most businesses have been in a race to the bottom with suppliers to provide the cheapest goods and services in order to create bigger profits and margins. In the past few years in a high percentage of people in procurement and finance all that people want to do is talk about price as that is how they are being measured.

Let’s look at some formulas, if for example you are a ￡1bn market cap company your ESG reporting could have a 15% increase or reduction in your share price so a ￡300m market cap swing. By doing the right thing you could make ￡150m or ignore it lose ￡150m and you bottom line won’t be scrutinized because its an ESG investment and you have a happier workforce with less attrition.

 With a 15% increase in share price the bonus pool is going to be a lot bigger but if it goes down it will shrink. In this instance you could easily spend ￡50m in ESG initiatives and still see a further ￡100m upside. The hard part of the change isn’t the numbers at the board room as that all makes sense. Its changing the culture of the organisation to get people to spend on ESG initiatives and get over is it cheaper to I don’t mind if its more expensive if it delivers on ESG reporting metrics.

This is the real challenge for the CEOs and the board, get it right you are pioneering your sector, get it wrong its hurt the share price and market cap. Investing in ESG, be in energy, travel, packaging, carbon capture or even using Cheeky Panda paper products makes the shareholders happy. Perhaps that’s the best thing you can do all year and certainly worth mentioning on your website and annual report.