To ESG or Not to ESG: That Is not The Question. Here Is What Is.

According to a recent study by The Conference Board of more than 100 large US companies, nearly half noted they have experienced negative reactions regarding their ESG efforts and more than 60% believe this will trend will persist and intensify over the next two years.

This study brings to light a fundamental question: the question is not "To ESG or Not To ESG," but rather, what is the optimal mix and set of information that investors need to accurately assess a company's current and future performance and potential financially?

Historically, the metrics by which public companies are evaluated have been a space of continuous evolution and dynamism, and although ESG factors have recently garnered significant attention, we are on the cusp of even greater evolutions in the types of financial and non-financial metrics that public companies will use to communicate with the investor audience, including in ESG.

Especially during our current fast moving environment, the dialogue between investors and companies is far from static, and as societal values, technological advancements, and economic landscapes shift, so too will the metrics that serve as the language of this essential conversation with investors and be critical to enable companies to elevate their value.

ESG Metrics Evolution In 2024

As we approach 2024, the landscape for ESG-related metrics and disclosures is undergoing significant transformation. The emphasis on ESG factors has moved from being a niche concern to a mainstream requirement, evolving in complexity and specificity and connection to the business strategy in terms of three of the four "Foundational Four (the other being Capital Structure):"

• Strategic Trajectory
• Market Position
• Performance Excellence

Leading public companies are going beyond compliance with regulatory standards and are adopting best practices that serve as benchmarks for the industry and in the context of the backlash noted above. These pioneers are:

• Utilizing advanced data analytics and third-party audits to provide more accurate and comprehensive ESG reports
• Increasingly integrating ESG goals into their long-term business strategies,
• Tying ESG related work to annual operating plans, and
• Connecting ESG metrics to the next business outcome and value creation
• Engaging in more "first principle" dialogues with investors to develop a more customized approach to enable valuation.

This on-going evolution reflects a maturing understanding that ESG metrics are not static, but must adapt to changing environmental, social, and governance landscapes to offer investors a nuanced and complete picture of a company's current and future value, tie to the business strategy and growth trajectory of the company as well as contributing to performance excellence and market presence.

Looking Ahead

As pubic companies are planning for 2024, here are some of the emerging trends shaping the investor conversation that can be a supplement to their current financial, non-financial and ESG efforts including:

1. Digital and Data Ethics Score:

• Example: Google's "Privacy Sandbox" aims to replace third-party cookies, reflecting growing concern over data ethics.

2. Innovation Quotient:

• Example: Tesla’s continuous R&D in electric vehicles and batteries sets it apart in innovation.

3. Mental Health and Employee Well-being Index:

• Example: Microsoft's 'Viva Insights' offers personalized insights to improve employee well-being.

4. Supply Chain Resilience:

• Example: Apple’s diversification of suppliers to mitigate trade war risks.

5. Cybersecurity Health:

• Example: Cybersecurity metrics are vital for companies like Amazon Web Services which manage vast amounts of data.

6. Customer Engagement and Satisfaction Index:

• Example: Netflix’s focus on personalized recommendation algorithms to enhance customer experience.

7. Local Economic Impact:

• Example: Starbucks' initiatives to hire locally and use local suppliers.

8. Intellectual Capital and Skills Development:

• Example: IBM's internal training programs aim to close the skills gap in data science and artificial intelligence.

9. Ethical AI Metrics

10. Climate Risk Assessment:

• Example: Unilever's detailed reporting on its environmental footprint and climate change-related risks.

The metrics used to evaluate companies have come a long way, evolving to reflect the multifaceted interests and needs of investors overtime. The introduction of ESG metrics was a milestone in this evolution, offering a more holistic view of a company's sustainability and ethical practices.

As we look ahead to 2024, the focus is increasingly on metrics that provide a more nuanced and comprehensive picture of a company's financial and non-financial performance and impact. This continual evolution ensures that investors are well-equipped to make informed decisions that align with their financial goals and investment mandate and elevate public companies value.