The evolved investor has arrived: Why companies must prioritize ESG to survive and thrive
September 28, 2020
September 28, 2020
Environmental, social, and corporate governance is gradually becoming the norm. Companies that are reactive to this shift risk losing both their consumer base and access to funding.
The shareholder of today has evolved. With information about the operations and impacts of companies at their fingertips, today’s investors can make informed decisions. Companies who do not pay attention to this change risk more than share value. The modern shareholder wants a company that embeds sustainability in its operations and contributes to a better world. But how did we get here? And what can your company do to meet the needs of today’s evolved shareholder?
It’s 1965. The Dow Jones closes at 969. The Voting Rights Act, guaranteeing African Americans the right to vote, becomes law. Health warnings are now mandated to appear on cigarette packets. The maple leaf becomes the symbol on Canada's new national flag. Young investors have been convinced by their parents to build wealth and equity, so they identify high performing stocks on the stock exchange. Their questions are basic: How much has this made? What is the return on investment? Does this pay dividends? Alright, deal.
Fast forward 25 years. Climate change is a key issue, as shown in the first report of the Intergovernmental Panel on Climate Change (IPCC) which finds that the planet has warmed by 0.5°C in the past century. The IPCC warns that only strong measures to halt rising greenhouse gas emissions will prevent serious global warming. Issues around equality and racism are forefront. Home Alone and The Simpsons are released. Young adults in leather jackets and denim are about to join the workforce. The shareholder of this era asks more enlightened questions: How much does this share cost? Does the company profit from war and environmental damage? Does the company hire people of all races?
It might not have completely played out like that, but the general idea remains valid.
Jump to 2020 and those enlightened questions have become mainstream. They’re being asked by everyone, from individual investors to asset managers to development institutions. Today, investors ask: “How is your company advancing humankind without destroying our chance to survive and the future of generations to come?”
Companies who do not pay attention to this change risk more than share value. The modern shareholder wants a company that embeds sustainability in its operations and contributes to a better world.
This gradual change in mindset from the Earth Warriors in the 70’s and 80’s has become more than a watershed moment, but rather a foundation for better business practices and an inclusive work environment for people of all races and genders. There is a growing need for businesses to track and develop systems that consider these trends and position themselves as active players in contributing to this change.
For example, in Accenture’s annual and extensive survey of global CEOs, the mood shift was clear. As the CEO of Pernod Ricard said: “I need to recognize where consumers want us in ten years…Businesses that are only targeting profits will die.”
The global community is now rebelling against full-on capitalism and what it represents. Companies that are profit-centric are being shunted to the sidelines. People want a company that mirrors their identities. A company that cares about its impact in the community. A company that protects the environment and restores/conserves the resources it uses for its operations. Not because it’s a good thing to do, but because it’s the right thing to do.
Companies need to embrace the ideas being put forward by investors by considering environmental issues, such as climate change, social impacts, such as diversity, and by adhering to the highest standards of business ethics. This holistic approach to managing a company is called Environmental, Social, and Corporate Governance (ESG) and multiple frameworks have been developed to support companies with the transition.
ESG is gradually becoming the norm. Companies that are reactive—rather than proactive—to this shift risk losing both their consumer base and access to funding. Global Banks have active plans to reduce credit funding to sectors with high environmental impact. The Government of Canada requires companies to have climate planning before they can access certain economic support programs. Stock exchanges around the world now require their listed companies to report on their sustainability and ESG activities and initiatives. There is a growing realization that environmental and social concerns, and the policies that are coming to tackle them, represent an acute financial risk and a permanent shift in valuations.
The good news is that the new stakeholder is more likely to buy a product from a company that clearly shows its efforts towards achieving sustainability. According to a recent survey from Accenture covering more than 6000 consumers in North America, Europe, and Asia on their purchasing and consumption habits, 72% of respondents reported that they were actively buying more environmentally friendly products than they did five years ago, while 81% said they expected to buy even more over the next five years. This shows that companies that adopt sustainability transparency can reach a new market segment and leverage this opportunity to develop new products or improve existing ones to capture a newer consumer base.
The business community has evolved and will continue to do so. It is now up to companies: Evolve and ensure your survival or be reactive to the growing trend and run the risk of missing out and being tagged a “Dinosaur.” And we all know how things turned out for the dinosaurs.