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ESG Matters and 2020 Proves It

I’m not a tenured professor or a seasoned professional with decades of experience under my belt. I’m an early career employee who has the unique privilege of experiencing corporations of all shapes and sizes. Throughout college, my 10 different roles across five industries, and journey toward receiving my Chartered Financial Analyst designation, I have learned and communicated the importance of sustainable, or ESG, investing.

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ESG has become the latest business buzzword, an acronym that describes a wide range of factors related to the Environmental, Social or Governance standing of a company. ESG is a common area of discussion in corporate boardrooms and is rapidly replacing the term “corporate social responsibility.”

ESG is central to what I do as a lead associate at Willis Towers Watson, helping develop and present our sustainability offerings to clients of the global advisory, broking and solutions company. The question increasingly has turned to this: Is an ESG platform essential for companies today and is there a risk to not having one?

Evaluating for Value

From my experience, the answer to this question seems obvious. But let’s dive into what ESG really is and what it isn’t. First, companies are not charities. A well-run company will most likely have a vision or mission statement that indicates what value it hopes to provide some segment of society and a sales/business strategy that indicates how it expects to be compensated for adding this value.

Value is the key word here. Companies should be providing value through goods and services and receiving commensurate compensation. However, there seems to be a disconnect between the value companies provide and the compensation they receive. When we look at the full picture of their impact, some companies are paid more value than they provide. This is because we have not historically had the tools or data available to properly understand the full net value a company provides (or extracts from) society and the environment.

For example, say a company sells a product at a considerably low price, but only if it overworks their workforce and stresses them out. This stress has a cost to the business. Studies estimate that stress costs American companies $300 billion a year in health care, absenteeism and poor performance.

That’s not even including spillover or long-term effects to our society. This is only one example of a myriad of other S factors companies are looking at. Some other examples include health and safety, inclusion and diversity, modern slavery, and child labor, among others. The common theme is ESG factors can be used to illuminate the full impact or net value that companies and their supply chains have on our society.

Supporting the Benefits of ESG

Where I sit within the world of investing, investors increasingly use these ESG factors to make capital allocation decisions. For a long time, however, there was a debate on whether ESG was financially material or not.

Over the past decades, investment professionals and academics have looked into this question, and after thousands of studies, have settled on a resounding “yes.” The question is now resurfacing in the corporate sphere as companies can no longer ignore the significant role they play in peoples’ lives.

2019’s massive global climate protests and subsequent corporate climate commitments from nearly two dozen multinational corporations placed attention on the E. Then the global COVID-19 pandemic and, more recently, the protests demanding racial equality, have brought the S and the G to the forefront, with corporations grappling how to be responsible to their employees on the diversity and inclusion (I&D) front, among others, as well as being accountable to their customers, communities, people of color and our planet.

All of this to say there is a benefit to developing and applying an ESG platform and there is some potential risk for companies not addressing these factors. The COVID-19 pandemic and social unrest over racial justice issues have made this clear, and have accelerated ESG investing and corporate sustainability initiatives. Research continues to support ESG’s significant benefits. Consider:

• Organizations with high ratings for I&D are 70% more likely to succeed in new markets and 45% more likely to enhance their market share, a Center for Talent Innovation study found.
• 85% of CEOs of organizations with a I&D strategy say it improved their bottom line, according to a PwC survey.
• Purpose-driven companies outperform the market by 42%, concluded the Conference Board’s 2018 Global Leadership Forecast, and an Earned Brand Study by Edelman found that 64% of global consumers are belief-driven buyers who choose their brands based on its position on social issues.
• As for critical talent and retention elements, a Cone Communications employee engagement study indicated that 58% of employees consider a company’s social and environmental commitments when deciding where to work; 51% won’t work for a company without a strong social and/or environmental commitments; and 55% would opt to work for a socially responsible company even if the salary offered was lower.

In addition, the World Economic Forum’s 2019 Global Risks Report revealed the No. 2 global risk is failure to mitigate and adapt to the impact of climate change. Companies are increasingly exposed to physical risks derived from how climate change impacts exposed populations, assets and systems, and transition risks that accompany the move to a low-carbon, climate-resilient economy.

Achieving the Best Outcomes

What all these surveys and studies make increasingly clear is ESG captures a global sentiment that “we can and must do better.” Investors have known this for a little while now and it’s time for companies to step up and realize ESG is not charity but a pragmatic way of enhancing the value of the company.

Despite many calls to action, the percentage of major companies that use ESG metrics in their incentive plans is still relatively low – 51% of S&P 500 companies. But companies’ forward-looking disclosures enacted in 2019 and published this year indicate more corporations are incorporating ESG into their incentive plans for the first time, a recent WTW study found. Likely
ESG categories or metrics being added to incentive plans include I&D, employee/HR, governance and environmental/sustainability.

My time at different firms has led me to the conclusion that companies need to adapt the way they do business. ESG provides an avenue for companies to stay relevant, understand what their net value is and ultimately achieve the best outcomes for their stakeholders.

About the Author

Jeff Marschke Bio Image

Jeff Marschke CFA, lead associate at Willis Towers Watson


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