How do investors assess ESG?

Let’s start with the basics and look at three essential concepts:

• What is ESG? It’s a set of standards governing company behaviour around environmental, social and governance topics. 
• What is ESG investing? It’s the sub-sector of investing that uses these standards in decision-making. 
• What is ESG reporting? It is published information that summarises an organisation’s ESG impacts. Reporting is the primary benchmarking tool for investors’ research and decision-making. 

Today, ESG investing is a major topic thanks to combined pressure from shareholders, consumers and governments.

Three reasons:

• ESG investing is flourishing. According to a Bloomberg Intelligence report this year, the global value of ESG assets is expected to top $50 trillion by 2025.
• This, combined with the ESG’s growing prominence in the minds of stakeholders, makes the topic far harder to ignore in day-to-day business. 
• Boards have a pivotal role to play in shaping company strategy, so ESG will naturally dominate their work.

This, unfortunately, has no easy or catch-all answer. It varies across years, countries, industries, business sizes and environmental impact. 

But we can give some general answers to lay the groundwork for winning investment.

Investors don’t want this. They want to see ESG fully integrated into the broader company strategy. 

It goes without saying that ESG investors will want to see an ESG strategy, but there are good and bad examples of strategy in business. The difference between them – especially for ESG – is integration. 

If a company has a standalone ESG strategy, it’s generally not good news for the investor. To them, it looks like the company considers ESG a side project – separate from central operations. 

Investors don’t want this. They want to see ESG fully integrated into the broader company strategy. 

If the company does this integration correctly, it will demonstrate:

• That it considers ESG a core part of its business model
• That it knows how it will make a profit while incorporating ESG

That with its integrated ESG goals – it remains sustainable.

When investors analyse companies of similar sizes and business goals against each other, they will target those who stand out as leaders in ESG.

Investors will always conduct industry comparisons, which is no different for ESG. 

When investors analyse companies of similar sizes and business goals against each other, they will target those who stand out as leaders in ESG.

They will want to see integrated strategies, management and board-level expertise, and a public commitment to ESG causes. 

ESG scores are an excellent way to measure this. Several score types exist in the absence of a universal standard, so performing well in at least one of them is a bonus.

Reporting is a significant player in the ESG world because it is how companies communicate their progress.

Reporting allows firms to measure impact against their goals, showcase what has gone well, and explain how they’ll address shortfalls. 

Crucially, it is how investors assess ESG impacts, so they will want top-standard reporting, shining with consistency and clarity so that they can see a roadmap to ESG success. 

Again, there is no universal template for reporting, and this continues to frustrate many. However, the gap of ambiguity is closing as standardisation continues. The EU, for example, has recently made several strides in harmonising reporting practices through SFDR and similar regulations. 

For now, just remember that investors will want clear and easy reporting for comparison purposes.

How do investors assess ESG? They don’t want hassle or complications, and they do want verified results. 

When engaging with investors, be sure about your firm’s ESG goals, how it integrated with company strategy, and how you’ll communicate this over the medium/long term.