Blog Post

ESG Impact and Sustainability Communication

MACK BHATIA

Engage your investors with sustainability communication on your ESG improvements

What is ESG

Environmental, Social and Governance (ESG) factors or criteria are a set of strategic and operational standards followed by a company which has a potential impact on environment or society. In other words, it is a framework for assessing the impact of the sustainability and ethical practices of a company. 

While the environmental factor (E) is primarily concerned with the company’s influence on the environment and its ability to mitigate various risks that could harm the environment,  the social factor (S) investigates the company’s relationships with other businesses and communities. Governance (G) is concerned with the internal company’s affairs and the relationships with the main company’s stakeholders, including its employees and the shareholders.

Investors look towards these ESG factors to make their investment decisions. The ESG criteria also helps determine the financial and future performance of the companies ( in terms of both returns and risks ). This investment decision making practice commonly known as responsible investing, is followed by numerous asset owners and asset managers moving towards making sustainability as a new standard of investing. BlackRock, as an example have already taken significant steps towards to make sustainable investing as a key part of their investment strategy.  

Sustainable Investing and ESG Integration 

Sustainable investing is about investing in the progress of the companies who are focused (in a way) to solve the existing environmental or social challenges. The approach is to identify those companies who are making significant efforts to pioneer ways in their operational, product or business strategies and address challenges such as climate change or other social issues. Investors now recognize that these companies are positioned to grow in a longer term. 

The growth in sustainable investing is largely driven by financial decision makers, regulators and governments incorporating sustainability into their investment information and into the decision making process. These financial decision makers are motivated by the Six Principles of Responsible Investment (PRI) which were formulated by United Nations. 

The PRIs addresses the current challenges were developed by the investors and for the investors in order to incorporate sustainability into the financial ecosystem and investment decision making process.

ESG Impact Sustainability Action Plan Green Supply Chain Communication Sustainable Finance Advisory Mack Bhatia

About ESG Integration 

ESG Integration is the practice to incorporate ESG information into the investment decisions. Looking at it another way -  ESG integration and the ESG components helps investors analyze the material factors to make informed investment decisions. Among the most important reasons to integrate ESG factors in the sustainable portfolio, the following two are the most valuable:

  • Risk, returns and opportunities: ESG factors are considered to be an important parameter to measure company's long term performance. Investors incorporate ESG factors to lower their risk or to generate better returns. Primarily, investors turn to ESG factors to attempt and avoid risk in an individual company or a sector. 
  • Materiality: Materiality is another key component of ESG integration. It primarily involves giving more importance to ESG issues or the ESG factors which are likely to affect a corporate's financial performance. Financially material ESG factors have a significant impact (positive or negative) on a company’s business model, revenue growth, cash, margins or other forms of capital. 


How do investors understand the ESG Factors? 

Practitioners and analysts study ESG factors using the ESG data available for a company or an organization. Investors can access this data through varied ESG data service providers or through any sustainability communication materials. They analyze this data to try identify the ESG factors with a potential material impact on the company and forecast any risks and opportunities.

Investors can also look if any of the companies in the portfolio have any ESG scores available publicly or through any rating agencies. ESG rating agencies do a deep research using varied methodologies and then score companies based on a set criteria. Investors either trust ESG data and ESG Ratings or embed this ESG data into their own tools for further analysis.

Corporates can also get their own scores through the rating agencies. This can give corporates a more in-depth view of how they are perceived in the market. They can look into the ESG parameters that investors are most interested in. There is a huge opportunity for corporates to showcase their ESG score or identify opportunities of improvements in their ESG factors. This message should be part of any sustainability (ESG) communication materials developed by corporates and companies. Read more on mapping sustainability communication with respective stakeholders.

Adding ESG improvements and ESG impact in their sustainability communication profile develops trust and transparency among investors and other stakeholders. 

ESG and Sustainability communication

Institutional and individual investors look for signals to help them make better investment decisions and reduce their risk with their sustainable portfolios. Investors will also want to strengthen their reputation on sustainable investment. The most important component of ESG communication is how you drive business value with ESG and sustainability.

Analysts and practitioners collate the ESG information from various sources which includes company reports, filings and any publicly available information through information on corporate websites, reports, videos, interviews, and other communication materials. They then refer and assess through this list of available information to periodically review the ESG impact and materiality impacts. 

Regular communication on how you address ESG issues and your progress towards the sustainability commitments is a critical factor in influencing the investment decisions. Moreover it is very important to maintain the reputation of the company. Stock prices depends, or at-least in part, on companies impact on environment and society.

Showcasing our ESG impact or your progress towards your sustainability commitments influences the sentiment among the shareholders and builds upon your reputation. Hence, sustainability communication is no doubt the most important component of a sustainability strategy. 

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