Tom FaustTom Faust

The issues, requirements and policies collectively known as Environmental, Social and Governance continue to evolve as the demands of regulators, business partners and investors grow. As a result, CFOs and compliance professionals are developing universal standards, common report formats and more robust data with specific metrics that go beyond policies of the past.

The real opportunity is leveraging the data and content gathered for a more expansive initiative that takes ESG from a financial and compliance box-checking exercise to a strategic component of corporate communications. This is especially true for private investment, asset management and other financial firms who often have more complex risk exposure around ESG due to diverse global holdings than single-industry businesses.

Changing ESG demand

O'Dwyer's Aug. '17 Financial PR/IR & Professional Services PR MagazineThis article is featured in O'Dwyer's Aug. '17 Financial PR/IR & Professional Services PR Magazine

A significant driver of ESG’s change came about as the “E” and “S” were added to what began as just governance. In the early days, this compliance function focused on the election of directors, voting standards and the separation of CEO and chairman roles. Governance is still critical, but has remained more of a procedural exercise. The focus recently has shifted to Environmental and Social as the public has grown much more conscious of and vocal about the actions of the companies they patronize, as well as the investors behind those companies.

Today, ESG is under intense scrutiny from all corners. Global stock exchanges are pushing listed companies for greater disclosure of ESG factors in investor reports. In 2003, barely 20 percent of S&P 500 companies reported ESG factors. By 2016, the number swelled to 82 percent. A similar change is happening on the private investment side. According to a 2017 report by Makena Capital Management, about 42 percent of investment firms polled had adopted ESG policies in 2016, compared to less than 5 percent a decade earlier. Furthermore, 66 percent of private asset managers said ESG is factored into their due diligence, regardless of whether a policy is in place.

We’ve seen the dramatic impact of ESG issues in corporate operations and investor decisions, such as divestment of interests in tobacco, fossil fuels and firearms businesses by private equity firms. Investment firms without robust ESG policies are increasingly at risk of being knocked out of consideration by major, global institutional investors ranging from state pensions and sovereign wealth funds responding to the pressure of the workers and citizens they represent, to corporate pensions concerned about reputational risk with consumers.

The challenge of standards

The emergence of the UN Principles of Responsible Investment has been a huge boon for IR and communications professionals who needed some north star to orient their ESG communications. Make no mistake; increased adoption of UN PRI is a real positive for the industry. However, a quick reading of the principles shows that there’s a lot of wiggle room in the language.

For example, “We will incorporate ESG issues into investment analysis and decision-making processes.” Certainly better than not incorporating them, but how are they weighted? What issues are considered? How does a firm think about the tradeoffs between different issues?

The lack of precision — by necessity — of the UN PRI language, has led to the current challenge of investment firms trying to satisfy dozens or hundreds of ESG information requests with widely varying data and formats. This not only makes life tough for compliance, it makes IR infinitely more complicated because the firm can’t tell a cohesive ESG story. Reporting has its place, but for an issue with such huge stakes, financial firms can’t rely on compliance-driven reporting to tell their story effectively.

Expanded opportunities

As stated above, ESG presents an enormous opportunity for IR and corporate communications pros if they can look beyond what’s required to what’s possible. Investors are often more interested in seeing intent, effort and progress around ESG than actual (and sometimes arbitrary) numbers. There are several ways firms can make ESG more meaningful to financial audiences beyond the compliance function.

Share the process. As the Makena report shows, factoring ESG into investment decisions is easier than putting a policy in place. But that doesn’t mean you can’t say anything more on this complex challenge. Talk about the discussions that you’re having internally about carbon footprint vs. labor conditions vs. data privacy vs. water usage. Show that you’re engaged in the broader ESG conversation as the industry works toward common standards and your firm works toward a meaningful policy.

Ally with experts. As financial firms continue to incorporate ESG into their investment activities, questions remain on their effects on not only immediate returns, but their impact on the socio-economic and sustainability issues themselves. Partnerships with institutions, think tanks and consultants to co-authoring and co-sponsoring studies can provide third-party validation of a financial firm’s commitment to ESG.

Gather the data. We recently worked with a private equity firm on enhancing its ESG story. Part of the process was looking at what its portfolio companies were doing. The results were surprising. From energy-saving environmental controls to ambitious recycling programs, waste reduction initiatives and green power mandates, the companies were doing more on ESG than the firm imagined. The firm was able to generate a number of compelling stories and some impressive metrics.

Don’t forget governance. Every time a company in the public eye stumbles due to poor internal controls, lax ethical standards or conflicts of interest, governance is on investors’ minds. This doesn’t mean financial firms should send emails after every news story, but they should make selective use of such media attention to remind investors of the strong governance in place to ensure such situations are avoided.

Raise your voice. ESG can be a sensitive issue for many financial firms, public or private. Its birth in the compliance department means that, more often than not, communicating on ESG is restricted to an occasional letter to investors or expressed in eight-point legalese type. This is antiquated thinking. ESG is on the minds of media, the public and your investors. Forward-thinking financial firms want to be in front of the issue through a dedicated section of the website, discussion on investor calls, updates within or accompanying quarterly investor letters, and even direct engagement to get investors’ input on how they are thinking about ESG.

While there are certainly compliance challenges to be overcome, ESG is no longer relegated to compliance or financial function. ESG holds tremendous potential for IR and communications professionals tapped with enhancing a financial firm’s reputation, differentiating in a crowded market, and generating positive visibility.


Tom Faust is Managing Director at Stanton.