Sustainability in business has moved from a marketing advantage to a business driver within the past decade. The movement that began with corporate social responsibility has shifted to become central to a company’s bottom line and, for publicly traded companies, their attractiveness to investors.
With the volatility that we are going to see throughout 2020, companies that are not paying attention to the needs of Environmental, Social, and Governance (ESG) and impact investors could risk being behind the curve – and it is the board’s job to keep them on track.
Corporate Social Responsibility and Sustainability are Maturing
Corporate Social Responsibility (CSR) is a movement that was started over a decade ago to standardize implementation of sustainability measures and good corporate citizenship in the business world. It is now no longer enough to simply follow environmental laws and give donations. Your business has to be viewed as a good corporate and environmental citizen in order to attract new hires and bolster the brand.
CSR has matured to the point where many large Canadian firms have a corporate social responsibility and/or sustainability executive at management level, and in some cases even an entire department devoted to CSR.
The measurement of sustainability efforts is done with Key Performance Indicators (KPIs) that provide relevant data about a company’s efforts, and these are usually reported on annually in a corporate social responsibility or sustainability report that is publicly released.
For companies that practice corporate social responsibility, a significant reward for being successful is a spot on the Corporate Knights annual Best 50 Corporate Citizens list. Corporate Knights is a Canadian publication which specializes in corporate social responsibility. Smaller companies without the resources of a large enterprise can use the Government of Canada’s SME Sustainability Roadmap as a guideline to becoming more sustainable. According to
A company’s CSR and sustainability efforts can be directly linked to better business outcomes and being more attractive to new hires. Both of these positive trends have made adopting CSR guidelines very attractive to Canadian companies. Investors have also taken notice, and a company’s sustainability and good corporate citizenship efforts are now a major backbone of the latest investment trends: ESG and impact investing.
ESG and Impact Investing Defined
Impact and ESG investing are similar, but not the same thing. Impact investing is when investors actively seek out businesses that are promoting social and environmental good, while also creating financial returns. ESG investing balances the same principles of impact investing with a third-leg focus on good corporate governance.
Both forms of ESG investing are based around sustainability ratings, which are generated by third parties and derived from things such as annual corporate sustainability reports, financial statements and other public information released by a company. This is an important shift as CSR performance is usually self-monitored at a company against industry benchmarks.
As such, investors view sustainability scores as more trustworthy. These ratings, according to the Harvard Business Review, are available from firms which operate much like Moody’s, but for ESG scores. The current leaders in the space are Sustainalitycs, Institutional Shareholder Services, and MSCI. Since the space is so new, investors can often be confused by the various rating systems. However, following best practices for both CSR and good corporate governance should allow for a decent sustainability rating.
How Your Board Can Enable Sustainability Success
The first step is to persuade naysayers on your board. The Harvard Business Review has a few tips on how to effectively do this, the most persuasive of which is to give them the hard data on how important ESG and impact investing are in the business world. Appeal to them with the business case. It may help to hold a seminar at one of your board meetings on ESG investing.
The next step is to form a sustainability committee. A seven-year study of UK firms revealed that companies with a sustainability committee had more effective CSR strategies. Once the committee is formed, it can track internal initiatives and the company’s sustainability ratings and report back to the board.
If the board is heavily involved in a company’s sustainability efforts, it is a signal to investors that your company takes it seriously. It is important to have every angle covered in a volatile market, and establishing a proper sustainability/CSR program at the board and management level will give your company a significant advantage in both bear and bull markets.