Opinion: ESG will determine funding – investors are counting on it

BY: Dina Readinger

There are very few financial studies giving clarity to what matters most when planning for the social piece of environmental, social and governance goals for corporations.

There are positive correlations between ESG and returns on equity and assets, and stock prices, yet it seems no one is planning for the social piece in ESG. Most private companies are unaware of what ESG is, yet large corporations are keenly aware of the impact ESG has on investors. There is a direct correlation between ESG performance and operational efficiencies, stock performance and lower costs of capital. As the market shifts toward ESG awareness, the big question is how we measure it.

Investors are measuring the performance of a company by their specific strategies as it relates to the environmental, social and governmental impact and making direct inferences to the quality of management and how they manage team performance. There is a direct correlation between ESG and performance. Investors call this impact investing.

Sustainable growth
Recent data from Mercer, Boston Consulting Group and McKinsey & Co. are focusing on the things that are unclear and a bit confusing. The environmental impacts of companies are much easier to establish and quantify. Long-term sustainability is exceedingly difficult to measure since it is complex, dynamic and relies on a different approach to creating social change. 

What is the main ingredient to managing long-term sustainable growth over time? 

When considering the “S” in ESG, there are many stakeholders to consider such as employees, civil society, suppliers and investors. Contracts between corporations and society can determine consumer loyalty, demand and government restrictions. The most pressing issues are the failure of diversity, equity and inclusivity programs to meet expectations from an outside investor’s view. New York University’s Stern School of Business determined in a five-year aggregate of studies through 2020 that ESG is a long game plan to produce sustainability and that other studies need to be done to completely understand ESG. More research needs to be completed around sustainability driven by innovation, employee relations, supplier loyalty, customer demand, risk mitigation and operational efficiencies, as well as DEI.

What is known? Companies who focus on ESG have significant positive impacts on their overall performance.

A recent article from the Harvard Law School Forum on Corporate Governance is looking closely at the commitment of companies to follow through with transparency, their commitment, accountability, ethical leadership and the correlation between the return for investors. The industries with the greatest reporting compliance on key ESG issues are oil, gas, chemical and energy. When the market changes around these key areas, impact on society is noticed by everyone since it has a direct impact on people and how they live. 

What can you do to boost ESG and what is measurable?

A Business Inquirer report stated that the black swan events related to COVID-19 and the Russia-Ukraine war has put everyone in survival mode and ESG is now ranking as the biggest factor affecting company performance.

What can companies do? 

• Engage in philanthropic endeavors, such as activist groups, which can spur pressure on states to promote environmental, social and governance change.
• Ask employees, “What are the biggest needs families have today?” Can your employees produce ideas of how they want to create social change?
• Use transparency to find out from stakeholders how to create a synergic approach to what needs to change.

You can measure anything. Any process that is specific to the “S” in ESG can be measured for success, such as activity, beliefs and the needs of your employees, stakeholders and your customers. You can measure social change, and you must think freely. Investors are using ESG to decide where to invest.

If you plan to go public with your company, be ready when they ask about ESG.

Dina Readinger is CEO of Diagnostic Thinking and creator of a leadership system to develop executives, particularly in employee retention and diversity, equity and inclusion. She can be reached at dina@acecoachingco.com.