It is clearer than ever that business performance is irrevocably tied to market forces. Today, these market forces are primarily characterised by environmental, social, and governance (ESG) issues. Not only do these factors guide impact investing, but they also determine consumer buying habits. Ultimately, ESG is shaping the future of global markets.
An organisation without an ESG strategy is, therefore, one that cannot possibly succeed long term. The better organisations can harness ESG intelligence the better equipped they are for future risk management, reputational management, and overall, maintaining their business performance.
The rise of ESG in business strategy
In 2007, only 5% of Global Assets Under Management were managed using ESG factors.
Today, over a third of all Global Assets Under Management ($40Tn) are managed using ESG factors – this is projected to be over 50% by 2026.
In 2007, when Polecat first opened its doors, supply chains had gone global. At the same time, there was a global food crisis driven by a sharp escalation in worldwide commodity prices. The Cold War with Russia was also well over, while in stark contrast, NATO was engaged in a war grappling with concerns regarding the potential use of weapons of mass destruction and the disruption of access to energy resources.
Back then, the world had become a more volatile, uncertain, complex and ambiguous environment for businesses. We were heading into a global recession and stock prices were falling as investors, and society as a whole, perceived that the value of business was declining.
In these environments, there is a business-critical need to understand organisational social capital value and to measure it quantifiably. Polecat was founded to achieve this. By harnessing the voices in every corner of the internet and social media, we can understand how an organisation’s stakeholders view their business, what is influencing them, and consequently how the perceived value of a business changes over time.
Many of these themes still remain over 15 years later, amongst many new ones. But now the business world has started to standardise how it perceives social capital resilience. It has established some clarity within the ambiguity, complexity, and uncertainty. Using ESG factors, companies can measure their business performance consistently, and in context, despite how the world changes around them.
What is ESG?
ESG stands for environmental, social, and governance. This is a set of principles that can be used to measure a business’s impact on these different pillars. Organisations are expected to report on these different themes and introduce practices that fulfil ESG standards.
This may be executed through establishing ESG goals, setting up ESG initiatives, revising business strategies, and sometimes getting an ESG rating. Most importantly, companies need to integrate ESG into their overarching business plan and provide transparency over their actions to consumers.
Sustainability, closely related to ESG, has experienced a similar rise in importance. Businesses are expected to demonstrate sustainable practices within their operations. The United Nations Sustainable Development Goals outlines 12 themes which organisations can adopt to contribute to their sustainability.
Why has business ESG developed so quickly?
What started as a screening technique for faith-based organisations in the 1960s, has made its way into the very DNA of running a business. ESG analysis is as essential as accounting or compliance. As of the end if 2022, Global ESG fund assets reached about $2.5 trillion, and over 90 percent of S&P 500 companies publish ESG report. So how has ESG gone from unknown, to cornerstone, in just 60 years?
Reasons for ESG growth
From the unignorable climate challenge to new tech innovations, there are various reasons the demand for ESG strategies has risen so rapidly and consistently.
1. Demand led by investors
Over $500 billion was spent on ESG-integrated funds in 2021 while assets within ESG-integrated products grew by 55%.
The shift to sustainable investing is so powerful because it’s being driven by demand from the bottom up. Quite simply, investors – from individual savers through to large institutions – are directing an ever-increasing proportion of their portfolios towards sustainable strategies as they look to use their capital to help create a more sustainable world. This was made particularly apparent in recent proxy seasons.
The 2022 proxy season had one of the highest records for majority-supported ESG shareholder proposals in recent years - PWC
Similarly, boards are being encouraged to strengthen their ESG credentials and skills and put their accountability into action through strategies like resilience measures for investment.
2. Technology is driving product innovation
New technology is helping fund managers keep pace with this sharp rise in demand for sustainable investments. The internet transformed the way information is captured, documented and disseminated, providing investors with access to more data than ever before. However, it’s only with the development of artificial intelligence (AI) that investors can analyse it all.
Read more about AI powered intelligence
The result has been a dramatic improvement in corporate transparency, as new data sources provide better insights into how companies are being run from an ESG perspective. As fund managers use AI to tap into big data, new and exciting opportunities are being created across an ever-growing range of sustainable strategies.
3. Action is encouraged and required
Many companies around the world already understand the need to take action on ESG issues. Boards are widely pushing for more sustainable initiatives from the inside. Sustainability laggards are similarly being caught up in the ESG wave and are propelled forward by consumer interest, active investor engagement, and government regulation which is continually evolving.
Net Zero pledges are creeping up quickly and organisations must be feeling the pressure to deliver. Shorter term sign postings and reporting are as, or more, important than long-term goals.
Although ESG is becoming a universal theme, with defined metrics, organisations inevitably have their own priority issues. This is inflating the use of ESG intelligence tools in order to dig into granular company issues and metrics. They are enabling organisations to forge their own paths and have an even greater impact. This is how organisations can identify where to take action to have the greatest impact.
4. The energy transition is creating new risks and opportunities
As well as focusing on the ESG credentials of individual companies, investors are starting to give more consideration to the sectors, countries and regions that have the resilience and competitiveness to thrive as the world moves towards a low carbon future. While on the other hand, organisations are pledging to help those whose economies will be negatively affected by the move away from traditional energies.
How ESG issues impact business practices
ESG is now a critical topic in the boardroom, which is both an opportunity and a minefield. It’s a reflection of how your business is managed, as well as its performance.
For your business practices, this means considering corporate governance and what is required of you by market regulation. This will affect tangible processes such as your supply chain operations or your energy consumption.
It also means taking a closer look at the intangible: culture and social issues. Although this may not fall under a legal requirement, how organisations view and live up to their social responsibility is an important factor for consumers, employees and stakeholders alike.
Your company’s perceived approach to ESG is, therefore, likely to impact everything from investment decisions to travel policies to recruitment processes and policies.
In short, ESG issues have rewritten many business practices from the inside out.
Why businesses need an ESG strategy
Organisations can view this ESG revolution as a threat, or as a tool to innovate and stand out.
Undoubtedly, ESG issues will impact your business, either today or in the future. Organisations must be aware of these potential impacts and be ready to deal with them. This is what creating an ESG strategy will achieve. As guiding star in every sector, understanding their ESG approach gives organisations a roadmap for resilience. It’s a guiding rope to hold onto in the face of an ever-changing landscape.
To effectively build an ESG strategy, organisations need to harness ESG data as the invaluable business intelligence tool it is.
With the right information in hand, organisations can utilise ESG intelligence to:
- Track market trends
- Benchmark company performance
- Keep up with competitors
- Set clear strategic goals
- Support compliance
- Identify and manage ESG risks
- Inform proactive business strategies
- Manage corporate reputation
- Inform consumer and stakeholder communications
- Align with stakeholder interests and improve buy in
- Prepare for AGMs and proxy season
- Guide investment and financial decisions
- Build resilience and manage risk
How to build an ESG strategy
Gather investor insight:
First, understand what your stakeholders and investors care about. Use their insight and values to map objectives and priorities for your ESG strategy.
Utilise ESG intelligence tools:
ESG tools are a valuable resource for gathering market intelligence. You can gather market research, ESG trend research, sentiment analysis, forecasting, competitor benchmarking, impact analysis, materiality assessments and much more to inform your objectives and next steps.
Build a framework:
There are many available frameworks for organisations to choose from, so it’s important to choose one that aligns with your values and goals. Examples include United Nations Sustainable Development Goals and the Global Reporting Initiative Standards.
Monitor KPI performance:
Set specific KPIs to track your progress for ESG goals. Assign roles within your organisation and work with outside experts to monitor these and keep track of any external or internal factors which may impact them.
Adapt and evolve:
Continue to utilise ESG tools, communicate with investors and pay attention to public perception in order to see what’s changed. Have you moved the dial? Are your ESG campaigns effective? What new trends or current events may sway the focus of your strategy? Ensure your strategy evolves alongside the landscape and the business.
How we help – Polecat
Polecat’s responsible business intelligence™ platform offers unparalleled access to ESG insight. Contextualising data from across the internet and social media, Polecat enables global companies to expertly manage reputational risk and create ESG strategies that build competitive advantage.
With dynamic intelligence, automated updates, and robust deep dive capabilities, Polecat empowers ESG teams to keep themselves and their organisations firmly at the forefront of ESG issues.
Here’s just a few ESG intelligence applications we support with:
- Dynamic materiality assessments
- Strategic ESG monitoring
- In-depth topic analysis
- Seamless stakeholder reporting
ESG trends with Polecat
We perform regular ESG monitoring and provide updates in our Weekly ESG Briefing newsletter.
Here are some of the latest insights at the time of posting and an example of what is included in the regular newsletter:
- SEC Moving Into Global ESG Police Role, Commissioner Uyeda Says: “The SEC has taken steps toward becoming the world’s enforcer of environmental, social, and governance disclosures, jumping into matters best left to foreign authorities, Republican Commissioner Mark Uyeda said Tuesday.”
- Greenwashing Pressures Step Up in U.S. and E.U.: “Both the EU legislation and any updates to the Green Guides would have significant impacts on how companies promote and market their products, and non-compliance can have significant financial consequences for a company… While there are numerous avenues to examine to ensure that ESG principles are being upheld and accurately conveyed to the public, the underlying compliance program for minimizing greenwashing allegation risks is absolutely critical for all players putting forth ESG-related statements.”
- FSC to announce roadmap for ESG disclosure system in third quarter: “South Korea’s financial regulator is planning to release a roadmap for an environmental, social responsibility and corporate governance (ESG) disclosure system in the third quarter of this year, as the country is in the process to phase in the mandatory system starting in 2025.”
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