“The ESG disclosure space is a mess,” Professor Ioannis Ioannou said as part of ESG Clarity’s live Twitter Q&A before setting out what companies can do to improve ESG reporting.
Professor Ioannou is considered a leading authority on how companies can integrate ESG factors into their processes and structures and how the investment community perceives, evaluates and reacts to such corporate attempts to integrate ESG.
He is currently associate professor of strategy and entrepreneurship at London Business School and a visiting associate professor in the Department of Management at Miami Herbert Business School at the University of Miami.
Professor Ioannou gave answers on 23 September live on Twitter to ESG Clarity readers who posed questions on integrating ESG.
We have collated all the questions and answers below for readers to view in one place.
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The live Q&A is an initiative from ESG Clarity to boost interaction between the in-house team and our readers, as well as connect them with ESG investing experts such as the CEO of the PRI Fiona Reynolds, Oxford University professor Linda Scott, Professor Gandhi and Paolo Taticchi.
We are asking readers to send further suggestions to email@example.com on who they would like to interview in the next Live Q&A Twitter sessions. These should be experts in responsible investing space, for example a senior person at a government or trade body/organisation, academics, charity representative, or somebody in a senior position at a think tank, campaign organisations, regulatory committees, network etc.
Within the ESG theme, what research questions do you see as most appealing for future research? Or that needed to be studied more. Be it at the level of capital markets, banking, or risk management.
There are so many! We still have work to do to understand the process of ESG integration by corporates. How does the process of transition look like? What are the challenges? What makes some firms more successful than others? Can large firms transition? Just a few of them!
Can a company slowly estimate the impact of it processes/products or must it report comprehensively from the start?
I do not think comprehensive reporting is even feasible at this point, provided all major voluntary reporting frameworks are still in development. Companies should strive to communicate to their stakeholders, in a truthful, accurate and verifiable manner, how they create value, both in financial terms as well as in socio-environmental terms. And how they do so in a synergistic manner. This implies that it is not only a challenge of reporting but also a challenge of actual implementation.
The final thing I would say is that sustainability, like every strategy, cannot be done piece-meal. It has to be an “all in” effort, that is integrated, comprehensive and coherent. So, like every successful strategy, going slowly may actually be ineffective.
How can investors figure out what companies are really working to improve their sustainability vs. just greenwashing?
By using a combination of approaches: using ESG data from multiple providers, information from relevant NGOs and civil society organisations and, critically, via direct engagement with the company. By asking management the right questions, and requesting documentation.
Relatedly, a company should be judged on its level of ambition, ability to implement/execute a sustainability strategy and the speed at which it is moving on the sustainability journey. It’s a dynamic, not static assessment.
How can investors understand regional differences of good governance to be able to evaluate companies for investment opportunities?
Increasingly, regional standards might be relatively less important than global standards. This is for several reasons. Markets are interconnected, as such, best practices diffuse relatively rapidly. Local companies that adhere to global standards are arguably better positioned. This is not to suggest regional standards are not important. They are. And one can assess companies based on “best in class” approaches, i.e., by benchmarking at the (local) industry level.
Lastly, it would also depend on the investment strategy of a fund. For example, I would expect an emerging market fund to weigh regional standards more, whereas a value investing strategy may actually arbitrage a gap between local and global standards.
Companies have many different interpretations on what ESG integration looks like making it hard to define and measure. How should companies disclose this info to shareholders? What about fund groups looking after “ESG-integrated” assets?
You are right: the ESG disclosure space is a mess. Here’s what I think companies should do: A) spend time, effort and resources understanding how (material) ESG challenges affect your industry and your current business model and its ability to create value. B) evaluate both the willingness as well as the ability of your company to address (at least some) of these challenges. C) leverage your company’s innovative capability to address some of these challenges and find solutions (i.e., products and services).
If you do a) through c) right, then reporting/disclosure should be more straightforward. The goal is not a uniform definition of ESG or reporting according to a particular standard. The goal is the effective communication of an integrated strategy that addresses ESG.
Think about it this way: there’s no one definition of what strategy is or one single way of how companies communicate their strategy to shareholders. Financials is only part of the story. Companies need to supplement with more credible, forward-looking info. Similarly for ESG.
There are lots of good initiatives in ESG but is there one thing which could speed up the green transition to meet the level of urgency of the climate crisis?
Unfortunately, I do not think there’s a magic wand. We need all social actors to play their part, and even then, our chances of addressing our existential challenges are slim. We have already overstepped some of the planetary boundaries and we need to walk back.
In other words, we need individuals to change behaviour, we need governments and institutions to adopt laws, regulations and international agreements, we need civil society and the younger generations to hold us accountable. We need to fix the political system, and its often endemic corruption by voting for the right people at the right places. And if those people do not exist, we may even consider running for office. Every single one of us has a role to play, as a citizen, as a consumer, as an employee, as a pensioner, as an investor.
Last year ESG funds outperformed, this year this theme has dissipated. What does the future look like in terms of performance?
I would be cautious in terms of drawing conclusions based on one very particular year of returns. First, we need to distinguish between performance at the level of the firm, and performance at the level of the fund.
We have robust evidence that integration of material ESG factors is associated with outperformance. And it makes sense: companies that deeply understand the mega trends and integrate them in the way they do business are much more likely to thrive in this new competitive landscape.
Second, there’s fund-level performance and there, the evidence is not as clear. Why? Well, because there are many ways to evaluate and assess high-ESG companies, and on top of that, there are many different investment strategies. Plus, it’s early days. There’s a lot of experimentation taking place in the financial industry.
As such, I expect that going forward, investment strategies will be refined, as measurement becomes better, and as companies themselves refine the underlying strategies. All in all though, I cannot imagine a world in which companies (or funds) that do not account for the global ESG challenges that we face do worse than those that ignore them. Those who ignore them will face higher risks, higher costs and erosion of their social license to operate.
Do corporates need a global framework that pushes them along to net zero? Or is there no one-size-fits-all?
They need a science-based framework. Science tells us precisely how much remaining carbon budget we have, and that’s not negotiable, if we want to remain below 1.5 degrees warming. So, companies should backward engineer from science and set their targets accordingly.
What is also important here is for companies to disclose on specific and verifiable plans that can lead them to those targets. And those plans should be verifiable. And they should be held accountable for them. That is, targets and concrete plans of execution/implementation.