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The Benefits of Strong ESG Practices to Companies and Investors

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In this guide, we shall be looking at the benefits of strong ESG practices to companies and investors. Make sure you read till the end so you don’t miss out on anything. 

How Does a Strong ESG Program Benefit Companies and Investors?

Corporate management and boards should prioritize environmental, social, and governance (ESG) issues. A public stance on ESG issues was once considered a public relations strategy. However, in today's fast-changing business climate, a focus on ESG issues is becoming increasingly important for long-term competitive success.

The benefits of proactively addressing ESG issues extend beyond creating a good public relations story and satisfying institutional shareholders. A robust ESG program can help build a strong corporate brand, make accessing vast pools of capital possible, and enhance sustainable long-term growth that benefits both companies and investors. It does so in the following ways:

1. Strong ESG practices can offer companies a competitive advantage

Companies that understand the need of adapting to changing environmental and socioeconomic conditions are better positioned to spot strategic opportunities and meet competitive challenges. Integrated and proactive ESG policies can help a company gain a competitive advantage over its competitors.

Executives that make efforts to improve labor conditions, give back to their communities, promote the diversity of their teams, and take a stand on environmentally sustainable policies also help to strengthen the company's brand. 

Additionally, as Millenials become investors, consumers, and employees, they observe and reward good corporate actors with loyalty.

2. Strong ESG programs can boost stock liquidity

Large sums of money are been invested by individuals and institutional investors alike into corporations that are proactive in governing and operating in an ethical and sustainable manner. Recent evidence shows that sustainable and impact investing is growing actively at double-digit rates. 

Investment research and consulting firms like MSCI and Sustainalytics have developed indices that evaluate and rank companies based on ESG criteria in comparison to their industry counterparts. 

The exchange-traded funds (ETFs) and investment funds that benchmark these indices are acquiring trillions of dollars that will be deployed in companies that implement sound ESG policies. Demand for your stock could be fueled by these long-term-oriented shareholders. 

Many investment firms now incorporate ESG evaluations in their portfolio risk assessments; this is an indication that capital will keep on flowing towards companies that have strong ESG practices and programs. 

3. Taking a proactive approach to ESG issues can help keep activists at bay

For years, governance weaknesses have been used by activists as a tool in campaigns and proxy contests against companies, but they are increasingly targeting management boards and teams that fail to take a proactive stance on possible social or environmental issues.

Companies that take a proactive approach to ESG issues can set the standard for the entire industry (such as oil and gas) while also helping to protect themselves from activist intervention.

4. ESG Investors are “stickier.”

ESG-focused investors are long-term thinkers who care more about what happens in the next decade than in the next quarter; they understand that it can take some time for change to happen.

Investors who include ESG in their mandate usually work with a company to strengthen it. They do this because they are more interested in creating long-term value over time rather than flipping the stock for a "sugar high" in the short term.

5. Companies with strong ESG values are more likely to attract and retain top talents

Millennials care deeply that the businesses they support and the companies they work for share the same values with them, and environmental and social responsibility is one of those values they place high importance on. 

Employees who are enthusiastic about the organization, who feel valued, and who are loyal, contribute to intangible goodwill that reinforces the company's brand and boosts the overall productivity of the workforce. 

Some Best Practices for Benchmarking and Strengthening Your Company’s ESG Program

To get the most out of taking a proactive stance on ESG issues, follow the practices below.

Identify the ESG criteria that are appropriate for your company and industry

Companies should not aim to be all things to all people when building an ESG policy framework. Rather, identify between three to five ESG criteria that can be measured and that are material to your constituencies and businesses. Additionally, these criteria should be in line with your corporate strategies. 

An oil and gas company that is fracking, for example, should measure waste and water management as well as impacts on scarce natural resources.

Researching industry rankings within an important sustainability ranking index is an effective way of benchmarking your company's ESG framework in relation to your peers. A number of global nonprofit advocacy organizations identify and rank corporate ESG programs. These organizations include: 

  • Global Initiative for Sustainability Rankings (GISR)
  • Sustainability Accounting Standards Board (SASB)
  • Global Reporting Initiative (GRI) 

Climate change impacts, supply chain management, natural resource scarcity, board composition, labor practices, political contributions, and workplace diversity are some of the criteria that these organizations analyze for each industry. 

Pursue inclusion with essential ESG indices

As previously stated, inclusion in ESG index funds and/or ETFs can help boost liquidity in your company’s stock.

After identifying the elements of your ESG framework, try to find out the criteria for inclusion (and exclusion) of some ESG funds or ETFs. Then, identify which among the indexes corresponds the most to your corporate strategy and the priorities of the shareholder base that you believe are your best long-term holders. 

Tell your story and stay true to it

The next steps after your company must have determined the relevant criteria for its ESG framework are to establish metrics, measure them regularly, and share progress publicly. If you don't do this, you may be accused of "greenwashing". 

By utilizing the LITH platform, consumers and businesses alike can show to anyone who cares to see that they are doing business responsibly. The LITH platform will make it easy for companies to track and share their progress on ESG. You can learn more about LITH by checking out the project whitepaper here.  

To Wrap Up

In this guide, we’ve discussed some of the benefits of strong ESG practices to companies and investors. From what we can see, it is obvious that in the post-COVID-19 world, a focus on ESG performance will be vital to success.

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