How to build investor confidence in ESG

Considerations for business leaders

Businesses no longer need convincing on the importance of good ESG practices. However, many are hesitant about what to do next, particularly when it comes to meeting the changing expectations of investors.

Our global investor survey shines a light on how UK business leaders can build trust and confidence among stakeholders in their ESG activity.

Investors seek accountability and reassurance from the top

UK investors are increasingly looking to business leaders to take accountability for ESG issues: 68% agree they feel more confident companies are on top of ESG risks if someone in the c-suite is accountable, and 59% think that should be the CEO.

The theme of accountability rang true in our 25th Annual UK CEO Survey. Michael Ryan, CEO of Dalmore Capital, told us: “The general view now is that CEOs are accountable to the public. The role has become broader and less private than it was.” The day job now involves a broader set of non-financial measures, namely ESG.

While investors turn to business leaders to take accountability for ESG issues, there’s a perceived lack of knowledge at board level, with only half of investors agreeing board directors are sufficiently knowledgeable. This marks an opportunity: business leaders willing to invest in bridging this knowledge gap will gain an edge with investors.

75% of UK investors consider a company’s exposure to ESG risks and opportunities when screening investment opportunities.

_{PwC’s 2021 Global investor survey}

Embedding ESG into business strategy

To take true accountability, leaders need to hardwire ESG into their business - a point which 85% of investors surveyed agreed with.

Zubin Randeria, ESG lead at PwC UK, says: “At PwC we talk about ESG being ‘built in’. What do we mean by that? Businesses need to rethink the risks of traditional business models and explore opportunities for sustainable growth. Leaders need to ask themselves: what are the long-term ESG risks and opportunities. It’s about building profit with purpose.”

Start-ups have the advantage. Starting from scratch makes it simpler to embed ESG in a business’s foundations. This is seen in the rise of ESG-focussed consumer brands, such as carbon negative food companies and ethical clothing brands. This poses a potential risk for incumbents: a wave of competitors looking to offer the best of both worlds: profits with purpose.

By embedding ESG into risk management practices, businesses can assess which elements of ESG are the biggest threat, and how to pivot to opportunity.

In the UK, investors indicated they’re likely to prioritise the diversity of the workforce and its executives, over other social issues such as worker health and safety which ranked the top ESG issue for global investors. Looking inward and addressing imbalances within the business should be a priority.

Questions for business leaders:

Does our business have the right talent, skills and experience to fully understand what our ESG risks and opportunities are?
How can our existing risk management process adapt to embed an ESG lens?

Showcasing the long-term value of ESG

Investors are largely willing to support a reduction in short-term profitability for long-term reward; 79% of respondents agreed companies should make expenditures to address ESG issues, even if that hits profitability in the short-term. This could include changes to the supply chain, moving away from carbon-intensive practices, and investing in climate risk assessment tools.

Critically, while investors are prepared to take a short-term, small drop in profitability, they aren’t prepared to take a negative hit on long-term returns. Only 39% are willing to accept a lower rate of return for beneficial impacts on society or the environment. The importance of assessing where ESG can sustainably grow your business is case in point here.

In the long run, businesses can’t rely on investors being willing to accept consistently lower returns for ESG benefits. It isn’t sustainable, not least because it wouldn’t fulfil a company’s fiduciary duty.

Zubin Randeria, ESG lead at PwC UK, says: “If you take the example of long-term asset owners - pension funds, insurers and sovereign wealth funds - they recognise the issues associated with ESG, such as climate risk, are likely to have a negative impact on their long-term investment returns. It’s up to companies to demonstrate how their business and their supply chains meet the ESG needs of their shareholders. Otherwise, they may see their shareholder register churn. Long term, low cost investors will be replaced by those demanding a higher cost of capital, which will naturally impact valuations. This economic case is a clear imperative to rethink business strategy.”

Like with any business change, effective modelling and demonstrating the long-term implications of investment is critical in ensuring investor buy-in.

Questions for business leaders:

What are the short, medium and long term ESG risks and opportunities for our business?
What are our strategic responses to those ESG risks and rewards?

Standardised and credible reporting

Reporting can shape thinking and force conversations about progress now and in the future. Amanda Blanc, CEO Aviva, said in our recent UK CEO Survey: “What gets measured gets done”. Investors agree and there are some immediate actions leaders can take to bear accountability.

Investors commonly look to annual reports and investor presentations for ESG data. However, UK investors appear distrusting of these reports. A fifth (20%) agree current levels of reporting on ESG are of a good quality, much lower than the 33% globally. Similarly, only 30% of UK investors trust ratings and scores provided by ESG ratings agencies, lower than the 40% globally.

This is where businesses can stand-out. Transparent, externally-assured reporting, providing a position on how they will address potential business challenges, and reap ESG rewards, can combat investor concerns and turn them into investor confidence.

Hemione Hudson, UK Head of Audit, PwC, says: “Investors are increasingly looking at non-financial reporting with greater scrutiny. They need assurance that public statements are underpinned by robust data, informed targets and clear milestones outlining how a company can achieve its goals. Right now, non-financial metrics are not held to account in the same way financial data is, so companies able to provide independently assured ESG reporting will gain a competitive edge with both investors and wider stakeholders.”

Investors agree (71%) that ESG reporting should be prepared in accordance with a recognised non-financial reporting framework, and in April 2022, TCFD-aligned requirements for large companies will be mandated in the UK.

To get ahead, mid-market companies looking to sell stand a strong advantage if they can demonstrate their ESG credentials prior to reporting being mandatory. Not only will this make them more attractive to potential investors, but it will increase readiness for future regulatory changes.

Questions for business leaders:

Are we reporting the things that matter most to our business, based on our ESG risks and opportunities?
What is our long term strategy for measurement, and is it rooted in our business growth plan?

“As the urgency to address some of these topics increases, so do the risks and opportunities.”

_{Sustainable equities analyst}

The risk of inaction

Investors are beginning to vote with their feet and make decisions with ESG credentials front of mind.

The risk of inaction is high. Those businesses taking insufficient action to address ESG issues will face difficult questions from investors, with 74% agreeing that, in the future, they’d seek dialogue to address concerns. Adding weight to the accountability argument, investors also agreed they’d seek inclusion of ESG targets in executive pay (56%), vote against executive pay (55%) and vote against director appointments (53%).

Reframing thinking on ESG and investing in long-term change will have far greater impact than viewing this as yet another reporting line.

Download The full UK survey findings

This article explores the UK findings following a global PwC online survey, conducted in September 2021. The survey received responses from 325 investment professionals, of which 80 were focused on the UK market.

See the global report, methodology and findings.