Companies, such as Amazon, are making ESG integral to their long- and short-term business plan by building wind farms and introducing a fleet of electrical trucks.
Investment management companies, such as Morgan Stanley, are pushing to popularize the concept by coaching their companies on how to integrate ESG practices into the fabric of the workplace.
The fact that ESG practices have moved from a “nice thing to do” to being an essential business strategy is not news.
But how do businesses navigate this new reality? How should they talk to investors to attract the capital needed to change the “business as usual” paradigm?
In a recent GreenBiz Webcast, “ESG in 2021: The State of Play,” Thomas Kamei, Executive Director of Investment Management at Morgan Stanley, along with Tessie Petion, Head of ESG Engagement at Amazon, and Joel Makower, chairman of GreenBiz, touched on what companies can expect and should be doing to embrace these standards.
Metrics vs. Impact: How do you Compare?
Interestingly, Morgan Stanley does not look at indexes or ESG scores to determine how well a company is doing. “A quality score in this area doesn’t make sense,” he says.
Kamei explains: “Taking plastic from the ocean and vaccinating workers are both good. But the impact of these activities is hard to compare. Because we can’t compare apples to apples on output, we don’t. All we can do is compare inputs.”
The company designed a questionnaire that they give to their portfolio companies. This set of ten questions helps determine the sophistication of a business’ sustainability program.
- How many layers of reporting is the company CEO from the Head of Sustainability? If there is a direct report, that says something very different than if there are many tiers between them. Or:
- Is there a dedicated Sustainability Board Committee? If yes, this shows agency.
Instead of measuring companies on very different scenarios, Kamei continues, Morgan Stanley asks, “How empowered are company operators to drive impact”?
There are people who are looking at ESG scores, he quickly adds, so companies can get market-based returns. But it isn’t what Morgan Stanley does.
In order to have a more meaningful and effective communication with investors, Kamei suggests that companies should disclose the things that are pertinent to their individual narrative, and which have a positive societal impact.
For example, several software companies asked the investment management company what they should do about their Scope 3 presentation (indirect greenhouse emissions that occur in a company's value chain).
“These companies don’t have a carbon footprint except for the occasional air travel,” says Kamei. So instead of spending time and money on trying to change something internally that would not have a significant impact, Morgan Stanley advised that the software companies ask themselves, “What can we do to make a difference in the world? For example, what can our company do to help elevate disenfranchised voices?’ That is something that could make a difference in a meaningful way,” Kamei says.
And this is what investors are looking for these days.
Be Your Own Advocate
Tessie Petion, Head of ESG Engagement at Amazon, stresses the need for companies to be vocal about what they are doing. “It is up to the company to make known to investors and their customers what they are doing for the environment and society,” she says.
ESG numbers don’t necessarily give the full picture. A business needs to tell its own story and do so often and loudly.
“Each investor comes with their own specific needs,” Petion explains. It is up to the company to explain how they meet those needs.
Amazon, for example, was disengaged with investors for a while and became “seriously misunderstood,” she says. Amazon got “knocked” for not being transparent. “But we were being pro-active in areas that weren’t seen, such as health care.”
In an effort to repair relationships, the company began publishing a sustainability report. And once Amazon had a working carbon accountability plan that would make real their Climate Pledge of meeting zero emissions by 2040, they made it public.
Bottom line: it is onerous on the company to explain to investors how ESG is being implemented throughout their business, including the supply chain.
Greenwashing (where a company advertises a grand environmental practice or goal, but has nothing in place to substantiate it) is a real issue, says Kamei.
Companies will say that they have a great sustainability program like a Tier I priority program, for example. Yet, when the investment firm evaluates the business, they often find that the level of investment or culture of adaptability is not there to support it. “This is a red flag for us,” says Kamei.
Kamei tells investors to look for companies who are activity working to improve their ESG practices, rather than those who promise grandiose sounding goals.
And he tells companies, “that it is okay to say that you are working on this and that, and then identify the areas that you are working on.”
This more realistic dialogue will help desensitize greenwashing in the long term, he says.
Why All This is Important
Companies need investors and investors are looking for companies. ESG is an important part of that equation.
In the United States, for example, Alison Heron Lee, acting Commissioner of the US Securities and Exchange Commission, recently outlined plans for the agency to take a hard look at how investors could better influence human rights. Companies have to pay attention.
“One wants investors on their side, especially in terms of ESG, because it takes the sustainability out of the world of company spending and puts it onto the world of investing,” says Kamei. Then it becomes a marketing tool for the company.
This is important on so many fronts. First, it pulls in financing, which make it possible for companies to implement these much-needed programs. Second, if a recession arises and spending must be cut, a sustainability program is less likely to be eliminated.
These programs should be seen as a necessary asset, so tied into the foundation of the company that they have staying power, says Kamei.
So why wait? Start communicating how your company is implementing ESG and get investors to take notice.